Vale Earnings: Lower Iron Prices Drive Lower Profitability

No-moat Vale’s VALE 2023 second-quarter adjusted net profit after tax fell almost 80% on the second quarter of 2022, to USD 0.9 billion or USD 0.20 per share. Adjusted EBITDA fell 26% to USD 3.9 billion, driven by lower iron ore prices. Total iron ore sales volumes of 74 million metric tons were similar to the previous corresponding period and we continue to forecast iron ore production of around 310 million metric tons in 2023, a modest increase on 2022. Vale realized an average iron ore price of USD 99 per metric ton, down roughly 13% on the PCP, while unit cash costs of USD 24 per metric ton were up 12% driven by inflation. We think unit cash costs will moderate slightly over the remainder of 2023, helped by likely higher sales volumes in the second half.

We retain our fair value estimate of USD 14 per share, with Vale shares trading at a modest 5% premium to fair value. Vale will pay a USD 0.41 dividend in September and continues to repurchase shares. However, with its shares trading close to fair value, repurchases are likely to be broadly value-neutral. The balance sheet is sound, with net debt/trailing 12 months EBITDA of 0.9.

Vale has sold 13% of its energy transition metals business, or ETM, its copper and nickel operations. As mainly an iron ore miner—iron ore accounts for 80% of our forecast midcycle EBITDA in 2027—we see merit in demonstrating the value of ETM by selling a minority stake. Particularly as many investors are optimistic over rising demand for copper and nickel due to decarbonization and electrification. We think Vale has achieved a good price—it implies the base metals business is worth roughly 65% more than our value for it—though at current copper and nickel prices Vale is unlikely to receive a similar price for 100% of ETM. Vale plans to significantly ramp up base metal production, but this will require meaningful capital expenditure. We think the sale is likely a first step in separating base metals and iron ore.