Vale Earnings: Temporary and Seasonal Headwinds To Diminish

No-moat Vale’s VALE first-quarter 2023 result was weak, with one-off headwinds adding to its usually slower first quarter driven by seasonal factors including the southern hemisphere wet season. Adjusted net profit after tax was USD 1.8 billion, or USD 0.41 per share, down roughly 60% on the first quarter of 2022. Adjusted EBITDA fell 42% to USD 3.6 billion, primarily due to lower iron ore prices along with higher cash unit costs and lower sales volumes. Sales volumes of about 56 million metric tons were 6% lower than the same quarter of 2022 and tracking about 30% below our full-year estimates. Vale achieved average iron ore fines prices of USD 109 per metric ton in the quarter, down from USD 141 last year. Margins were also affected by lower sales volumes, which drove higher cash unit costs.

We retain our fair value estimate for Vale of USD 14.50 per share. In our view, most of the nonseasonal headwinds experienced in the first quarter are temporary and sales are likely to recover as the year progresses and as seasonal headwinds diminish. We continue to forecast Vale will produce about 310 million metric tons of iron ore in 2023, a modest increase on 2022. The company’s iron ore business accounts for about 90% of our forecast 2023 EBITDA. With net debt of around USD 8.2 billion at end March 2023, representing about 0.5 times EBITDA, Vale’s balance sheet remains strong. Liabilities in relation to the Mariana and Brumadinho dam disasters amount to an additional USD 6.1 billion, but we think these can also comfortably be paid from forecast cash flow. Vale continues to repurchase shares, up to 270 million shares or around 6% of shares outstanding at end March 2023. But with its shares currently trading close to fair value, we think the share repurchases are broadly value-neutral.