Vale Reports a Solid 2022 Result Despite Lower Iron Ore Prices; FVE of USD 16 Retained

No-moat Vale VALE reported a solid 2022 result, albeit down on 2021, driven by lower iron ore prices and higher unit costs. Adjusted net profit after tax was USD 16.7 billion, or USD 3.61 per share, down 32% on USD 24.7 billion earned in 2021, but 9% above our estimates. Adjusted EBITDA fell 37% to USD 19.8 billion. The USD 11.6 billion reduction versus 2021 was primarily due to lower iron ore prices. On 3% lower sales volumes of about 302 million metric tons, Vale achieved average iron ore fines prices of USD 108 per metric ton in 2022, down from around USD 141 last year. Higher cash unit costs due to the stronger Brazilian real, increased freight and fuel costs also contributed to lower margins.

We retain our fair value estimate for Vale of USD 16 per share. We forecast Vale to 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. Vale is seeking offers for a minority stake in its base metals division, arguing that the value of this business isn’t reflected in its share price. We think this argument has some merit given the dominance of the iron ore division means that Vale is perceived by many investors as just an iron ore company.

The balance sheet remains strong, with net debt of around USD 7.9 billion as at end December 2022 being about 0.4 times EBITDA. While liabilities in addition to net debt relating to the Mariana and Brumadinho dam disasters amount to about USD 6.7 billion, we think these can be comfortably paid from forecast cash flow. Vale will pay a dividend of about USD 0.41 per share in March. It also still has up to 310 million shares (or around 6% of shares outstanding as of end December 2022) remaining on its current share repurchase program. With the shares currently trading at a small 6% premium to fair value, we think the share repurchases are likely to be broadly value-neutral.