More Downside is Imminent for Vale

Like other iron ore miners, Vale (VALE) has been on a terrible run for the last 24 months. The stock has lost almost 90% of its value in the reference period and is now trading at all-time lows. After such a massive drop, investors might be hoping for Vale’s fortunes to turnaround, however I think the company is still in troubled waters and investors should avoid taking a long position in the stock going forward. Let’s take a look at the reasons why I think Vale’s downtrend will continue.

Iron ore prices

Iron ore prices have been falling for years now and consequently this has negatively affected all iron ore miners.
While prices are near multi-year lows, investors shouldn’t think of it as the bottom as I believe prices will continue to remain weak for months to come. Lack of demand, especially from China, has pushed iron ore prices downwards and with the country's GDP falling to 6.9%, this trend could continue.

This makes matters worse for Vale because it generates about 40% of its revenue from China. With the Chinese economy slowing down and Vale’s heavy exposure to iron ore production, I think the stock is likely to fall further.  Citibank recently revised its price target for iron ore downwards and said that it is forecasting iron ore prices to reach $41 per ton in 2016.

In addition, Vale is also expected to increase iron ore production next year, sending the prices further down. Vale has placed a $20 billion bet of its S11D mine and it expects to begin production next year. Vale says the mine will bring down the cash cost from $12.07 per ton to $10 per ton, and is forecasted to produce 90 million tons of iron ore per year. While the cost savings are good, increasing iron ore supply will further weaken the commodity. Weak pricing will offset the company’s cost saving efforts.

While Vale is trading near all-time lows, investors shouldn’t bet on a turnaround. Amid weak pricing market, the company will continue to struggle. Moreover, Vale isn’t helping the cause as its S11D mine is expected to produce 90 million tons or iron ore per year. With the current lack of demand, increasing supply will definitely push iron ore prices lower. In addition, the company also has a huge debt burden that brings with it large interest costs. All these factors negate Vale’s cost-cutting efforts. Hence, I think the stock is still a sell.
Published on Nov 23, 2015
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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