Bail on Vale Before It Gets Worse

Iron ore miners have been in troubled waters for over two years now and a turnaround doesn’t likely. Fundamentally, many of the iron ore stocks look cheap. However, I believe investors should continue to avoid these stocks as they are value traps. One such stock is Vale S.A. (VALE). Vale has plummeted over 90% in the last two years, but the stock isn’t going to turnaround anytime soon as the plunge in iron ore prices is expected to get worse.

In the previous month, iron ore prices have dropped over 12%. Keeping in mind the current situation on iron ore for the short term is that prices are set to move downward, as none of the company is making production cuts.

I believe that this trend will likely carry on due to the constant oversupply in the end market.
Apart from the slowdown in demand in China and Brazil, the company still have many barriers in its way and will continue to struggle due to escalating production in the weak market.

The competition has been rising day by day in the iron ore market has been plagued with oversupply. The only option left with them is to wait for smaller companies to exit the market. On the other hand, there is a chance that additional quantity from Vale’s approaching S11D will certainly substitute the volume of weaker manufacturers, whereas BHP and Rio Tinto are dedicated to their volume tactic, as they have a geographical lead over Vale.

Recently, Rio Tinto detailed its strategy to surge its production from the Pilbara mining region in Western Australia, whereas BHP plans to surge its production from its Jimblebar mine in Western Australia. However, the occurrence of low-cost supply, driven by productivity enhancements and brownfield mine developments will account to hold onto iron ore prices under pressure due to tenacious oversupply.

According to recent reports, due to various low-cost iron ore extension projects mainly in Brazil and Australia, the low-cost of iron ore will surge at a more rapid rate. This will result additional drop in iron ore prices that have reduced at a hasty rate in primary markets like China.


With iron ore prices expected to fall further, I can say that Vale is yet to bottom. Moreover, the company’s recent dam burst scandal will further hurt its cash flow in the coming quarters. The iron ore miner faces many headwinds going forward, which is why I think the stock should be avoided at current levels.
Published on Dec 4, 2015
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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