We came across a bullish thesis on Vale S.A. (NYSE:VALE) on ValueInvestorsClub by om730. In this article, we will summarize the bulls’ thesis on VALE. The company’s shares were trading at $8.45 when this thesis was published, vs. the closing price of $9.43 on Feb 28.
A drilling rig in the middle of an industrial mining site, surrounded by rugged terrain.
VALE produces and sells iron ore, iron ore pellets, nickel, and copper in Brazil and internationally. It is one of the largest metals and mining companies and operates through the Iron Solutions and Energy Transition Materials segments.
The stock price is under pressure due to a number of temporary issues with the overall industry. Due to a cyclical downturn, companies like VALE, BHP and Rio Tinto have been downgraded in their ratings. The price of iron ore also hasn’t helped VALE’s cause with 80% of its revenue coming from the Iron Solutions segment. VALE was also involved in a couple of environmental disasters involving Mariana Dam (2015) and Brumadinho Dam (2019). Investors have weighed these incidents heavily on the stock price but with new management, the company is turning a new leaf.
VALE operates in an oligopolistic market where large players have a leaner cost structure; almost half of smaller players. Even at a down cycle, large players like VALE can generate positive cash flows. The markets believe that the infrastructure boom in China is losing ground and a large mining project in Guinea called Simandou would bombard the market with low-cost, high-iron content capacity. While this may put pressure on VALE, the demand for iron should be sustained by developed economies that have a preference for high-quality content. It is likely that the share of low-grade Chinese ore will be replaced by high-quality ores generated by companies like VALE. The dumping of ore through Rio’s Simandou project is also highly unlikely as it could disrupt the market causing prices to turn unfavorable.
To put its current undervaluation into perspective, the company almost returned its current valuation to its shareholders in the form of dividends and buybacks from 2021-2023. At that time the price of iron ore stood at $140/ton. The stock currently trades at ~5x its 2025 estimated EPS and can steadily increase its cash flows from $3 billion to $7 billion in five years if the iron ore price can sustain a $100/ton level. Without a rating upgrade, this would imply a ~15% CAGR that could increase to 20-30% if there is a more favorable rating.
While we acknowledge the potential of VALE as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than VALE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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