Weigh China and Vale (VALE3) Downgraded to Neutral by Itaú BBA: Market Caution Increases to Action

Weigh China and Vale (VALE3) Downgraded to Neutral by Itaú BBA: Market Caution Increases to Action

With new data from China showing a more challenging scenario for the Asian giant’s economy and revisions to estimates after earnings season, market analysts have grown more wary of miners – especially Vale (VALE3) on the Brazilian stock exchange.

On Wednesday (17), it was Itaú BBA’s turn to downgrade the recommendation of an American Depository Receipt (ADR, in practice, US exchange-traded assets) for an outperforming (above average) Brazilian miner. to buy) to market performance (performance in line with the market average, equivalent to a neutral performance).

The target price has also been lowered from $20 at the end of 2022 to $15 at the end of 2023, still representing a 10% upside potential from the previous day’s closing price. This Wednesday, at 1:15pm (Brazilian time), VALE3’s assets were down 2.54% to R$68.17. Since the highs recorded at the March 7 close of R$96.49, shares have already fallen about 30%.

The bank’s analysts incorporated lower iron ore prices, lower production volumes, lower share buyback potential and new capital costs into the review.

“We estimate that the average iron ore price should fall to $115 per ton in 2022 (from an estimate of $125) and to $90 per ton in 2023 (from a previously projected $95),” he notes. BA This decline is mainly attributable to the weakest moment in the Chinese economy – the institution’s macroeconomic team cut Chinese GDP growth from 4.2% to 3.2% in 2022. This is mainly due to the slowdown in the real estate sector and lower expectations for steel production in Country.

“In addition, we also believe that Vale will provide lower production volumes due to the downward adjustments made by the company, both in iron ore and in base metals,” the analysts note.

Thus, the BBA lowered its estimate for iron ore shipments from 325 million tons per year to 310 million tons per year, nickel from 340,000 kilotons per year to 275 kilotons per year, and copper from 182 kilotons per year to 177 kilotons per year. in 2022.

He notes, “In this context, we confirm that the cost of cash delivered in China has reached record levels due to the high cost of iron ore extraction and the high costs of sea freight.”

BBA analysts also highlighted their understanding that Vale has less ability to repurchase shares in the future due to lower expectations of cash generation, greater constraints due to the company’s level of indebtedness and the already high level of share buybacks (about US$10.5 billion). Made in recent months. Thus, they estimate that Vale will be able to buy back about $3.5 billion in stock in the coming months. In this way, they expect a lower return to the shareholders.

Learn more about Vale’s Itaú BBA thesis by watching the video below:

It is worth noting that a series of data released by China, this week, affected the commodity market and raised pessimism with the growth of the Asian giant. In the spotlight, the real estate sector, which suffered from a mortgage boycott that affected buyer sentiment, plummeted in July. Real estate investment fell 12.3% last month, the fastest rate this year, while the decline in new sales intensified to 28.9%. The sector requires a lot of steel which uses iron ore as its input.

This Wednesday held raw Iron ore, the most traded iron ore in January 2023 on the Dalian Commodity Exchange, fell 4.4% to 683.50 yuan ($100.87) per ton, the lowest since July 28. In addition to the more ambiguous scenario for China, specific factors, such as the heat wave that has hit several regions of the country since mid-July, have caused power shortages, forcing the authorities to ration electricity, which led to the closure of steel plants.

Oversupply of raw Iron prices in China also affected prices. stock raw Iron imports at Chinese ports have risen steadily over the past seven weeks, reaching 138.6 million tons on August 12, the highest level since mid-May, according to data from consultancy Mysteel.

In an interview with Global Pickers, from Stock Collectors Gilberto Cardoso, commodity analyst at Ohmresearch, noted that China is likely to see a 6-7% drop in steel production this year, which is quite a bit, and even more so given the fact that it is the world’s largest producer. ..

The country should continue its strategy to reduce civil construction – which accounts for about 40% of steel demand – while infrastructure – which accounts for 10% of demand – should be stimulated, partially offsetting a greater weakness in the real estate sector.

On the supply side, the analyst anticipates a downward revision in production estimates (guidance) for miners amid a scenario of increased pent-up demand. “They would rate very well, especially with prices in the $90-$100 per tonne range and a greater focus on steel mill cost, with the premise of ‘good quality ore’ no longer glamorous.”

Looking at the companies, in the current scenario, Cardoso points out that it makes sense for those with a long stay in Vale, to maintain their position. “For those that have already been purchased, the paper will recover, and in addition to being a great company to execute, it is also paying dividends,” he assesses.

However, it does not recommend increasing the exposure and volatility of projects to stocks, amid the news that is still too heavy for the sector. To the analyst, the crude floor should be between $80 and $90 per ton, still far from the $45 low reached in 2012. However, the peak should not exceed $120 per ton, which is lower Much price. Above 200 USD registered in the middle of last year.

“Vale is trading between 70% and 80% of the price of Dalian crude in the futures market, so [o investidor] You have to have a heart,” notes the analyst.

In a recent report, the Bradesco BBI emphasized that there should be a path to recovery in demand, but it should not be linear, citing Gerdau (GGBR4) as preferred among mining and steel companies. Caution over the miner’s assets is mounting amid China’s tougher environment, with targeted price reviews and recommendations increasing since July of this year.

After Vale’s results were announced at the end of July, Bank of America reiterated its neutral recommendation for Vale’s assets. The price target for the ADR is $18.

“Vale’s earnings are almost entirely driven by the iron ore price and our recommendation reflects BofA’s more cautious view of the iron ore sector, particularly as Chinese steel production has been reduced while prioritizing emissions reductions. China is also implementing policies to prioritize growth in sectors outside of real estate and steel-intensive infrastructure. (and iron ore),” analysts noted in the assessment.

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