VALE3 has lower-than-expected production, while attention turns to cuts in forecasts; action drops

Vale (VALE3) produced 74.1 million metric tons of iron ore fines in the second quarter of 2022 (2Q22), 1.2% lower than the same period last year, but an increase of 17% compared to the previous year. 1st quarter of 2022, according to the operational preview published last Tuesday (19).

The mining company also revised its projections for 2022. Production should be between 310 million and 320 million tons of ore. The previous projection was between 320 to 335 million.

The reaction to the numbers is negative: at 10:14 am (Brasilia time) this Wednesday (20), VALE3 shares fell 2.83%, to R$ 66.93.

In a report to clients, Morgan Stanley said it sees a slightly lower number regarding its assumptions for earnings before interest, taxes, depreciation and amortization (EBITDA) for Vale in 2Q22 (below the consensus of US$ 6.4 billion) due to lower shipments of iron ore and base metals in 2Q22 and lower realized premium for iron ore. Regarding the guidance, the bank’s current production estimates for 2022 are at the top of Vale’s new guidance (ie 320 million).

For Bradesco BBI, iron ore production and shipment figures in 2Q22 were in line with its expectations, while premiums were slightly below the bank’s projection, at US$ 7.30 a ton (the positive highlight was a strong pellet premium contribution of $6.20 a ton).

Analysts believe investors, however, will focus on the downward revision of iron ore production, implying a potential downward revision of BBI’s estimates of 325 million tonnes. The revision is partially explained by a one-time impact on Ponta da Madeira and the sale of the Midwest System to J&F, but also attributable to the company’s “value over volume” strategy amid volatile iron ore market conditions.

In light of this, “it seems that Vale is more cautious in relation to the demand perspectives for the rest of the year”, wrote the BBI.

Itaú BBA’s analysis team also says that the downward revision of the iron ore production guidance for 2022 signals operational challenges to reach Vale’s long-term target of 400 million tons per year, but could help sustain the iron ore prices.

In addition, BBA points out that the “17% improvement in quarterly production comes from a weak base in 1Q22”.

XP views the results as slightly negative as production fell below consensus numbers and guidance for iron ore and copper was revised downwards. “As expected, the dry season improved overall production and we see the sale of the Midwest System as positive and in line with the company’s strategy of simplifying the portfolio and focusing on key business opportunities,” the analysts say.

In addition, JPMorgan analysts pointed out that, on the base metals side, production numbers also disappointed expectations, especially in copper.

For BBA, sequentially lower production of nickel and copper was driven by maintenance stoppages in the quarter.

Based on the overall timid numbers, JP Morgan and Goldman Sachs highlighted, in pre-opening reports, that they expect a negative reaction from stocks in Wednesday’s trading session.

“Vale’s mid-range iron ore guidance does not imply production growth compared to 2021, which is disappointing and is likely to fuel investor concerns about the company’s performance,” Goldman Sachs said.

Goldman has a neutral recommendation for Vale’s ADR (in practice, the company’s assets traded on the American stock exchange), as it sees the share price at US$ 87 a ton for the price of iron ore, only slightly below the expected average. by the bank of $90 a ton for 2023-2024. The target price was revised down from $17 to $15, a potential upside of 18% compared to yesterday’s close.

Bradesco BBI, in turn, maintains a Buy recommendation for VALE3, as it expects demand trends in China to improve in the second half of the year, supporting commodity and stock prices, although recognizing that the path should not be linear. , especially in the short term (usually weaker seasonality during summer, higher Covid-19 cases).

“That said, we see the price of VALE3 pointing to a correction in iron ore prices to US$70/ton as of 2H22, which we see as very pessimistic. Remembering that Vale will release the 2Q22 numbers on July 28th and we project adjusted Ebitda at US$ 5.75 billion (without considering Brumadinho’s expenses)”, he concludes.

XP also remains positive in terms of iron ore prices and Vale’s cash generation, which is why it maintains a buy rating on the share (target price of US$ 17.6 per ADR and R$ 97.1 per share).

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About Yadunandan Singh

Born in 1992, Yadunandan approaches the world of video games thanks to two sacred monsters like Diablo and above all Sonic, strictly in the Sega Saturn version. Ranging between consoles and PCs, he is particularly fond of platform titles and RPGs, not disdaining all other genres and moving in the constant search for the perfect balance between narration and interactivity.

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