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Vale: Deposit request is negative, but RBC maintains 'outperform' rating

Published 05/08/2024, 11:02 PM
Updated 05/22/2024, 05:46 PM
© Reuters.
- – Following news that the Attorney General's Office (AGU) has requested the Federal Court of Minas Gerais to compel mining companies Samarco, Vale SA (BVMF:VALE3), and BHP to deposit R$ 79.6 billion in damages within 15 days, RBC Capital Markets pointed out that this is another short-term concern but not enough to revise its recommendation. The companies are held responsible for the environmental disaster in Mariana (MG), involving the collapse of the Fundão dam in November 2015.

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In a report released to clients and the market, RBC Capital Markets recalls that in November 2015, the Brazilian government and the states of Espírito Santo and Minas Gerais, along with other public authorities, filed a public civil action against the companies totaling R$20 billion, about US$5.2 billion at the time, for cleanup and repair costs.

In 2016, the Federal Public Ministry and 18 other public entities filed another public civil action seeking damages of up to R$155 billion, around US$43 billion at the time, for compensation, indemnification, and collective moral damages.

"We believe that today's headlines, albeit with minimal near-term cash flow impact, contribute to the ongoing political noise surrounding Vale that has been weighing on the stock, in our view," evaluates analyst Marina Calero in the report on Tuesday.

“The $15.7bn ($7.9bn each) fine reported today is a part of the BRL$155bn claim on collective moral damages, and has been increased from the previously reported $9.7bn ($4.85bn each) in Jan 2024," adds the analyst, who believes Vale will appeal the decision and projects Vale's expenditure of around $4 billion for these claims.

Rejected Agreement

This week, the Federal Government and the state of Espírito Santo rejected the mining companies' proposal for compensation for damages caused by the collapse of the Fundão Dam, assessing that the proposed R$127 billion, including amounts already paid, would not bring significant advances compared to previous discussions.

This proposal would include R$37 billion in funds already invested in remediation and compensation to date, R$72 billion in cash payable over a certain period to the federal government, the states of Minas Gerais and Espírito Santo, and the municipalities, and R$18 billion in obligations to be fulfilled.

Despite the agreement being rejected by the authorities, it is expected that discussions will continue and be concluded by mid-year, according to the Brazilian miner.

Outlook for Vale

RBC Capital Markets points out that although the company trades at a discount compared to its peers, this is another factor that could heighten investors' short-term concerns, in addition to uncertainty regarding CEO succession, operational licenses for basic metals, and the current political climate.

"Fundamentally, we continue to like Vale's medium-term positioning and think that its offering of pellets, DRI and high-grade inputs are best suited to meet steelmakers' decarbonisation needs and are likely to hold pricing in a surplus market," concludes the report.

Thus, it maintains an outperform recommendation, equivalent to a buy, with a target price of $18.50 per American depositary receipt (ADR).

At 3:00 PM (Brasília time), Vale's shares were up 1.11% at R$64.88, while ADRs were up 1.59% at $12.79.

Vale on InvestingPro

Vale has maintained good dividends for 24 years and has a valuation implying strong free cash flow yield, according to InvestingPro, the premium platform of Protips, AI-based fundamental indicators, mention high returns over the last decade. Virtually all Protips for the stock are bullish, indicated by a bull icon in green, suggesting positive prospects, while the caveat would be the operation with a moderate level of debt.

The financial health of Vale is considered to be excellent, according to InvestingPro, with a score of four out of five on the metric scale.

The fair price of common shares is estimated at R$78.85 according to 14 investment models compiled by InvestingPro. The target set by 10 analysts is slightly more pessimistic, at R$74.26.

For the ADRs, the fair price is estimated at US$15.42 according to 14 investment models.

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