It’s been a roller coaster of a year for Vale stock. After reaching a 52-week high of over $23 per share, several events led to the stock bottoming out at around $11.

But since hitting support levels, Vale stock is now recovering and looks to be establishing an uptrend.

Although commodity stocks are outperforming the market, Vale S.A. (NYSE: VALE) has mostly traded in the opposite direction. In fact, the Dow Jones Commodity Index is up over 32% in the past year compared to Vale stock gaining only 7% in the same time.

With this in mind, Vale is the world’s largest iron ore producer, which is essential for making steel. The company has four segments:

  • Ferrous Minerals
  • Base Metals
  • Coal
  • Other Products.

Having said that, the company is looking to move away from coal to focus on growing its base metals unit. In December, the mining company sold its coal assets to Vulcan (NYSE: VMC) for $270 million.

As a result, the company is freeing up cash and reducing debt to put shareholder returns first. Keep reading to learn what to expect next from Vale stock.

What to expect next from Vale stock.

Why Vale Stock Is Underperforming

The market seems to be in free fall right now. The Nasdaq 100 Index (NDX) is falling under its 200-day moving average as tech stocks continue falling. But commodities, on the other hand, are on a tear. So why is Vale stock lagging the market?

Well, there are several explanations. Here’s a quick briefing on the events that dragged VALE down.

  1. Iron ore prices climbed to all-time highs of over $200 per metric ton units in May 2021 as steel demand skyrocketed. Then the largest steel consumer, China, moved to crack down on production to limit pollution, causing prices to sink.
  2. Brazil’s economy is getting hit especially hard as a severe drought, interest rate hikes, and nagging inflation bring it into a recession.
  3. The ongoing Brumadinho dam disaster is still lingering over the company’s head almost three years later.

To explain further, Vale’s stock price is heavily dependent on the cost of iron ore. With iron ore fines making up over 67% of total operating revenue in Q3, the company is looking to diversify its holdings.

Nonetheless, declining iron ore prices throughout the quarter led to lower earnings than last year. As long as the segment controls the majority of revenue, VALE will continue to fluctuate along with prices.

More importantly, with China being the largest steel consumer, they control over half of the world’s demand. With this in mind, as the country consumes more, prices generally rise. And if they cut back on demand, prices will typically fall, as is the case lately.

Strong Fundamentals

On the positive side, Vale stock has an impressive fundamental profile as it works to repair its image. The dam disaster had a major impact on the company and continues to be a risk. Yet the company is taking action to make sure nothing like this happens again.

VALE is positioning itself for the future by slimming down and selling off parts. As a result, the company generates massive free cash flow (FCF). That said, FCF reached about $7.5 billion in the third quarter.

Furthermore, VALE is using the extra cash in two strategic ways. First, they are using it to pay down debt. Over the past eight quarters, the company has paid +$9.8 billion in debt. At the same time, VALE still has over $15.4 billion in long-term debt on its balance sheet.

Secondly, the company is rewarding investors with dividends and share buybacks. So far, the mining company has paid almost $13.5 billion in dividends while repurchasing another $5.3 billion in stock.

On top of this, VALE plans to buy another potential 200 million shares with its latest buyback program. If management can win back investors’ trust, Vale stock should participate in the commodity rally.

A Huge Opportunity

After several major challenges these past few years, VALE is turning the ship around. Between the dam incident, a fire breaking out, and miners getting trapped, the company is feeling the pressure.

At VALE Day 2021, the company laid out its ‘New Pact with Society.’ The plan consists of three parts:

  1. Partner in building a better community
  2. Engage in relevant global issues
  3. Commit to sustainable mining

The last part, “commit to sustainable mining,” will be a significant theme for the company going forward. After selling off its coal business, VALE is targeting carbon neutrality by 2050.

With this in mind, the mining company is looking to improve its high-quality portfolio. With VALE’s class 1 nickel being among the lowest carbon products, this is where the company is focusing.

More importantly, high-grade nickel is one of the most widely used minerals for building EV batteries. The company is selling about 5% of its class 1 nickel for use in EVs right now. Vale stock is expecting this number to reach 30%-40% in the next few years.

Even more, the company is considering a nickel sulfide plant to produce premium EV materials. The company is going as far as considering spinning off its base metal business to capture market share. If this is the case, VALE could play a role in the growing EV market.

VALE Stock Forecast

As VALE moves to minimize risk and promote future growth, they are starting to earn back investor trust. Since hitting a 52-week low of $11.16 in mid-November, Vale stock is climbing back with a strong commodity market.

Although the company’s plans sound attractive, it will come down to execution. They can become a top mining stock with a portfolio of premium materials. If they can successfully grow their base metals, we could see Vale stock less dependent on iron ore price.

At the same time, the dam incident is still hanging over them. In fact, after receiving a formal notice from the SEC, a probe is a possibility. If this is the case, VALE could remain under pressure.

Another key thing to consider is the price of iron ore. With China moving towards stimulating economic growth, iron ore prices are recovering right now. But, for how long will it last this time?

VALE needs to continue expanding its portfolio to stabilize prices. The company will see a lot more attention if they can take advantage of its nickel resources, using them for the growing EV market. Until then, Vale stock will likely continue tracking iron ore prices.