Iron Ore Miner with higher P/B Value

Vale is the world's largest iron ore miner and a key supplier to the global steel industry. It is leveraged to Chinese raw materials demand, which we expect to slow as the country's infrastructure-led investment boom wanes and as recycled steel becomes a growing source of supply. Vale is dominated by its exposure to iron ore which accounts for the vast majority of forecast midcycle group EBITDA in 2029.

Vale’s iron ore business is mainly located in Brazil and produces ore with an average iron content of 63%-64%, higher than the 62% benchmark. However, its position on the seaborne iron ore cost curve is middling, higher than Rio Tinto and BHP but better than Fortescue, Anglo American, and the smaller producers when adjusted for the grade premium. Vale’s cost disadvantage relative to BHP and Rio Tinto stems primarily from the additional cost of shipping iron ore to China from Brazil versus Western Australia.

It has invested in a fleet of very large ore carriers (Valemaxes) which somewhat mitigate this freight disadvantage. We expect the breakeven cost curve to materially flatten by midcycle, a function of likely lower demand as China's economy matures, loss of market share by high-cost producers, greater efficiency from the miners, and, for Vale, a recovery in output following restrictions from tailings dam failures and the coronavirus. Failure of the tailings dam at Brumadinho in January 2019 brought environmental and humanitarian liabilities along with elevated attention to its social license.

We think Vale will do what is needed to support its licence to operate given its importance. Energy transition metals, the base metals division, accounts for approximately 15% of forecast midcycle EBITDA in 2029. It comprises the company’s nickel mines and smelters along with its copper mines.

Copper cash costs are around the industry median, but nickel assets have at times made operating losses when prices are low. Approximately 40% of Vale's asset base, after adding back asset impairments, sits outside the most profitable iron ore assets. Diversification away from these was value destructive.