| SAO PAULO, March 10
SAO PAULO, March 10 Shares in Vale SA fell on
Friday, bringing their losses over the past two weeks to nearly
a fifth, as investors fretted over the impact of a potential
drop in iron ore prices on the world's largest producer of the
steel-making raw material.
The decline underscored growing investor concern that
optimism over Vale's aggressive cost-cutting and governance
reform plans, which drove shares to a four-year peak on Feb. 21,
may have been overdone.
Shares are still up 26 percent this year, among the biggest
gainers on Brazil's benchmark Bovespa stock index, which
has risen 8.6 percent. But their recent slump suggests the
strong start to the year may be slowing.
"Clearly, investors are telling us that earnings are not
sustainable at current levels, and that iron ore is set for a
strong correction ahead," Banco BTG Pactual SA analysts led by
Leonardo Correa wrote in a note distributed to clients on
Vale's preferred shares were down 1.1 percent in
early afternoon trade on Friday in Sao Paulo.
Executives at the miner have been bullish about iron ore
prices, saying they expect it to average above $80 per tonne in
2017 compared to Friday's $86.79 spot price for delivery to
China's Qingdao port .IO62-CNO=MB.
But traders and analysts are all but convinced prices are
likely to drop further as the year drags on, hit by concerns
over global iron ore and steel oversupply and weak demand from
Fourth-quarter iron ore futures indicate a price of $68 per
tonne, according to BTG Pactual, a drop of roughly 20 percent.
Vale has sold non-core assets and cut costs to weather a
global demand slowdown and steel industry over-capacity. At the
same time, iron ore output reached a record high last year as
ore prices reached two-year peaks.
Vale's unveiling in February of plans to scrap its
controlling shareholder structure further boosted stock prices
as investors saw it reducing risk in a country long plagued by
corporate governance abuses.
Now analysts and investors are questioning whether that is
enough to keep the stock rally alive.
"If you expect iron ore prices to hold above $90 for a long
time, Vale should trade at a minimal discount to peers. But the
market's base-case scenario is of a downward trajectory," said
AZ Quest Investimentos Ltda head of equities Alexandre Silvério,
who helps manage 1.6 billion reais ($506.9 million) in stocks.
Vale shares are trading at 6.14 times projected 2017
earnings, compared to 8.56 times for Rio Tinto Plc and
11.72 times for BHP Billiton Ltd, according to Thomson
However, Vale's enterprise value, or total equity and debt
minus cash, clocks in at 5.42 times estimated earnings before
interest, tax, depreciation and amortization (EBITDA), in line
with both rivals and suggesting room for further stock drops.
Vale shares could also suffer a period of volatility as the
company looks for a new chief executive, with CEO Murilo
Ferreira stepping down in May.
But some saw the selloff as a buying opportunity, betting
Vale will manage to deliver strong operating results even if
iron ore prices plummet.
In a bearish scenario in which ore prices drop to $50 per
tonne, analysts at JPMorgan Securities estimated U.S.-listed
Vale shares should trade between $8.10 and $10.20,
compared to $9.56 currently. If ore prices fall to $60 per
tonne, that range would rise to between $13 and $15.80.
($1 = 3.1567 reais)
(Reporting by Bruno Federowski; Additional reporting by Stephen
Eisenhammer; Editing by Meredith Mazzilli)