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Here's Why Shares of Vale S.A. Popped 9% in November

By Scott Levine - Dec 11, 2017 at 8:37AM

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Investors clearly dig the fact that this company is committed to digging out of debt.

What happened

Extending the 28% climb they experienced through the first 10 months of the year, shares of Vale S.A. (VALE -3.28%) rose 9% in November, according to S&P Global Market Intelligence. Besides celebrating the company's execution of its strategy to divest non-core assets, investors responded to several upgrades of Vale's stock from the Street.

So what

Delighting investors, Vale announced in mid-November its intent to sell its subsidiary, Cubatao Fertilizantes, which currently owns and operates the company's nitrogen and phosphate assets located in Cubatao, Brazil. The transaction, which will provide Vale with $255 million in cash at closing, is expected to close in the second half of 2018. Besides Cubatao, Vale has its eye on selling off several other assets: Biopalma and Eagle Downs. The company intends to divest the two assets over the next two years and values the transactions, combined, at approximately $750 million.

Big yellow heavy trucks in open cast mine.

Image source: Getty Images.

The interest in divesting non-core assets stems from the company's desire to improve its financial condition by reducing its leverage and strengthening its balance sheet. In the recently completed third quarter, for example, the company decreased its net debt by $1.1 billion, resulting in a net debt-to-EBITDA ratio of 1.3. Further demonstrating its success in reducing its leverage, Vale had a net debt-to-EBITDA ratio of 3.0 at the same time last year.

Investors also responded to Wall Street's attention to the stock, which analysts at RBC Capital and Macquarie upgraded to outperform in November. Thefly.com reported that RBC Capital analyst, Tyler Broda, raised his price target from $11 to $14.50, stating that "while the iron market could face some near-term headwinds due to winter pollution curbs in China, the structural supply side reforms are pushing significant advantage toward Vale that will drive significant earnings upgrades." Grant Sporre, an analyst at Macquarie, based his bullish view on the stock, in part, to the belief that Vale is "one of the few market participants with spare pellet capacity which it can either produce additional volumes or withhold volumes to ensure better contract bargaining power."

Vale also received upgrades to overweight and buy from Morgan Stanley and BTG Pactual, respectively. 

So what

Although investors may be encouraged by Wall Street's bullish outlook on Vale, it's important to remember that these analysts usually don't consider the stocks in terms of the long-term -- something which we weigh heavily. Consequently, investors interested in Vale must exercise caution. In the long-term, mining stocks usually underperform the market. Over the past 10 years, for example, the S&P 500 has risen 76%; however, Vale has plummeted 71%.

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Stocks Mentioned

Vale S.A. Stock Quote
Vale S.A.
VALE
$14.15 (-3.28%) $0.48
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,825.33 (1.05%) $39.95

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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