Why Vale Stock Fell 10% in January

Another Vale disaster took a toll on the stock, but the damage is likely to be worse than it looks.

Reuben Gregg Brewer
Reuben Gregg Brewer
Feb 8, 2019 at 10:42AM
Energy, Materials, and Utilities

What happened

The shares of Brazilian mining giant Vale (NYSE:VALE) fell 10% in January, according to data provided by S&P Global Market Intelligence. That drop was driven entirely by the tailings (mine waste) dam collapse at the company's Feijao Mine on Jan. 25.   

However, the 10% figure doesn't show the disaster's full effect on the stock price. In the days immediately following the news of the dam failure, Vale's stock lost roughly 25% of its value. The shares recovered some of the lost ground by the end of the month, however, and were only down 16% from the monthly high when January came to an end. Still, the hit to Vale investors was far more severe than the full-month figure suggests.

A man watching mining equipment at work

Image source: Getty Images

So what

A mine disaster such as this comes with a fair amount of uncertainty. Many lives were lost as the mine waste escaped the dam, and the most recent tally of over 100 deaths is likely to increase since several hundred people are still considered missing. The company has already had $3 billion in assets blocked by the courts to ensure there is money set aside to cover the financial impact. Meanwhile, lawyers are lining up civil suits. Some industry watchers are even suggesting that Vale could lose its mining license, which would put the company's long-term survival in doubt.   

For its part, Vale has suspended its dividend and stopped all share buybacks -- actions that directly impact shareholders. It has also eliminated executive bonuses. None of this, however, changes the bigger picture. This is the second major tailings dam disaster for the company, which suffered a similar, though much smaller, breach at the Samarco Mine less than four years ago. Worse, Vale may have been aware of the risks at the Feijao Mine before the tailings dam ruptured. The company has since announced that it's taking up to 10% of its production off line and decommissioning 10 tailings dams. Although that's the right move, it doesn't help the company's image problem very much. 

Now what

There is no way to fully appreciate the damage that has been done or what the long-term impact on the company will be at this point. The fact that there have been two similar mine disasters in such a short period of time is likely to multiply the company's legal and regulatory troubles. Most investors should avoid Vale, as there is just too much uncertainty.

Check out the latest earnings call transcripts for companies we cover.