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Why Vale S.A. Stock Jumped 43.2% in March

By Reuben Gregg Brewer - Apr 8, 2016 at 9:15AM

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Vale's stock took off last month, here's the reason for the move.

Image Source: Vale

What: Vale S.A.'s (VALE 0.74%) shares moved higher in convincing fashion last month, ending March with an advance of just over 43%. Although rising iron ore prices were a part of the advance, there's another issue that may have had a bigger impact.

So what: Iron ore prices have strengthened of late, and that's been a good thing for Vale's business, which is heavily weighted toward the metal. But, most of the gain in March came in the first few days of the month. In fact, at one point last month the stock was up 55%. So strengthening iron ore prices were in the mix, but there was something else that may have had even more of an impact.

That something else was the Samarco mine disaster. Only it was good news this time around, relatively speaking. As a refresher, late in 2015 the Samarco mine, a 50/50 joint venture between Vale and BHP Billiton (BHP -0.41%), experienced a waste containment dam failure. Waste material from the dam washed through nearby towns, destroyed surrounding lands, and killed several people. It was, without a doubt, a horrible event.

Although Vale and BHP reacted swiftly and with appropriate concern, Samarco opened the pair up to huge potential liabilities. Brazil, Vale's home country, was quick to say that the co-owners would be liable for clean up costs. This couldn't have come at a worse time for Vale, which had already been facing the pain of low iron ore prices. The shares, understandably, fell on the news.

In early March, however, there was some clarity on just how bad Samarco would be. Vale, BHP, and Brazil agreed on clean up costs of around $5 billion spread over a 15-year period. That isn't likely to be the last of the costs the pair faces, but it at least puts a number on a big piece of the pain. And with that out of the way, Vale rallied strongly. BHP rallied, too, but not nearly as much as Vale because BHP is in a stronger financial position.

Now what: The Samarco situation isn't over yet by a long shot, but, with the Brazilian deal, it should be easier for investors to look past the Samarco issue and focus more on the iron ore market. That's going to be the real driving force for Vale over the longer term. In March that was a positive, so everything was going right for Vale last month. But there's still a lot of risk at this miner, which continues to bring on new iron ore production despite the global supply/demand imbalance that's hampered iron ore prices. So, even though it is important over the near term, don't think Samarco is the only issue investors need to think about here.

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Stocks Mentioned

Vale S.A. Stock Quote
Vale S.A.
$17.62 (0.74%) $0.13
BHP Group Stock Quote
BHP Group
$68.41 (-0.41%) $0.28

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