Fund managers see once-in-decade shot in Brazil’s iron ore giant

Vale pelletizing plant in Vitória, Brazil.

Investors have been piling into shares of the world’s largest iron-ore producer, touting it as one of the biggest opportunities to emerge from the carnage in Brazilian markets.

Vale SA sank to a three-year low in March amid the coronavirus outbreak that has disrupted production chains across the globe and sent growth estimates plunging. The stock has recovered about 30% in the past week, but is still trading at levels last seen in 2019 after a dam disaster that killed 270 people.

The stock has recovered about 30% in the past week, but is still trading at levels last seen in 2019

“Vale is an opportunity like those that happen every 10, 15 years,” said Paolo Di Sora, chief investment officer at RPS Capital, during a videoconference hosted by Banco BTG Pactual SA.

One of the reasons behind the optimism is that the miner benefits from a weaker Brazilian real as most of its revenue is in foreign currency. The real has lost more than 23% this year, one of the worst performances in the world. Di Sora said the stock’s valuation implies an exchange rate of about 3.50 reais per dollar, much stronger than the current 5.26 per dollar.

Adam Capital, one of the country’s biggest independent hedge funds, is also among the bulls. According to Marcio Appel, who founded the asset manager in 2016 with Andre Salgado, the stock is attractive even in adverse scenarios for iron-ore prices.

“If I had to pick one Brazilian stock that’s particularly cheap it would be Vale,” Appel said during a videoconference hosted by Itau Unibanco Holding SA on Tuesday.

According to Goldman Sachs, which recently upgraded Vale’s American depositary receipts to buy, current stock prices imply no volume growth and iron ore prices at $65 per ton for an extended period, which the bank deems unlikely. Iron ore is down 11% this year to about $80 per ton, a less drastic drop than the one seen in other commodities amid speculation China will ramp up stimulus.

Credit Suisse’s Caio Ribeiro also sees the current discount as excessive, especially considering “strong free cash flow generation prospects,” according to a report.

In its fourth-quarter earnings, Vale said cash generation allowed it to reduce net debt to about $4.9 billion, the lowest since 2008

In its fourth-quarter earnings, Vale said cash generation allowed it to reduce net debt to about $4.9 billion, the lowest since 2008. The company also tapped into $5 billion of credit lines to bolster its cash position amid the recent turmoil.

“Our main metric nowadays has been whether a certain company is able to survive stress scenarios,” Felipe Campos, a founding partner at asset manager Navi Capital, said in an interview. “Vale has solid cash, lower costs and is surely on that list.”

(By Vinícius Andrade and Felipe Marques, with assistance from Sabrina Valle and Pratish Narayanan)

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