Investors left both Brazil and mining stocks for dead at the end of 2015. Since then, both have roared back to life, posting jaw-dropping gains. Not surprisingly in this environment, Brazil’s Vale SA (ADR) (NYSE:VALE) has performed strongly. Since its low around $2, VALE stock has quintupled.

The bull case sells itself. Iron prices are rising, and Trump’s election should support commodities further.

Vale looks cheap on an earnings basis; the company will practically print money this year. But it’s not all good news, and with VALE stock already up big over the last year, can the rally continue?

VALE Stock Pros

Iron Prices Up: VALE is the world’s largest producer of iron ore. For years, that has not been an enviable position. The price of iron crashed from well over $100 per ton in 2014 to just $40 per ton at times last year. However, a stabilization in the Chinese economy, along with optimism for steel demand in the U.S. under President Trump has shifted sentiment.

On Vale’s most recent conference call, company director Peter Poppinga stated that: “In summary, 2017 is going to be a very strong year … Steel demand is greater than in 2016. New supply that’s going to come is less than in 2016, and stocks are unbalanced. Therefore, prices will be significantly higher than in 2016.” Corporate forecasts are no guarantee, of course. But the sentiment seems well-placed. The United States, after years of slow construction demand, in particular, appears ready for a significant burst of infrastructure spending.

Clearer Share Structure: If you currently say that you own VALE stock, you might have to clarify that statement. That’s because there are multiple classes of its stock, including commons and preferreds. However, an agreement last month will change this. Going forward, the preferred stock will be exchanged for common VALE stock.

This will clean up Vale’s corporate structure, and remove the controlling interest that previously dominated the company’s affairs. Additionally, having just one class of stock will allow Vale to uplist to Brazil’s highest market tier, potentially offering more liquidity and support for shares there.

Samarco Coming Back: In late 2015, Vale scored plenty of unwanted international headlines. Its Samarco project — a joint venture with BHP Billiton Limited (ADR) (NYSE:BHP) — suffered a gigantic dam collapse. The tragedy resulted in more than a dozen deaths and vast environmental damage.

BHP Billiton and Vale had disagreed about how best to get the mine back online. However, those differences appear close to being resolved. The firms announced a non-binding agreement in December that creates a path forward for getting Samarco back into operation this year. Prior to the dam collapse, Samarco accounted for roughly 20% of the world iron pellet market, a high-value premium niche. VALE stock should benefit following its return to service.

VALE Stock Cons

Political Pressure: When doing business in Brazil, you must never forget about political risk. That’s especially true in Vale’s case, since the government is a major shareholder. This generally puts the firm at a competitive disadvantage against companies based out of more capitalistic countries. Instead of simply making the best business decisions, Vale must also consider political opinion.

We just saw another consequence of this political reality recently. Vale announced that its CEO Murilo Ferreira will be stepping down in May, ending a 6-year run at the company.

The company didn’t disclose a reason for the departure. However, according to the Wall Street Journal, analysts speculate that Ferreira was forced out so that the right-wing Temer government could give the CEO position to a close political ally. Socialist ex-president Dilma Rousseff previously installed Ferreira in the post. It’s not ideal when a private government sees its chief executive and business strategy change every time the party in the president’s office changes.

Brazil Still Troubled: For all the excitement, the Brazilian market remains on pretty flimsy footing. The Brazilian economy crashed in late 2014 and has shown few signs of recovery. Foreign commentators widely hailed 2016 as the turnaround year. A controversial maneuver kicked socialist ex-president Rousseff out of office. The new government made friendly remarks to investors. Protests in the streets died down for a bit.

Yet, the supposed economic turnaround simply hasn’t happened. Bribery-related scandals continue to expand in scope. The holiday retail sales of 2016 did no better than 2015. According to Reuters, the economic decline “unexpectedly” worsened in the last quarter of 2016, contrary to all forecasts.

For full-year 2016, Brazilian GDP contracted by 3.6%, a hardly noticeable improvement from the 3.8% shrinkage the previous year. Analysts are still forecasting positive economic growth for Brazil in 2017, but they’ll likely be proven wrong again. Brazilian stocks, as a group, rallied 70% in 2016 largely on hype and thus far unfulfilled expectations. The whole index could plunge this year as the economic depression rolls on, taking VALE stock with it.

Leveraged Balance Sheet: Vale currently holds $4.2 billion in cash, which seems decent. However the company’s long-term debt dwarfs its modest cash position. As of the last filing, the company has $27 billion in long-term debt along with various other obligations. As a result, while VALE stock has a $50 billion market cap, its enterprise value, which incorporates debt, weighs in at more than $80 billion.

Debt is fine. However, taking on so much debt carries extreme risk when you are in a highly cyclical business, such as iron mining. Mining stocks got crushed when commodities collapsed from 2012 onward. Companies like Vale can and did lose 80% of their value in the blink of an eye. During a bust, the equity becomes little more than a call option on the commodity market recovering. Yes, in this case, it paid off. VALE stock recovered spectacularly off the lows. But know that it is likely to dive again the next time iron goes south unless the company pays off a large part of its debtload.

Verdict

Since I live in a relatively stable Latin American country, it is hard to endorse a Brazilian firm. Particularly one (mis)managed by the government. Foreign investors tend to lump all of South America together. However, there are real differences in governance, and Brazil is near the bottom rung of “investability”. VALE stock quotes at lower valuation ratios than its direct peers, but that discount is warranted. Brazil is a basket case economy. Vale, as a leading component of it, is subject to unwelcome outside influence.

If you look past Vale’s poor governance and its excessively levered balance sheet, the bull case is reasonable. A commodity bull market will lift iron prices. Trump is a plus. The share consolidation will improve the company’s optics to foreign investors. However, the negatives still outweigh the pros at least from my vantage point.

At the time of this writing, Ian Bezek had no positions in any of the aforementioned stocks. You can reach him on Twitter at @irbezek.