Why Vale SA (ADR) (VALE) Stock Is Still a HUGE Risk

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Over the last month, several analysts have been telling all who would listen that they need to buy mining stocks. Not just any mining stock, a Brazilian mining stock. Vale SA (ADR) (NYSE:VALE) is the stock in question. VALE’s business is mining coal, iron ore and nickel — the makings of steel. The company produces other metals as byproducts, and mine fertilizer.

Why Vale SA (ADR) (VALE) Stock Is Still a HUGE Risk

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VALE stock closed Mar 21 at $9.44 per share, with a market cap of about $50 billion.

With the Brazilian Real trading at 3.15 to the dollar, it produced about $500 million in net income on $8 billion in revenue for its last quarter. Some of the optimism on VALE is based on iron ore prices, which have doubled since June. Some is based on shipping prices for the ore, which have fallen. But there is more to the VALE investment case than that.

VALE: Brazil Turning a Corner

More than half of VALE stock is held by agencies of the Brazilian government, which has been convulsed in bribery scandals, and the government is now separating itself from business. Creating a single class of stock will water down government influence, although that may not be as big a deal as it appears.

CEO Murilo Ferreira is getting the boot in May and while new president Michel Temer will name the replacement, it’s expected to be the last time the government calls the tune in this way. Temer’s government is said to be more conservative, more pro-business than that of predecessor Dilma Rousseff.

But there’s more. VALE produced a record amount of iron ore last year, moving production from southern Brazil to the Amazon, and it will soon re-start production at a mine co-owned with BHP Billiton Limited (ADR) (NYSE:BHP) that suffered a deadly dam burst in 2015.

By mothballing inefficient mines, re-opening the Samarco mine with BHP and increasing production at more-efficient mines, the hope is that VALE stock will get good margins and make fat profits in 2017. By removing government interference from the boardroom, the hope is that Vale shareholders will reap the full benefits.

However, as InvestorPlace contributor Ian Bezek took a look at all this recently, he concluded that, while many signs are positive for VALE in the near-term, it’s still a Brazilian company.

While 3G Capital is also a Brazilian company, the government has no holding in it, as it does in Vale, and the local economy is still mismanaged. A 2016 turnaround for Brazil never materialized, with an unexpected drop in GDP, so trust is at a low ebb.

Then there is VALE’s debt — about $30 billion worth. That’s less than 30% of the company’s assets, and it has been heading down in recent years, but the boom-bust cycle for mining stocks makes that debt a significant overhang if something unexpected happens in the iron ore market. The government’s continuing role in VALE is why Bezek can’t recommend the stock.

The Bottom Line on VALE Stock

VALE, and companies like it, are a big reason why U.S. investors do most of their international buying through mutual funds that take out a big piece of the action each year in the form of fees, but earn those fees by supposedly staying on top of things, and keeping a diversified portfolio.

Investors are quickly learning, however, that political risk exists everywhere, and that such risk isn’t a question of left or right, but right and wrong. Brazil has been down so long anything looks up from here, and folks like the 3G boys have always made money there regardless of the government, taking advantage of instability and making it their friend.

In other words, if you like a little speculation, and you’re tired of playing the big techs, take a good look at VALE stock. Your speculation is as much on iron prices as on Brazil, which means you’re betting here on Trump’s ability to whip deflation now.

Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/vale-sa-adr-vale-stock-still-huge-risk/.

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