Vale (NYSE:VALE), the Brazilian iron ore company that had blossomed under CEO Fabio Schvartsman, is back in the penalty box after a dam holding mine waste killed 58 people in central Brazil. Almost 300 people are still missing. Schvartsman had taken over the CEO chair in May 2017 and doubled the value of VALE stock, promising to clean up a corporate culture that allowed a similar but less deadly accident in the Marianas three years ago.
The company’s first reaction was to suspend its dividend, which had been yielding 3.7%; the VALE stock price dropped 8% on Jan. 25 and fell an additional 15.7% in early trade Jan. 28.
Vale had been worth over $80 billion before the disaster, compared with $115 billion for BHP Group (NYSE:BHP) and $88 billion for Rio Tinto (NYSE:RIO), its two primary competitors. Both those stocks were virtually unchanged in early trading Jan. 28.
BHP had been VALE’s partner in the previous disaster, through a company called Samarco, and the company’s recovery from that disaster had been Schvartsman’s claim to fame as a business executive.
The disaster is also a test for new Brazilian President Jair Bolsonaro, whose opponents called him an anti-environmental fascist during his winning campaign last year. He expressed sorrow about the accident and said Israel had promised technology to help mitigate it. The governor of Minas Gerais, where the accident occurred, insisted that laws covering the industry were strict.
Supporters of the company said VALE stock investors have gone insane, but HSBC and Jefferies have already cut their recommendations on the stock from buy to hold, worried that the entire mining industry may be impacted. Some $14 billion in Vale market cap has disappeared in two trading sessions.
Iron ore itself had been trading in a narrow range since 2016, following a plunge starting in 2014 that took two-thirds off its price. The most recent price quoted is $75.26, up about 7% for 2019 so far, thanks to a shift away from scrap steel as a raw material and strong demand from China.
Iron ore prices in China are currently at a 16-month high. The disaster may prove to be a foreign policy blessing to the Trump Administration, forcing China to rethink its imports of scrap and imports from Australia, Canada and even the U.S.
The Samarco disaster wound up costing $5.28 billion, in a settlement BHP and Vale reached last year.
Fortunately for VALE stock owners, Schvartsman had been focused on increasing profits and shoring up the balance sheet rather than gaining new market share over the last two years. The company’s cash balance in September was $6.5 billion, and the company will have time to increase that cash balance further before it faces a jury.
The Samarco agreement took three years to negotiate. It is possible that, if the rest of the business performs and VALE husbands its cash, it could come out the other side of this, which is why it suspended the dividend.
The Bottom Line on VALE Stock
It’s hard to see an argument for VALE stock in the wake of the disaster. The dividend suspension guarantees you won’t see income from it for at least three years, and maybe more, as the cost of the disaster winds through Brazilian courts.
The disaster would seem to make BHP, whose primary source of supply is in Western Australia, a better buy, with a dividend yielding 5.3%, shares that have more than doubled since early 2016.
Rio Tinto, which has performed similarly since 2016 but whose dividend is below 5%, is also more diversified, with mines in Australia and Canada as well as Brazil, and extensive interests in aluminum, copper and diamonds as well as iron.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.