Under the best of circumstances, investing in Brazilian companies is tricky business because of concerns about political and economic stability. But for those involved with mining giant Vale (NYSE:VALE), their situation gives a whole new meaning to the word ugly. Throughout this year, Vale stock has been a choppy, volatile mess.
Of course, the pain started early in the year when the company’s Brumadinho tailings dam collapsed. Tragically and horrifically, the dam contained mining waste from the nearby Corrego do Feijao mine. The incident caused a torrent of muddy sludge to rip into the area. Approximately 300 people lost their lives.
Unsurprisingly, the stock cratered following the incident. More volatility hit shares when Brazilian prosecutors leveled criminal charges against the mining company, including murder, manslaughter and environmental damage.
Further, prosecutors sought false representation charges against Vale and German inspections company Tuev Sued for certifying that the dam was safe just prior to its collapse.
Quickly, Vale cleaned house at the executive level, anxious to separate the company from its criminally bad actors. While that may satisfy some stakeholders of Vale stock, the optics are likely to get worse.
A few days ago, Reuters reported that now-ousted former CEO Fabio Schvartsman received an anonymous email weeks before the collapse. In it, the sender stressed that there are “dams at their limit.”
But rather than investigate the claim, the email offended Schvartsman. Instead, he demanded that the company find out who sent the warning. And while Vale has defended the charge of apathy by stating that the email was non-specific, here’s the reality: the dam collapsed.
With so many lives lost, that puts Vale under substantial pressure.
Vale Stock Is an Intriguing Risk
I’m not going to sugarcoat it: Vale has many dark clouds hanging over the organization. That said, the company’s equity has some intriguing points for contrarians and risk-takers.
First, the adage, be greedy when others are fearful may apply here. Because the headlines are almost always focused on the miner’s Brumadinho disaster, any positive development may trigger a rally. Indeed, throughout this year, we’ve seen the Vale stock price surge on key news items.
Of course, this dynamic works the other way, so buyer beware.
Second, despite the inherent volatility of iron ore prices, investors have reasonable confidence that market value will rise. Since late 2015/early 2016, iron ore prices have steadily increased. Also, a significant thawing in relations between the U.S. and China may lead to a trade war resolution.
For Vale stock and its ilk, the conflict between the top-two economies of the world plagued their underlying industry. Presumably, a trade deal would restore demand, turning the lights back on for the iron-ore mining sector.
Even if a deal doesn’t materialize – and that’s not out of the question given the many head-fakes – iron ore prices can still move higher. That’s because the U.S. Federal Reserve has steadily pushed a dovish narrative in terms of monetary policy. In other words, the Fed is attempting to drive more inflation into the dollar.
Since the greenback is the world’s reserve currency, that’s net positive for all commodities. Generally, it’s also positive for the stock market. Heading into a critical election year, President Trump desperately needs strong financial metrics. Expect the monetary spigot to flow generously.
Finally, Vale has strong operating and net margins as it is. Any inflationary pressure on iron ore prices should help the bottom line even further.
But Here’s Why You Should Be Careful
Although Vale stock is intriguing due to its discount, when compared to other players, it loses its luster.
And on a technical basis, both BHP and Rio have incurred significant declines relative to their 2019 highs. Thus, Vale stock isn’t the only discount you can get today. You have very similar names to choose from.
But perhaps the biggest difference is that BHP and Rio Tinto didn’t kill 300 people this year. Because they don’t have the liabilities associated with Vale, their payout is much more credible. Immediately following the Brumadinho disaster, Vale suspended dividends.
Is there a contrarian case for Vale stock? Absolutely! But the problem is that its closest alternatives are safer, and in some respects, look superior.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.