Can Vale still be a ‘buy’ opportunity after Brumadinho?

Since January 25, 2019, Brazilian mining company Vale has been living something approaching an astral hell. On that day, a dam failure in the south-eastern town of Brumadinho caused 251 deaths and brought back investors’ worst flashbacks from the previous tragedy at Mariana, including a wave of legal processes and charges, damages, and sanctions. However, as the dust settles, investors and analysts are beginning to reassess the company and, with the publication of Q3 earnings on the horizon, prospects are less obscure than one might expect.

Vale’s investment thesis can be split into pre- and post-Brumadinho. Boosted by its “Mariana Never Again” slogan, Vale had mitigated its reputational hit from what was at the time the worst environmental disaster in Brazil, and was perceived by the market as being a solid company that generated huge cash flow and was set to pay out some USD 6 billion in dividends in 2019, according to analysts’ calculations seen by newspaper Estado de S.Paulo. 

After the tragedy, the company not only saw BRL 70 billion wiped in a single day, as its shares traded on the São Paulo stock market plummeted 24 percent. It also had to suspend the payment of dividends to shareholders and executives bonuses—more as a reputational precaution rather than an inability to pay. Provisions and damages expenses added up to BRL 23.236 billion by the halfway point of 2019.

To make things even worse, there was a fear that neighboring structures at the Brucutu mine might collapse, which interrupted the production of Vale’s largest mine in the state of Minas Gerais, with the capacity to produce 30 million tonnes of iron ore per year. 

When life gives you lemons …

Vale is the third-largest mining company in the world, as well as the largest producer of iron ore, meaning that global supply is linked to the company’s struggles. As a result of the supply cut, benchmark iron ore prices traded in China reached 5-year highs. Even after a slow down, the Dalian Commodity Exchange contract for January has...