“Effect” Vale (VALE3) eases Ibovespa’s decline since the election, with a 39% jump for the mining company: will the climb continue?

Despite the uncertainties surrounding the Brazilian market in relation to the new government, the leading Brazilian market index, the Ibovespa, has shown resilience since the election of Luiz Inácio Lula da Silva.

Since the PT was elected to the Presidency of the Republic until the close of last Wednesday (18), the index went from 114,539 points (closing of October 28, 2022, round before the second round) to 112,228 points, which corresponds to a decrease of only 2% over the period.

At first, this could indicate that the Brazilian market is “on the sidelines”, not echoing PT statements that pointed to higher intervention and public spending, as well as fiscal risks that are on the radar.

However, a closer look could indicate that there was one important factor responsible for smoothing Ibovespa’s movements: Vale’s shares (VALE3), which correspond to Ibovespa’s highest individual weight, with a stake of nearly 16% in the index.

As evidenced by a study conducted by XP’s research strategy team, excluding the “Vale” effect of Ibovespa, the Brazilian Stock Exchange index would have fallen by 5.9%, or a difference of 3.9 percentage points ( pp).

This is because, from the election of Lula until the close of Ibovespa on Wednesday, Vale’s shares rose by about 39%, from R$67.25 to R$93.34, with a surge in iron during the same period amid signs of opening up in China and the resulting impact on demand. Over the same period, the price of the most traded commodity contract on China’s Dalian Stock Exchange rallied by about 45%, from US$86 to US$125 per ton.

Meanwhile, shares aimed at the domestic market have fallen sharply. The B3 consumer stock index (ICON) fell 17% over the same period, amid signs of an economic slowdown in Brazil and the prospect of longer-term high interest rates hitting companies in the sector.

Source: XP

What to expect for stocks? There’s optimism…

With this scenario outlined, questions like whether Vale’s actions will continue to support Ibovespa are on the radar. Most analysts’ view remains positive for Vale’s stock, even if they are cautious, which underscores that the stock is already pricing in the Chinese reopening scenario.

On the positive side, in a recent survey of executives, Itaú BBA highlighted the more positive perception of the so-called buy side with mining companies in the commodity universe. In addition to a higher exposure to commodity companies, the exposure to the mining sector is higher.

“Only 43% of respondents said their current allocation in the steel, mining and pulp and paper sectors is below the historical average, compared to around 70% in our last survey. There seems to be a more optimistic sentiment towards China, which has led investors to change their sector and company preferences: the
the mining sector is the first choice, with Vale as the first choice in this segment”, highlight Daniel Sasson and team, analysts who signed the report.

In regards to sector preferences, 49% of buy-sides prefer mining, which now appears as the “most preferred” sector (was pulp and paper, with 45%), with Vale appearing as the first choice in mining and steel with 49% preference, followed by Gerdau (GGBR4;34%) and CSN (CSNA3;8%).

BBA analysts understand that optimism about China directly reflects investor perception:
74% believe that the mining sector is the one that benefits most from the recovery of the economy of the Asian giant. Investors have revised their iron ore forecast upwards for 2023: In August, just 18% of investors estimated iron ore above $100/tonne, while that number is already at 56%.

This in a scenario in which the perception of Brazil has slightly worsened among investors, with estimates of lower GDP growth, which leads to an increase in the position of companies whose performances are more linked to the external scenario.

Bradesco BBI also has an optimistic view of Vale and reiterated the outperform recommendation (performance above market average, equivalent to buy) for the company’s shares traded on B3 and for the ADR (receipts of shares traded in the US) . The target price of the VALE3 was raised from BRL 92 to BRL 120 (upside of 28% compared to the close of the previous day) and that of the ADR from USD 18 to USD 23 (upside of 27%), with the bank highlighting the action as first choice in the mining and steel industry together with Gerdau.

The move follows improved BBI forecasts for iron ore prices for 2023 and 2024, to US$130 and US$100, respectively, from US$100 and US$80 previously.

Thiago Lofiego and his team, who signed off on the bank’s report, cited China’s economic reopening and pro-growth policies, as well as lower-than-expected supplies and low inventories at Chinese steelmakers.

“After a volatile 2022, which led to suboptimal activity, China’s economy is poised to recover to healthier levels of GDP growth in 2023, driven by the reversal of Covid-zero policies, substantial household savings , as well as the government’s fiscal and monetary stimulus measures.While short-term risks remain (e.g. increased prevalence of Covid-19 cases during/after the Lunar New Year), it is clear to us that the recovery in economic activity should be a key driver of metals demand growth throughout 2023, in many cases offsetting the impact of weaker economic growth elsewhere (e.g. in the US and Europe),” they assess.

In particular, continued investments in infrastructure, higher consumption of manufactured goods on the domestic market and higher confidence in the real estate market (following the implementation of the stimulus measures) should support
the demand and prices of metals in 2023, highlighted.

The projection is for earnings before interest, taxes, depreciation and amortization (EBITDA) of $26 billion for Vale in 2023, which leaves the stock with a multiple they consider “still attractive”, while compensation is expected for the shareholders of US$11 billion, of which US$5.4 billion in dividends and the remainder in share buybacks.

Among the risks to the investment case, analysts cite the continued spread of Covid-19 in China and talks about higher taxation in Brazil.

There are those who see the shares already listed…

Reporting on the outlook for Ibovespa in 2023, several strategists highlighted the reopening of China as one of the catalysts of the index this year with the momentum of commodity stocks, even though the domestic scenario calls for more caution from investors.

However, some houses, such as JPMorgan, already see Vale’s shares as not so obvious in the current scenario. Analysts have recommended overweight (exposure above the market average, equivalent to purchase) for assets, but it should be noted that the stock is in line with the historical average, while the cheapest of the basic materials is Gerdau (GGBR4).

Goldman Sachs, in a recent report comparing the prospects of Petrobras (PETR4) shares versus Vale’s, reiterated a neutral recommendation for both assets and said Vale’s shares are already at reasonable levels, but stressed that there may still be a near-term boost to the mining company’s shares.

“Despite still weak physical steel demand in China, the combination of positive macroeconomic sentiment and seasonal replenishment amid times of tight supply in Q1 could continue to support Vale stock price in the near term,” he commented. Additionally, analysts note that some investors continue to see Vale as an attractive name to have in your portfolio in times of heightened political uncertainty due to the export nature of its business.

Bank of America also has a neutral recommendation for Vale’s assets, with newspapers already pricing the ore at between $100 and $110 a ton.

on the podcast Action selectors On Thursday, Bruno Garcia, founding partner of Truxt Investimentos, said he was skeptical with ore prices at $120 a ton and had a more optimistic view with oil due to the supply deficit. In this scenario, he stressed that, in case Vale shares exceed R $94, he will have a negative view (shorts, projecting the fall) onto the paper. In the early afternoon of this Friday, the shares rose by 0.7%, to around R$ 94.40.

“But it is complicated because the market is very thematic when it is said that China will reopen call it is mining and steel. However, if you look at how much money Vale generates at the current level, it generates roughly 10%, 12%. There are much better options in the Brazilian stock exchange and also in the commodity market,” he assesses.

According to a compilation made by Refinitiv with 18 analyst houses covering the VALE3 paper, 12 have a buy recommendation and 6 have a neutral recommendation, with an average target price of 99.58 BRL, a modest 6% increase since the close of vigil.

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