Stifel Downgrades Vale To Hold; Sees Iron Ore Price Move As 'Unsustainable'

Stifel’s Paul A. Massoud downgraded the rating for Vale SA (ADR) VALE from Buy to Hold, with the company’s shares having appreciated 82 percent since January 25.

The increase of more than 60 percent in iron-ore prices since December 11 appears unsustainable, analyst Paul Massoud said, while adding that spot prices are expected to “reverse in order to force supply discipline.”

While higher prices are expected to benefit Vale’s near-term earnings, there is no incentive for high cost producers to curtail production at this price, the analyst wrote.

Association With Fortesce Metals

Vale announced a non-binding MOU with Fortesce Metals Group for the exploration of creation of a joint venture to blend the iron-ore products of both companies to meet the requirements of their Chinese customers.

The two companies are also exploring the possibility of Vale joining in Fortescue’s joint mining developments in Australia and acquiring up to 15 percent of listed shares of Fortescue. Vale seems to be hoping to blend high quality Brazilian ore with lower Fe content Australian material in a bid to maintain quality premium, Massoud commented.

“While the potential for Vale to take a minority stake exists over the long term, we believe Vale’s near term goal remains selling non-core assets in an effort to deleverage,” the Stifel report stated.