UBS Upgrades Vale On Oil Prices, Cost Dilution

Weakness in iron ore prices is not a major concern for Vale SA VALE, while rising oil prices could act as the main catalyst for the stock, according to UBS.

The Vale Analyst

Andreas Bokkenheuser upgraded Vale from Neutral to Buy, while reducing the price target from $13 to $12.

The Vale Thesis

Despite the decline in iron ore prices to $60 per ton, missing expectations of $65-$87 per ton by a wide margin, Vale will not be significantly impacted, Bokkenheuser said in the note.

He explained that the company’s correlation with iron ore had declined to around 50% in recent years, while its correlation with crude oil had risen to more than 90%.

The analyst noted three main reasons for the upgrade:

1. The energy team at UBS believes oil prices could rise to as much as $48 per barrel in 2021. Rising oil price may “lift the overall iron ore cost curve in support of prices and, in turn, Vale's shares,” the analyst wrote.
2. Following the Brumadinho spill, Vale lost almost 100 million tons of iron ore production. This could result in significant cost dilution as the company ramps, partially offsetting lower iron ore prices.
3. Ramping production is likely to drive freight cost inflation, putting Vale at an advantage versus its peers with higher spot freight proportions.

VALE Price Action

Shares of Vale had risen almost 2.5% to $10.50 at the time of publication Wednesday.

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