"September Investor Tour: Lower Capacity Targets; Decarbonization Initiatives
Bottom Line: Vale hosted its annual September investor tour today virtually (slides here). This year's event primarily focused on adapting to the steel industry's decarbonization initiatives. Vale also reduced its forward-looking iron ore capacity targets, but the lower capacity still remains above our current 2022/2023 production estimates. Overall, interesting longer-term iron ore briquetting initiatve (albeit early days/relatively small currently), but primary driver remains the iron ore market/outlook, in our view. We maintain our view VALE is inexpensive on meaningfully lower-than-current longer-term prices, but we acknowledge primary near-term headwind remains falling IO prices.
Key Points Iron Ore Production/Capacity: 2021 production target of 315-335mmt unchanged. 2021 exit rate capacity of 343mmtpy unchanged. 2022 exit rate capacity target lowered to 370mmpty, vs. 400mmtpy previously, citing Northern System licensing/ramp-up delays (details in slides linked above). 'Future' exit rate capacity target lowered to 400-450mmpty, vs. 450mmtpy previously. By way of comparison, our 2022E/2023E production estimates are 359mmt/375mmt.
Iron Ore Market/Capital Allocation/Base Metals Spin-Out Commentary: Limited Market Commentary: Vale reiterated expectations for September/October seasonal demand recovery, but acknowledged it has not yet materialized given China steel production constraints. Capital Allocation: Reminder...September is semi-annual dividend month...plan remains to pay above the minimum (nothing definitive/new). Base Metals Spin-Out: Significant shift in tone away from a potential spin-out, citing more investor interest in growing that business vs. harvesting the cash via an IPO.
Decarbonization/Sustainability Initiatives: Vale outlined new product/process initiatives aimed at decarbonization/improving sustainable processing, including: Iron Ore Briquettes: New patented product branded as a more environmentally friendly substitute vs. pellets/lumps/sinter (reduced processing steps and lower drying temps). Three plants under construction, 2023 start-up, ~$185M capex, ~7mtpy production. Vale framed ultimate potential of ~50mtpy and $500M/year of incremental EBITDA. Dry Concentration Processing: Vale building-out dry concentration capabilities as a substitute for traditional wet/dry processing. Key benefits: No water usage (i.e., no tailings dams); final product up to 68% Fe content; scalable modular design. First plant under construction (~$150M capex, 1.5mtpy capacity); three larger plants targeted for 2023 approval.
Bigger Picture: Overall, maintain our view VALE shares are inexpensive on lower than-current longer-term prices. Near term, primary headwind remains falling prices. Based on BMO's iron ore price forecasts for 2H'21/2022/2023 of $140/$108/$83 (vs. IODEX spot of ~$130/t), Vale shares are trading at 2022E/2023E EV/EBITDA of 2.9x/3.4x, and 2022E/2023E FCF yields of 18%/12%. $27 TP continues to represent 4.5x/5.5x 2022E/2023E EV/EBITDA using price assumptions noted above."
