Lawyers, Dams and Money

Hey Influence Traders,

By all accounts VALE S.A. (Ticker: VALE), the Brazilian mining and metals producer, should be celebrating fantastic stock performance.

It is taking in near record revenues during a time when demand for its products is high.

VALE operates in an attractive sector, particularly given infrastructure and green energy initiatives around the globe.

A recent projections report from the company shows that it expects production to increase in 2022.

That should be helped by a recent announcement that VALE will create more cash on its balance sheet when Vale Canada signed a deal to sell its 50% stake in California Steel Industries to Nucor Corporation (Ticker: NUE) for $400 million.

That transaction, which should close in the first quarter of 2022, will allow it to run lean and focus on its core businesses.

VALE increased its revenue by over 40% year-over-year, and had revenue of $208 billion in 2020. While that number will be slightly lower in 2021, it is still near record-high levels.

Tie into that a low P/E of 4%, EPS of 3.9%, and a 22% dividend yield make for an attractive investment.

But VALE’s stock price has languished.

Trading guru Andrew Giovinazzi and I have followed VALE for a long time and have been able to make some profitable trades around it.

One hallmark of the stock was that it was always volatile, which made for attractive options plays.

But even the vol has stagnated.

Mining is a hazardous industry.

But the hazards of mining are not just below ground … they also reside in the courtroom.

And VALE has had legal issues.

Impact on Supply Chains

In April this year, VALE was fined $430,348 by the Brazilian city of Itaguaí for non-compliance with environmental laws at a port site.

That followed the temporary closure of its iron ore terminal in Mangaratiba for the lack of an operating permit.

Those issues were temporary thorns in VALE’s supply chain.

Damn, Dams

Two years ago, a dam collapsed at a VALE mine in Brazil killing 270 people.

The collapse opened a flood of wastewater that buried the employee cafeteria and dozens of homes under toxic sludge.

The spill also created an environmental catastrophe when the sludge polluted local rivers.

As a result, VALE agreed in early 2021 to pay nearly $7 billion in compensation to the Brazilian state of Minas Gerais to provide funds for affected communities, emergency aid and resources for urban mobility.

That was the largest settlement in the country’s history.

But it was not the first disaster to strike Minas Gerais.

A dam burst in 2015 flooded the village of Mariana and killed 19 people.

The mining company Samarco (Ticker: SAMNE) — a joint venture between VALE and BHP Billiton (Ticker: BBL) – agreed to pay $6.2 billion in restitution for that collapse in 2016.

In October of this year, prosecutors in the state of Minas Gerais filed a $457 million lawsuit against SAMNE, VALE, and BBL claiming that they have not fulfilled the terms of their prior settlement agreement.

Digging a Deeper Hole

Apparently, the settlement was not sufficient.

Recently, Brazilian police recommended criminal charges against VALE for its role in the 2019 disaster.

The federal police probe concluded that “various pollution-related crimes" were committed, as well as crimes “against land and water-based fauna and flora."

The police also recommended multiple homicide charges, including homicide, against 19 people who worked for VALE (the dam’s owner) and German company TUV SUD (which inspected the dam).

Federal prosecutors will now determine if they will bring the recommended charges.

That will certainly cause the company to pause on some of its business activities.

Conclusion

These disasters have caused the Brazilian government to engage in renewed scrutiny of VALE’s mining practices and environmental regulations.

In turn, the myriad of issues facing VALE are causing investors to pause on the stock to evaluate the impact.

Andrew and I will continue to monitor and look for trading opportunities.

The Full Capitol Gains Trading Log is Here.

Cutting Through The Noise For You,

Frank

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.