Vale, BHP To Resume Iron Ore Operations At Samarco; Street Sees 12% Upside

Vale and BHP (BHP) on Dec. 23 announced that they will resume iron ore pellet production at their Samarco Mineração joint venture following a dam rupture in 2015.

Vale (VALE) plans to resume Samarco operations at the Germano complex in Minas Gerais and the Ubu complex in Espírito Santo, located in Brazil. Vale and BHP Billiton Brasil each hold a 50% interest in Samarco. The Fundão dam rupture on Nov. 5, 2015, led to the suspension of Samarco’s operations. 

The company said the move follows independent tests, which have been carried out at the Samarco sites to ensure a safe restart of operations. Samarco’s operations are expected to resume with a production capacity of 8 MTPA (metric tonnes per year).

Additionally, Samarco plans to restart a second concentrator in 5 years to reach a production range of 14-16 MTPA following the receipt of the corrective operation license in Oct. 2019. The restart of the third concentrator in 9 years could lead to production of 22-24 MTPA, the company estimated.

On Dec. 3, HSBC analyst Jonathan Brandt reiterated a Buy rating on VALE stock and raised the price target from $14.75 to $17.25, following the company’s annual investor day meeting.

While Brandt was slightly disappointed by the company’s revised iron ore guidance, he noted that management reiterated a commitment to propose strong shareholder returns as the main use of the company’s free cash flow.

Brandt believes VALE is likely to narrow its valuation gap with rivals BHP and Rio Tinto (RIO) as the dividend yield approaches its peer group, its ESG [Environmental, social, and governance] focus improves, its cash costs continue to fall and the company’s iron ore production reaches 400 MT. (See VALE stock analysis on TipRanks)

From the rest of the Street, the stock scores an analyst consensus of a Strong Buy based on 7 Buys and 2 Holds. The average analyst price target of $18.88 implies upside potential of 12% at current levels.

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