Vale's Base Is 'Crumbling,' Warns HSBC Analyst Amid Downgrade

• Vale SA (ADR) VALE shares have been on a downward trajectory, and have plummeted 57 percent since July 20.
• HSBC’s Leonardo Shinohara downgraded the rating for the company from Buy to Hold, while reducing the price target from $5.00 to $2.20.
• Vale’s value is crumbling due to the falling iron ore and base metals prices, Shinohara stated.

HSBC’s Global M&M team indicated that steel intensity in China may have peaked, and projected 1 percent medium-term growth in global steel production, with Chinese steel demand declining by 1.2 percent in 2016 and by 0.2 percent in 2017.

The average iron ore price estimates for 2016, 2017 and the long-term have been reduced from $52/t to $41.0/t, from $53/t to $39/t and from $58/t to $54/t, respectively.

Product quality and cost resilience appear insufficient to support EBITDA, with the average iron price estimate for 2016-2018 at $39/t, analyst Leonardo Shinohara said. The 3-year EBITDA for Vale has been reduced by 33 percent to reflect the revised price forecast. The analyst added, however, that Vale should be able to control cost, which would ease the impact of the decline in price.

“Bridging the FCFE gap in 2016 will be challenging, in our view, with low prices and Samarco’s liabilities,” Shinohara wrote. A negative $282m FCFE is forecasted for 2016, which reflects:

1. $1.0bn asset sales
2. The recent debt increase worth $2.0bn
3. Samarco’s capital increase of $2.0bn

With debt increase appearing unavoidable, Vale is unlikely to pay dividends in 2016, Shinohara mentioned.