Vale Seen Cheap by HSBC as Cost Cutting Produces Ray of Light

  • HSBC upgrades Brazilian mining giant on cost-cut benefits
  • Iron-ore prices fell below $50/ton as China steel demand sags

As iron ore dives below $50 a metric ton and Chinese steelmakers speak of collapsing demand, some analysts see a ray of light for the world’s top producer Vale SA.

The Brazilian miner received a buy recommendation this week when analysts at HSBC Holdings Plc upgraded the stock, citing cost reductions and quality improvements to mined material that can help boost premiums.

The move helped push the percentage of buy recommendations for the producer’s American depositary receipts to 26 percent. That’s up from 20 percent on Oct. 20, the lowest since at least 2001, according to data compiled by Bloomberg. Currently, 28 percent of analysts are recommending to sell the stock and the remaining 46 percent have a neutral view. ADRs of the Rio de Janeiro-based company tumbled almost 60 percent over the past year amid the rout across commodities.

“Investors are overly focused on iron-ore prices and have overlooked the potential of cost reductions and quality premium to offset falling prices," HSBC analysts led by Leonardo Shinohara wrote in a note to clients, boosting their recommendation from neutral. “Our 45 percent upside for Vale’s stocks suggests that the market hasn’t priced in cost/quality resilience yet."

Vale, the world’s largest iron-ore and nickel miner, on Thursday reported a decline in third-quarter earnings as slumping metal prices overshadowed efforts to focus on higher quality deposits and cut costs. The company is producing more higher-quality iron ore and halting some of its most expensive output to navigate an oversupplied market.

Iron ore, the key ingredient in steelmaking, on Wednesday sank back below $50 a ton, the lowest since early July, on speculation that a global glut that saw prices retreat more than 70 percent since a peak in early 2011 will deepen. Steel demand in top producer China is collapsing along with prices, banks are tightening lending and losses are stacking up, an official at the China Iron & Steel Association said on Wednesday.

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