Contrarian Investment Thesis & Recent Stock Investment
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Hello Fellow Investor,
Welcome for the 1st Contrarian Investment Thesis of 2025.
This company has already been discussed earlier and has belonged to the Example Income Portfolio since July. On Q4 2024, we decided to increase its stake.
On today´s edition we are discussing why & and take a closer look on technical analysis justifying re-entries. You may also review July´s edition from the link below:
Ode for Ore
Vale S.A. (“VALE”) is the largest producer of iron ore in the world, which is critical for the global steel industry. Iron ore plays an essential role in construction, infrastructure, automotive manufacturing, and on other fields of production.
On average, Vale produces over 300 million tons of iron ore annually, with its key operations located in Brazil, including the renowned Carajás Mine —one of the richest iron ore mines globally.1
In addition to iron ore, Vale belongs to top global producers of nickel and copper. As demand for electric vehicles (EVs) grows, so does the need for nickel, as they are key elements for EV batteries. Vale is also well-positioned to benefit from continuous demand, and perhaps even increases in demand of, copper, a critical component for power generation, electronics, and industrial machinery.
Vale’s expansive mining operations span across several countries, including Brazil, Canada, Mozambique, and Indonesia. However, its revenue is still heavily reliant on iron ore and U.S. dollars, leaving Vale vulnerable to commodity price fluctuations.
Does Vale Have a MOAT?
Yes and No.
When considering whether to invest in Vale, it’s important to assess its competitive advantages. A moat helps companies maintain profitability by protecting them from competitors, strengthen market position, safeguard supply chains and generate more profits.
Vale has a strong position, but not invincible, and necessarily not a moat. Here’s why:
1. Market Share in Iron Ore
Vale is able to produce iron ore at a lower cost than many competitors. Carajás Mine further boosts its profitability, especially when demand for iron ore is high. Vale can often weather price fluctuations better than smaller competitors due to its size and cost structure.
2. Integrated Operations & Logistics
One of Vale’s most significant advantages is its integrated supply chain. Vale has control over its distribution network, including railways to cargo logistics. This reduces costs and allows Vale to transport iron ore directly to major markets—an edge over competitors who have to rely for third-party logistics, ultimately strengthening its position in the market.2
Imagine that you would;
own a mine;
own all relevant logistics for operating that mine;
have understanding how to developed those elements further, as a whole?
That sounds like pure potential. At least if people in charge will think big enough.
3. Diversification into Nickel and Copper
Vale is not just dependent on iron ore.
Vale also produces nickel and copper, both of which are essential to the growing electric vehicle (EV) market. As demand for renewable energy and EV´s grow, Vale’s focus on these metals could eventually turn out to be a good thing. The increasing adoption of clean energy technologies boosts the demand for nickel and copper, which adds another layer to Vale’s competitive advantage.
Sector cost of entry
Similar to railroads, the entry of cost for new operators is massive, as entering the market requires substansive investments, land, and operative licenses.
Although the global mining industry is extremely competitive, it is quite unlikely that new competitors would threat Vale’s position, even with the help of latest technology.
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Political risks - worth to consider?
Yes. But not for too much.
Vale’s head of operations are primarily located in Brazil, exposing the company to several political risks that investors must consider. Here’s a breakdown of the potential risks:
1. Brazil's Political Instability
Brazil has a history of some political instability. Frequent changes in government, policy shifts, and social unrest could lead to alterations in tax laws, mining regulations, and environmental policies. Any major political shifts could directly impact Vale’s ability to operate and affect its profitability.
Then on the other hand, Vale is one of the biggest companies in Brazil - also distributing products and sales outside of the country. And how about employment the company offers? It would be quite unlikely, that companies with such a domestic status would be targeted in purpose. Possible, but worth the risk.
2. Environmental Accidents
In January 2019, a dam holding back mining sludge at the Córrego do Feijão iron ore mine in Brumadinho, southeastern Brazil, collapsed. Around 10 million cubic meters (2.6 billion gallons) of the liquefied waste, or tailings, burst out of the dam, flattening nearby settlements, destroying a railway bridge, sending a surge of toxic mud into the Paraopeba River.
In all, the disaster killed 272 people.
The company behind the dam, Vale S.A., Brazil’s biggest miner, was ordered to pay $7 billion in damages to the affected communities.3 Stuff like this happens sometimes, unfortunately, although no now wants it and no one can predict such accidents.
3. Government Influence and Nationalization Risk
The Brazilian government of course has considerable influence over the company’s operations. While Vale remains a publicly traded company, this government politics, trends or involvement to company operations can lead to conflicts, especially around fiscal policies or taxation.
Technical Analysis
Monthly:
Below you may find a +20 years price chart. It´s pretty cyclical yes, and different from news headlines taken by Nasdaq or famous tech stocks.
Basically, the price has hit all-time-lows and all-time-highs and wondered between. Since 2010 the price has not been able to reach previous highs, as you can notice from picture below.
However, the upside reactions from lower price regions have been strong. Around 530% since 2016 and 190% since 2020, respectively.
Daily:
The Price broker Weekly Key Level.
Next Support around 6,5 dollars? Next strong reaction around 6,5 - 7 dollars?
Closing Thoughts
We hold a stand, that Vale S.A. is a huge global company with international demand for its products and services. Political and currency risks are included, yet, such risks are always included to some extent. International trade should protect Brazil´s currency risks a bit.
Based on technical analysis, Vale is heading downside. For how long and when it turns, no one knows.
The Contrarian Thesis is a basis to invest for Vale. We´d expect the price to take turn in the upcoming years, depending of course a lot out the general market situations globally. At this stage, Vale S.A. offers dividend during the time well waiting to see, how everything eventually folds.
Investment
We’ve added 100 stocks of Vale S.A. with a price of $9.
This investment was made with 9-5 salary income.
Vale ADR now is up to 14% of the Example Income Portfolio. Yield on cost for Vale is approx. 13 % annually. The Example Income Portfolio size (updated on later February).
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https://www.mining-technology.com/projects/carajas-iron-ore-mine/
https://vale.com/check-out-our-company
https://news.mongabay.com/2024/02/scientists-now-know-how-the-brumadinho-dam-disaster-happened-and-the-lessons-to-learn/