Vale S.A.

VALE Details

Resuming Operations at Samarco: Vale S.A. (NYSE: VALE) is a mining company, involved in the production of ore, pellets, and nickel. As on 28 December 2020, the company’s market capitalization stood at ~$85.82 billion. On 23 December 2020, VALE informed that following the extensive commissioning tests, it has resumed its operations at Samarco Mineração S.A. with 7-8 Mtpy production capacity. Currently, the company is using one of the three concentrators to beneficiate iron ore in Germano Complex and expects to restart a second concentrator in approximately 5 years to reach a range of production of approximately 14-16 Mtpa. VALE also expects to start the third concentrator in around 9 years, with production volume expected in a range of approximately 22-24 Mtpa.

Capanema Project Update: On 21 December 2020, the company confirmed that it has received the required licenses to start the construction of the Capanema Project located in the municipalities of Santa Bárbara, Ouro Preto and Itabirito (MG) Brazil. The company anticipates the start-up to happen in the second half of 2023. It further expects production capacity by natural moisture (without tailings generation) of 18 Mtpy (Metric Tons Per Year) and in the first years, which will bring a net addition of 14 Mtpy of capacity to VALE.

Q3FY20 Result Highlights: For Q3FY20, the company reported a proforma adjusted EBITDA of $6.224 billion, up by $2.638 billion on Q2FY20, mainly driven by the 26% increase of iron ore realized prices and 20% higher iron ore sales volumes in 3Q20. Due to decent EBITDA and a small increase in working capital versus production and shipments acceleration, the free cash flow from operations grew by $3,474 million to $3,751 million in Q3FY20, compared to the previous quarter. As at 30 September 2020, the company had net debt of $4,474 million.

Proforma Adjusted EBITDA (Source: Company Reports)

Market Outlook: With WSA forecasting stability in steel production in China, the outlook for iron ore products has improved. Further, due to the recovery in global industrial and construction activities, the Seaborne coking coal market is also expected to strengthen in 4Q20.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Month

Stock Recommendation: Over the last three months, the stock has provided a return of 59.48% and is trading close to its 52-weeks high price of $17.46. On the technical analysis front, the stock has a support level of ~$15.14 and resistance of ~$17.15. We have valued the stock using an EV/Sales based illustrative relative valuation method and have arrived at a target price with a limited upside (in % terms). For the purpose, we have taken peers like Commercial Metals Co (NYSE: CMC), Southern Copper Corp (NYSE: SCCO), Nucor Corp (NYSE: NUE), etc. Considering the company’s decent returns in the past few months, and current trading levels, we are of the view that the stock has factored in most of the positives of the company at current trading levels. Hence, we suggest investors to wait for better entry levels and give an “Expensive” rating on the stock at the closing price of $16.73, down by 0.95% as on 28 December 2020.

VALE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Lithium Americas Corp.

LAC Details

Thacker Pass Lithium Project Update: Lithium Americas Corp. (NYSE: LAC) is a development-stage company advancing the Cauchari-Olaroz lithium brine project in Jujuy, Argentina and Thacker Pass lithium project in Nevada, USA to production. As on 28 December 2020, the company’s market capitalization stood at ~$1.3 billion. Following a comprehensive review of the potential impacts of the Thacker Pass lithium project, the company recently released the Final Environmental Impact Statement. The company now expects the issuance of the Record of Decision (ROD) by the BLM in early 2021. This will be the final step in the Federal permitting process for Thacker Pass.

Q3FY20 Result Highlights: During Q3FY20, the company continued construction activities at Caucharí-Olaroz Lithium Project and made significant progress on the lime plant, SX plant, concrete works on the carbonate plant units and solar evaporation ponds. The company also made significant progress in the development of Thacker Pass Lithium Project. During the quarter, the company incurred total expenses of $5.7 million and incurred a net loss of $6.5 million. The company ended the quarter with cash and cash equivalent of $72 million, including an $18 million drawn from its credit facilities to fund Caucharí-Olaroz.

Q3FY20 Results (Source: Company Reports)

Outlook: As per Thacker Pass development schedule, the company expects to receive all major permits in Q1 2021. The company is currently fully funded to advance Caucharí-Olaroz to production and expects to have excess liquidity available under its credit facilities. The production from Caucharí-Olaroz is expected in early 2022.

Stock Recommendation: During Q4FY20, the company received gross proceeds of $100 million from the ATM financing. As a result of this, the company’s cash balance has now increased to $145 million. Over the last six months, the stock of LAC has provided a return of 168.04% and is currently trading higher than the average 52-weeks’ price level band. On the technical analysis front, the stock of LAC has a support level of ~$8.97 and resistance of ~$15.28. Considering the steep increase in the stock price over the last six months, and current trading levels, we are of the view that most of the positives of the company have been factored in at current levels. Hence, we suggest an “Expensive” rating on the stock at the closing price of $12.33, up by 0.16% as on 28 December 2020.

LAC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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