Vale unveils ‘massive’ buyout program amid Iron Windfall

(Bloomberg) — Vale SA has unveiled its largest-ever share buyback program as the Brazilian iron ore and nickel giant rewards shareholders concerned about slowing Chinese demand.

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The world’s No. 2 iron ore company announced on Wednesday evening that it would buy up to 500 million shares — about 10% of the total number outstanding — in 18 months. Based on Wednesday’s closing price in Sao Paulo, that implies a value of 41.1 billion reais ($8.3 billion).

“It’s a clear sign that Vale thinks its shares are trading at fairly cheap levels,” said Christian Keleti, Sao Paulo-based managing director and portfolio manager at Alpha Key Capital Management. “It’s a massive program.”

Chief executive Eduardo Bartolomeo told investors on a Thursday conference call that he saw no conflict between Vale being a “cash cow” – including the payment of extraordinary dividends plus the buyback program – and having plans growth in iron ore, nickel and copper. “We do not buy the story that iron ore is a mature business on the way out. Vale is a growing class 1 iron ore business.”

The Brazilian mining giant and its peers have been helped by the global economic rebound, but are starting to encounter headwinds in the form of soaring prices for energy and mining supplies like explosives. At the same time, Covid lockdowns in top consumer China are beginning to eat away at manufacturing and construction demand.

Optimism about the takeover was dampened after US regulators accused Vale of misleading investors. The shares, which had risen 4.1% in early trading, were up 2.3% at 1:43 p.m. in Sao Paulo.

Vale allegedly made false safety claims before the January 2019 collapse of its Brumadinho dam that killed 270 people, the U.S. Securities and Exchange Commission said in a statement Thursday. Vale falsely told investors that the company adhered to “the strictest international practices” despite knowing that the dam did not meet international standards, according to the regulator.

“We strongly disagree and will contest the SEC’s allegations,” Vale Chief Financial Officer Gustavo Pimenta said on the conference call.

The buyout eclipsed first-quarter earnings that lagged a year earlier. Profits were hurt by lower sales volumes despite a bonanza in deliveries of high-grade ore to steel mills seeking to limit their emissions. The Rio de Janeiro-based miner produced less iron ore than expected amid licensing delays and heavier than normal rains, with sales lagging behind production. Still, his net income was $4.46 billion, beating analysts’ average estimate of $4.1 billion.

The Brazilian iron ore producer still sees a tight supply-demand market for the steelmaking ingredient, with signs supporting downstream demand from China. Vale sees the invasion of Ukraine increasing the premium for iron ore pellets – a raw material for blast furnaces – as the country and Russia together account for around 30% of the 120 million tonne global market. While second quarter premiums were settled before the dispute, Vale foresees the possibility of higher prices in the next quarter.

Nickel and copper production fell in the quarter due to unplanned maintenance in Brazil and weaker performance in Indonesia. In Wednesday’s report, Vale said it still has a very positive long-term outlook for nickel, driven by strong demand in the electric vehicle sector. Nickel earnings jumped amid the huge price jump, which was partly offset by hedging losses.

The miner said he continues to monitor the impacts of the war in Ukraine and the resulting sanctions against Russia as well as China’s strict Covid-19 lockdowns which “have various impacts on upstream nickel markets and downstream”.

(Updates comments from Vale executives and SEC charges from fourth paragraph.)

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