A view of a tailings dam owned by Brazilian miner Vale that burst, in Brumadinho, Brazil, January 26 2019. Picture: REUTERS/ADRIANO MACHADO
A view of a tailings dam owned by Brazilian miner Vale that burst, in Brumadinho, Brazil, January 26 2019. Picture: REUTERS/ADRIANO MACHADO

For months since Vale’s dam disaster, some of Brazil’s biggest investors snatched up shares in a bet they’d bounce back and then keep rising.

A year later, the gamble paid off, but with a caveat: the stock rebounded, but Vale’s reputation hasn’t — and that’s the problem. While the world’s largest iron-ore producer has like all miners struggled with environmental issues in the past, there’s no denying that a company’s green credentials suddenly matter now more than ever.

“With sustainability growing in importance by the day for the global investor, my big concern now relates to the long term and whether Vale is going to be able to change its image,” said Leonardo Rufino, portfolio manager at Pacifico Gestao de Recursos. “Because if it can’t, the risk is that Vale ends up being a cheap stock forever.”

Pacifico, along with SPX Capital and Vinland Capital, were among asset managers that scooped up Vale stock after the dam break in January 2019 wiped out a quarter of the company’s market value. Though Tuesday marked an important milestone for Vale as shares closed at their highest since the accident, a look at the miner’s valuation tells a different story. Vale still trades at a discount of at least 20% to peers BHP Group Ltd and Rio Tinto Plc, based on enterprise-value-to-expected-ebitda ratio.

Exposure to Vale shares and holding company Bradespar SA at Pacifico Acoes, a fund that Rufino helps manage, rose to about 12% of assets at its peak from 8% at about the time of the dam break. The fund has since sold its position in Bradespar, but Vale is still among its top five holdings.

Generating cash

If all else were equal, Vale’s fundamentals would signal that the stock has more room to run, Rufino said. He still believed further gains were in its future. The company’s generating cash, and analysts from Bradesco, Scotiabank and Goldman Sachs see a good chance of dividends being reinstated this year. Rufino said the nuts-and-bolts fallout from the Brumadinho disaster, including potential liabilities and the hit to output, was “mostly priced in”.

Vale has taken several steps to clean up its image in the aftermath. It replaced its CEO, committed to decommissioning the type of dams that faltered and built a treatment plant to clean up polluted water. At investor meetings last month, it focused on green initiatives, including projects to help it become carbon neutral, and also launched an ESG website. The company declined to comment for this article.

“The company’s been careful, taking a lot of provisions and focusing on handling the problem,” said Rufino, who helps oversee 2.2bn reais in assets at Pacifico. “A discount to its global peers seems unjustified.”

But as the world grows more sensitive to environmental issues, money managers are ploughing more and more funds into investments that fulfil environmental, social and governance — or ESG — standards.

The Church of England dumped Vale after Brumadinho’s tragedy and blocked investments in the miner through an ethical exclusion process. And BlackRock, which upped its stake in Vale to above 5% as of December, struck an urgent note in its annual letter to corporate executives: climate change will upend global finance sooner than they might think.

CEO Larry Fink said his company would take steps to address the issue across the thousands of companies in which it invested.

Brazil’s own reputation isn’t helping Vale. President Jair Bolsonaro has questioned the need for action to combat global climate change and scoffed at his counterparts in Europe who called for him to do more to end the burning of the Amazon.

That backdrop may continue to hinder any Vale upside.

“At some point, we need to see a multiple expansion,” said Rufino.