8%+ Yields From Brazil’s Iron Giant

Roughly 3,000 years ago, some tinkering pyromaniac discovered he could make wrought iron using a crude furnace.

Thanks to this unknown genius, civilization would never be the same. The Iron Age lasted from 1200 BC to 550 BC.

Agriculture, toolmaking, and warfare all leapt forward.

Despite the impact of this breakthrough, iron technology evolved slowly. The blast furnace, which allowed iron to be melted (as opposed to wrought), wasn’t invented until 500 BC in China. And it wasn’t until the 1850s that the modern steelmaking process was discovered in England.

Iron and steel have had an incalculable impact on human civilization. In many ways, we are still in the iron and steel age today.

It was steel, and the iron which it’s made of, that powered the second Industrial Revolution. Railroads, combustion engines, bridges, cars, and more were all made possible thanks to iron ore.

Steel is a uniquely strong and resilient alloy, and no other metal can replace it. Breakthroughs in steel continue to this day, with SpaceX’s massive Starship being made from a new steel alloy, as well as some of the latest hypersonic missiles.

Iron ore and the steel made with it are absolutely critical in the modern world. However, over the past few years iron ore prices have been beat down. This gives us a chance to buy one of the best iron miners in the world at a deep discount.

VALE: A Contrarian Pick With Juicy Dividends

Vale (NYSE: VALE) is one of the largest iron and nickel miners in the world. This Brazilian company also produces substantial amounts of gold, silver, cobalt, copper, and manganese.

Vale is a titan in the world of mining. They operate in Brazil, Canada, China, Indonesia, and beyond.

However, the company’s shares are currently down 79% from its all-time highs. The firm is still valued at $41 billion, but that’s a cheap price to pay for what you’re getting. VALE trades at deep value levels:

• 6.8 P/E ratio
• 1.08x sales
• 1.06x book value
• 9.5% avg dividend yield from 2022-2024

The stock is so cheap primarily due to the fact that iron ore prices are down 56% from its 2021 highs (see chart below).

Iron ore price, $/ton – Source: TradingEconomics

Depressed iron ore prices mean lower margins and inconsistent dividends for Vale. However, yields have remained respectable, and I believe the stock offers an extremely attractive risk/reward ratio at these levels.

Even at the current $94/ton, Vale can sell iron ore at a substantial profit. Its total costs are around $57/ton. The company owns arguably the best iron ore mines in the world, with the highest grades and lowest levels of impurities.

I am quite comfortable holding the stock for multiple years, even if prices remain low. I currently own VALE and plan to buy more going forward. The company will still pay out nice dividends, which will be automatically reinvested to accelerate compounding.

When iron ore prices rebound, Vale’s share price will too. However, we shouldn’t expect immediate profits on this one. It may require patience.

This is a deep story worth looking into. Because there’s a lot more to Vale than just mining operations.

Vertical Integration: More Than Metal

Vale isn’t just a mining company. It’s a vertically-integrated logistics, transportation, and energy giant as well.

The company owns a vast fleet of ships which are among the largest and most efficient ore carriers in the world. Here’s one of their custom Valemax vessels:

Source: Vale

VALE also owns a huge portfolio of railroads, ports, terminals, and other transportation infrastructure.

Vale’s Ponta Madeira Terminal. Source: Vale

The company also owns multiple hydroelectric dams and power plants which provide electricity to its mining operations.

When you buy shares in Vale, you’re buying a vast array of assets spread across the globe.

Risk vs. Reward

In terms of potential risks, Vale is substantially exposed to China, which buys a large percentage of its ores. This is not really a negative, however, because China is the largest builder of infrastructure in the world.

However, if China were to have another economic crash, it could negatively impact ore prices, and thus Vale’s short-term outlook.

The good news is that despite the ongoing trade war between the U.S. and China, South American companies like Vale are unlikely to be affected. The world loves Vale’s pure, high-grade iron ore, and this isn’t going to change anytime soon. No matter what happens in the trade war, this Brazilian giant will keep selling to the world.

In summary: at current levels, Vale shares offer an excellent risk/reward ratio. However, this is not a quick trade. For me, it’s a long-term investment. I plan to let the dividends compound for years to come.

This is a classic contrarian bet on a beat-down sector. Patience will be a virtue here.  We could go lower before a re-rating occurs, and you have to be comfortable with that risk to make the investment.

I’ll keep readers updated as this one progresses.