Investment Thesis: Vale is a buy primarily due to a combination of sector strength, rising earnings and a good chart. But keep an eye on central bank policy and steel PMIs as they may soften faster than expected.

Valley (NYSE:VALE) is on the steel market:

Vale SA, together with its subsidiaries, produces and sells iron ore and iron ore pellets for use as raw materials in the steel industry in Brazil and abroad. The Company operates through ferrous minerals, base metals and coal segments. The Ferrous Minerals segment produces and extracts iron ore and pellets, manganese, ferroalloys and other ferrous products; and provides related logistics services. The Base Metals segment produces and mines nickel and its by-products, such as copper, gold, silver, cobalt, precious metals and others. The Coal segment is involved in the mining of metallurgical and thermal coal; and provides related logistics services. It also offers platinum group metals.

It is the third largest company in the “other metals and mining” sector behind Rio Tinto and BHP.

The steel market softens:

The world price of steel fell from a 5-year high. The drop happened very quickly. Prices are now near the upper level of their range since the last expansion.

PMI for steel users is now barely positive:

At 50.1 in January, the seasonally adjusted Global Steel Users Purchasing Managers Index™ (PMI™) – a composite indicator designed to give an accurate overview of the operating conditions at manufacturers identified as heavy users of steel – increased from 51.6 in December. Latest reading shows broad stagnation operating conditions, and was the lowest recorded since June 2020. Asia noted second reading below 50.0 in three months, while overall readings for the US and Europe fell slightly over the month.

January saw a further drop in production levels among global steel users, the second in three months. However, the reduction was only marginal. Steel users in Asia recorded the largest contraction since February 2020, while the United States recorded the slowest rate of growth for three months. Businesses in Europe commented on a weaker expansion, although still subdued.

But the slowdown is mainly regional:

The Asian PMI (in purple) has been negative for a few months. But European and US PMIs remain positive.

Now let’s move on to business finances, starting with gross revenue:

Vale’s revenue started to rise in 2016 and has been growing ever since. The last 12 months have seen a meteoric rise.

Vale’s gross, operating and net income percentages are in very good shape. But a caveat is in order. Natural resource companies are known to have greater variability in their workforce. Just scroll through Vale’s numbers to see the wide range of reported numbers. Overall, however, Vale’s numbers are good.

Above is a table assembled from cash flow and income statement data. The third line down shows the amount of cash the company has after spending on investments. This number has been positive for all but one of the past 10 years, meaning the company is able to fund its capital needs from current operations. The fifth line down shows the money left after the company’s dividend is paid. This number has been positive for the past few years – which is also apparent in the last row, which shows the cash remaining after the dividend has been deducted from EBT.

Finally, here is the company’s debt situation:

The chart above shows Vale’s debt/asset position, which has improved over the past few years.

Finally, here are the tables:

The weekly chart (left) shows that the stock trended lower in 3Q21, falling from the 20.5 level at the 200-week EMA. It has since risen higher. The daily chart (right) shows that the latest rally sent prices above the 200-day EMA while pushing the shorter EMAs higher.

Vale’s image is quite positive, making the stock a buy. But there are some important caveats. First, the macroeconomic situation — although positive — is easing. Second, global interest rates are tightening. Currently they are not restrictive. But central banks have definitely turned hawkish, meaning they could tighten to the point of triggering a recession. Assuming the current rally continues, I would set a sell stop higher just to be sure.