VALE Don’t Get No Respect… (VALE)

Global mining giant VALE S.A. (NYSE:VALE) is our spotlight trade this week.

The company’s stock has run higher on the back of huge increases in the price of iron ore of late, the result of new Chinese buying and Batflu-based supply issues.

The metal is now trading at U$170 per ton, up close to 80% this year, her best price in almost a decade, and by far the best performing metal in the commodities pantheon in 2020.

And yet…

The increases appear to have run their course.

Which means the best is already baked in.

Internal Troubles

Vale, whose Brazilian operations have been severely disrupted by the flu – and who just last month was hit by a landslide at her Córrego do Feijão mine, that killed one and temporarily closed the operation – has lowered 2021 output guidance accordingly.

Moreover, the company operated this last year with a net loss of $1.6 billion, and does not expect 2021 to deliver much better.

Fundamentally, the picture’s like this –

• P/E is 30.03, with analysts expecting a massive earnings deluge in the coming year – though at this stage, we’re not sure from where,
• Dividend yield, at 3.94%, is STRONG and will support the stock price somewhat going forward, and
• Price to Book is a bedevilled 2.39.

Earnings has always been the issue with VALE, as they carry little debt and are reliant on situations like the current one to drive overall numbers.  The question is whether the Chinese have done their post-Batflu infrastructure buying and/or whether the rest of the world will ramp up production to account for any surplus demand going forward.

And to both those questions, we answer in the affirmative.

Prices for the miners have topped.

Have a look now at the daily chart for the last half year –

Technically, we’ve got a 200% rise off the March Batflu bottom, of which nearly 100% was mined in the last ten weeks.  And…

1. RSI has been repeatedly overbought during that period (in red, at bottom),
2. Both MACD and RSI are diverging lower from price for at least six weeks now, an indication that buying momentum is slowing,
3. The rush to new highs has left numerous gaps in its wake, of which we believe the $14.45 occurrence is the most significant.
4. Why? Because it aligns with a simple Fibonacci retracement calculation of $14.22.

Now look at the weekly –

Technicals on the weekly chart line up as follows –

• First, weekly RSI has tapped the overbought 80 line twice in the last two months (in green) – a downbeat signal the bulls will have to come to terms with sooner rather than later,
• Weekly MACD is rolling over, and
• Price has now ventured close to 90% above her longer term weekly moving averages (in purple), the level at which a snapback ordinarily occurs.

Which is why we’re now setting a split-strike synthetic short on the stock, as follows –

A Jew and His Gold recommends you consider selling the VALE April 16^th 21 CALL for $0.50 and buying the VALE April 16^th 14 PUT for $0.60.  Set a STOP buy for the shares at $21.00.  Total debit on the trade is $0.10.

Rationale: we’re targeting the $14 level on the downside because both the gap situated there and the simple Fib retracement point to a touch-down in that area in the coming months.

And we’re paying for it with the $21 CALL because $19 was the high water mark for the move, and any push above that level would require a significant new cohort of buyers – which, in this environment, we doubt will materialize.

The STOP buy should be reset as a STOP sell (at the same level) if the STOP is triggered and we’re bought in.  Should price subsequently drop below $21.00, a new STOP buy should be set.  And so on…

There should always be a STOP in place to ensure the trade remains square and to avoid any unnecessary losses.

Maximum loss on the trade – should proper STOPs be emplaced – is $0.10.

Maximum gain is unlimited.

Many happy returns,

Matt McAbby

Follow @HughLOHaynew