Vale SA (VALE, Financial) is a Brazillian multinational metals and coal mining business. In addition to its exploration exploits, Vale is also a leading logistics operator. I am bullish on the stock due to the strong nickel upside potential and low valuation compared to earnings expectations.
Surging nickel prices
The price of Nickel has surged by 48% since the turn of the year as sanctions on Russia due to its war on Ukraine have led to a considerable short supply. Nickel is a crucial element used for industrial purposes, and it's realistic that nickel prices could be headed for a multi-year bull market amid the war-induced shortage and rising inflation.
Nickel's price rise will likely have adverse effects on the downstream part of consumer discretionary and certain industrial segments. However, there's always a buying market somewhere, and my prediction is that upstream suppliers will remain in great shape during the price surges due to the inherent trait of demand almost always exceeding supply in the metals space.
Vale's operations
Vale's nickel operations only contribute to approximately 6% of the company's revenue mix, and yet it's still one of the largest producers of nickel on the globe, which just goes to show how vast of an operation Vale truly is.
The mining company has nickel interests in North America, Brazil, Indonesia, Canada, the United Kingdom and Taiwan. In 2021, Vale produced 168.0 kilotons of finished nickel, and reached sales numbers of 44.7 kilotons in its fourth quarter, eclipsing that of the third quarter by 6.9%.
Furthermore, Vale mines a host of other resources, including iron ore, copper and coal. It's widely argued among Wall Street analysts that Vale's base metals portfolio isn't yet fully priced in by the market.
According to Brazilian financial services company BTG Pactual (BSP:BPAC3, Financial), "We are not arguing nickel prices are sustainable at current levels, but we reiterate our call that Vale's base metals unit is poorly priced-in and can offer relevant upside potential for investors ahead."
Valuation
I agree with the assessment from BTG Pactual, which concluded that Vale isn't yet fully valued by the market. Vale is a significantly undervalued stock with its price-earnings and price-book ratios trading at discounts of 57.11% and 51.47%, respectively, to their industry averages.
In addition, Vale's stock has formed a momentum pattern as it's trading above its 50-, 100- and 200-day moving averages, meaning that investors are more optimistic about the stock now than they were last year.
Vale SA provides excellent exposure to nickel, and its base metals portfolio as a whole is underestimated by investors. The stock is trading at a discount relative to its peers and has recently formed a momentum pattern.
