Goldman Sachs Initiates Vale, Sitting On The Sidelines

Goldman Sachs has started coverage of Vale SA (ADR) (NYSE: VALE) with Neutral rating, saying that expected lower iron ore prices could offset volume growth.

Vale, the world's largest iron ore producer, is in the final stages (expected for late 2016) of delivering its flagship iron ore project, S11D, which should increase shipments by 31 percent over the next three years. However, the brokerage expects average EBITDA growth of just 5 percent per year over these three years, as lower expected iron ore prices will offset volume growth.

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"On our $40 IO price deck, we forecast negative FCF until the project kicks in fully (i.e., in 2018), which should pressure leverage to 5.5x ND/EBITDA YE2017E (4.0x in 1Q16). We see rising balance sheet risk with IO prices below $40. Vale trades at 6.5x growth-adjusted EBITDA (i.e., 2019E), broadly in line with its historical mid-cycle multiple," analyst Humberto Meireles wrote in a note.

Meireles has a price target of $3.80 on Vale (PNs) and $4.40 on Vale ONs.

ADRs of Vale closed Wednesday's regular trading session at $5.05.