On Apr 14, 2015, Zacks Investment Research downgraded Vale S.A. VALE to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Buy) primarily due to several headwind-related issues faced by the company. Going by the Zacks model, companies holding a Zacks Rank #4 have chances of performing weaker than the broader market.

Why the Downgrade?

Vale’s business is highly sensitive to macro-level changes in modern economies. The stock functions in a cyclical industry, as a result of which volatility in economic growth of any country affects the company’s revenues and margins. Moreover, unfavorable changes in money-market parameters such as interest and exchange rate hurt the company’s economic surplus. Also, certain environmental phenomena like natural disasters adversely impact Vale’s mining operations.

In order to achieve economies of scale in production, the company attempts to increase yield of its primary products such as iron ore, nickel and copper. However, such initiatives require more skilled as well as semi-skilled workforce, inadequacy of which remains a big issue for the company.    

Vale’s plans for growth and productivity enhancement are significantly influenced by government policies in each country served by it. In absence of required licenses and permits, several growth plans fail to materialize. Further, the company often encounters stiff price wars and risks of market share owing due to extensive industry rivalry.  

In fourth-quarter 2014, Vale reported an adjusted loss per ADR of 5 cents compared with 62 cents earned in the year-ago comparable period. Poor revenues led by declining market prices of the company’s major products were primarily responsible for the weak earnings show. Anticipating lower demand from major countries such as China, Vale predicts further deflation in the market price of some of its products in the near term.

In the last four trailing quarters, Vale delivered a negative average Earnings ESP of 73.75%, missing the estimates in all the seasons. The negative ESP was triggered by the above-mentioned issues, which also induced a downward trend in the Zacks Consensus Estimate over the last 60 days. The same moved south by 89.4% to 9 cents for 2015 and by 45.8% to 58 cents for 2016. At this juncture, the negative impact of headwinds can only be countered by an increased level of industrialization in the global forum, which would indirectly enhance demand for the company’s products.

Stocks to Consider

Better-ranked stocks in the industry include Asanko Gold Inc. AKG, Golden Minerals Company AUMN and Banro Corporation BAA. All three stocks hold a Zacks Rank #2 (Buy).