Shareholders believe company can return to listings with ESG improvements

08/23/2022

---

Brumadinho disaster contributed to several questions about the Vale’s environmental and safety practices — Foto: Bruno Correia/Nitro via AP

Since Vale became a “true corporation” in 2020, the market has been speculating about the sale of significant parts of the shares that are still in the hands of the former controlling group of the mining company. But as the company still trades at a discount compared with international peers, some of these shareholders are expecting higher prices to leave their positions. These shareholders expect, for example, that Vale will return to the sustainability indexes of stock exchanges, which could reduce the gap between the mining company and stocks of its main competitors – BHP Billiton and Rio Tinto.

Of Vale’s former controlling group, only Previ (8.61%) and Mitsui (5.99%) maintain more than 5% of the company’s capital. Bradespar, the equity arm of Bradesco and a shareholders since privatization, in 1997, now holds a 3.59% stake. Shareholders in this group has been selling stocks gradually and reducing their stakes, but still hold relevant positions. The exception is the Brazilian Development Bank (BNDES), which left the company completely.

The shares, which traded around R$98 in July last year, is now just under R$70. In March 2020, due to the effects of the collapse of the tailings dam in Brumadinho, the company fell to R$25.66 in the stock market. Sources recalled that some analysts put the target price at R$150 at some point and estimated that the return or entry into sustainability indexes could drive prices and the sale of stocks by former members of the controlling group.

The problem is that some banks have seen difficulties for Vale to deliver the expected growth in iron ore production and the commodity is not expected to maintain the high prices seen recently. These two factors are penalizing the company. Itaú BBA, for example, downgraded the company this month to “market perform” in the wake of lower iron ore prices, lower than expected production growth and higher cost of capital.

Investors who left the company, however, could look again at Vale as the company advances in ESG, as there are funds with governance rules that require investing only in companies with certain governance and sustainability “stamps.” But much work is needed to get there.

Dam accidents at Samarco (a Vale-BHP Billiton joint venture) in 2015 in Mariana and Vale’s own disaster in Brumadinho in 2019 have contributed to several questions about the company’s environmental and safety practices. The Government Pension Fund of Norway, for example, sold its entire stake in Vale in 2020 after the accidents. Also after Brumadinho, the Church of England divested its positions in the company.

Vale was part of B3’s Corporate Sustainability Index (ISE B3) between 2011 and 2015 and was removed after the Samarco dam collapse. The purpose of the ISE is to measure the average share price performance of companies selected for their commitment to corporate sustainability. The index supports investors in their decision-making and induces companies to adopt ESG best practices.

Companies apply for the ISE every year, and the exchange holds a selection process. In the United States, the Dow Jones Sustainability Index follows the same line: companies apply and there is a methodology to be followed.

After Brumadinho, Vale has significantly changed its ESG approach. Although it is not part of the portfolio of the main sustainability indexes of stock exchanges in the world, the company uses the reports and evaluations of the Dow Jones Sustainability Index and other ESG data providers — such as MSCI, Sustainalytics, ISS, and Glass Lewis — to develop and implement the best environmental, social and governance practices in its internal actions and processes.

In 2019, Vale mapped the top 63 ESG gaps and created an action plan to bridge them by 2030. So far, 54 of those gaps have been solved, and the company estimates that three more will be closed this year. Among those already completed are the further detailing of executive compensation; the consolidation of a majority of independent members on the board of directors and the CEO; and due diligence processes concerning human rights.

“The company is undergoing an intense cultural transformation, which seeks to put people and safety at the center of the decisions,” Vale said in a statement.

A source close to the company said that, today, Vale is “fully capable” to be part of the sustainability indexes of stock exchanges and emphasizes that the steps taken by the company in the ESG area are “solid in all spheres.”

“The [ESG] goals are completely tied to executive compensation and solidly embedded in the strategic plan. After Brumadinho, there was a very solid work of culture change in the company,” said the source, for whom it would be “no surprise” that the mining company would be included in the sustainability indexes.

The source added that, in this process, the company is likely to face “prejudices” still related to the accidents with the dams, since “outsiders and stakeholders may not see the depth of the changes in the company.”

“I don’t see why Vale shouldn’t join [sustainability indexes] in 2022 or 2023. I don’t see why it shouldn’t plead [for the entry],” says the source, recalling that the company was the first major mining company to commit to Scope 3 decarbonization goals, which consist of helping to reduce customer emissions.

Another source linked with investors in the company stressed that Vale has “come a long way” in setting and meeting ESG targets. “As the company continues to deliver on its commitments on this front, closing gaps, ESG rating providers should begin to recognize the company’s improvement,” says the source, who declined to provide a forecast for when the mining company will rejoin sustainability indexes.

For him, predicting the timing of this return to the indexes is very difficult, because there are subjective aspects of great relevance, such as the absorption of the effects of Brumadinho by stakeholders. “It takes time and a lot of effort from the company to prove that won’t happen again,” he said.

The source also recalled that, about the discount against international peers, there is still an operational issue, since Vale has been having difficulty in delivering the expected production volume. In other words, the mere entry into sustainability indexes may not guarantee a significant surge in the short term. “There is also a discount because of the operational performance below expectations in recent years,” the source said.

*By Rafael Rosas, Juliana Schincariol — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/