The Samarco iron ore JV of Vale SA (ADR)(NYSE:VALE) and BHP Billiton has slipped a second coupon compensation on dollar bonds and surpassed the grace period. BHP and Samarco parents Vale are said to be in difference over what measure to take for iron ore pellet JV, while prosecutors in Brazil seek damages from the firm and its supporters, which are supposedly maintaining the processes even if they are not compensating the debt interest coming unpaid. The Samarco lethal tailings dam disaster occurred one year earlier, leaving behind an extremely polluted river that residents will have to struggle with for long-period.

The performance

Vale faces seasonal problems in the near term and is expected to be FCF positive next year. Citi’s Alexander Hacking upgraded shares to Neutral from Sell, while revising the price target to $7.30 from $4.40. The analysts downgraded Vale stock to ‘Sell’ in 2014 on the base that 2014-16 will prove to be a cash crunch, and it now seems to be stuck in the rear-view mirror.

Iron-ore prices are usually high from November through February, as this period sees seasonal supply interruptions. The production of iron-ore production has declined and production from majors have surged by less than 2% YoY through the third and second quarters.

Analyst added that Vale can benefit from higher steel prices in China, which would be supported by surging coking coal prices, and from growing iron-ore quality premiums. Iron ore prices and Chinese steel production have surprised positively this year and the market probably missed the cyclical floor in the company, which now seems like 1Q2016.

Hacking projects Vale to post around $1 billion in FCF next year, even with a comparatively conservative iron-ore price projection of $46 per ton. However, if prices surge to $55 per ton, the firm would post $3.5 billion in FCF. Vale can hold current expenses relatively stable regardless of headwinds from freight, FX and oil.

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