BTG sees rare earths, Dexco as winners in a Flávio victory scenario

Brazil-focused companies could benefit from lower rates, while a stronger R$ would weigh on Vale, Suzano and other exporters, BTG Pactual says

By Brazil Stock Guide – A potential victory by presidential candidate Flávio Bolsonaro could favor Brazil’s emerging rare-earths industry and domestically exposed companies such as Dexco (DXCO3), while offering a less favorable earnings backdrop for miners, steelmakers and pulp producers, according to a BTG Pactual research note dated Oct. 5.

The bank said the first-round result, in which Bolsonaro received 47.0% of valid votes against 45.2% for President Luiz Inácio Lula da Silva, gives Bolsonaro an edge heading into the Oct. 25 runoff. It cautioned that the election remains open and described the second round as the key confirmation point for its scenario.

The central market implication outlined by BTG is a potentially stronger R$, supported by capital inflows and lower perceived political risk. That would favor some companies tied to domestic demand but could hurt exporters whose revenue is largely linked to US$ while a significant share of costs is incurred in R$.

Dexco stands out

Dexco (DXCO3) is the most domestically oriented company in BTG’s basic-resources coverage and could be among the clearest beneficiaries of a lower-rate environment.

The company’s net debt stood at 2.7 times Ebitda, with more than 50% of debt linked to the CDI benchmark, according to the report. Lower rates could therefore translate relatively quickly into reduced financial expenses and stronger cash generation.

BTG also sees potential support from stronger domestic activity because Dexco has exposure to retail, construction and remodeling-related demand. The company has also been pursuing deleveraging through non-core asset sales and operational improvements.

CSN could also benefit from lower financing costs because of its higher leverage. The company ended the second quarter with net debt at 3.49 times Ebitda, making its equity story more sensitive to lower CDI-linked rates and a decline in Brazil’s risk premium. A stronger R$, however, would be negative for its iron-ore earnings.

Vale may gain from flows, not earnings

Vale (VALE.N) could initially benefit from increased foreign investment in Brazilian equities because of its large weight in local indexes, BTG said. That could drive a technical rally and some valuation rerating.

The earnings effect would move in the opposite direction.

Vale has limited exposure to domestic demand and is predominantly a US$-linked exporter. BTG estimates that a 10% appreciation in R$ would cut the miner’s Ebitda by roughly 5% to 6%, all else being equal, because revenue is overwhelmingly linked to US$ while a meaningful portion of costs is in R$.

The bank said that means an initial gain in Vale shares would be primarily a flow and valuation story rather than an earnings story. A sustained appreciation of R$ would likely lead analysts to lower Ebitda forecasts.

Steel is less domestic than investors may assume

BTG said Brazil’s steelmakers do not offer uniform exposure to a stronger domestic economy.

Gerdau generated 74% of consolidated Ebitda in North America in the second quarter, compared with about 20% in Brazil. CSN has increasingly become a leveraged iron-ore story, while Usiminas offers the most direct Brazil-focused steel exposure among the companies covered by the bank.

A stronger R$ also lowers steel import parity when measured in local currency, creating pressure on domestic pricing. BTG therefore sees limited fundamental earnings upside from a broad Brazil risk-on move for Gerdau or Usiminas.

CSN is the main exception because lower domestic rates could provide greater balance-sheet relief, although that benefit would be partly offset by the negative currency impact on mining earnings.

Suzano is more exposed to a stronger R$

Pulp and paper would be the clearest relative loser in BTG’s coverage under a sustained combination of higher investor appetite for Brazil and a stronger R$.

Suzano derives about 81% of consolidated revenue from exports, while foreign markets accounted for 33% of Klabin’s revenue in the second quarter.

BTG estimates that a 10% appreciation in R$ would reduce Suzano’s Ebitda by about 15%. The impact on Klabin would be in the high single digits. Klabin’s domestic packaging business offers some protection, but both companies remain exposed to US$-linked pulp prices while carrying a significant R$ cost base.

Neither company would receive the same benefit from falling Brazilian interest rates as highly leveraged domestic businesses because their debt structures are predominantly denominated in US$. BTG therefore sees Suzano as more negatively exposed than Klabin.

Rare earths could get a policy boost

BTG said a Bolsonaro victory could be a meaningful positive catalyst for Brazil’s emerging rare-earths industry.

The bank said the agenda it associates with Bolsonaro gives strategic priority to critical minerals, particularly rare earths, with the goal of positioning Brazil as an important supplier to Western supply chains. Potential measures could include greater government coordination, closer integration with US and NATO-aligned supply chains and partnerships involving defense and aerospace companies.

Brazil has significant geological potential, according to the report, but development has historically been constrained by fragmented regulation, lengthy licensing and limited domestic processing capacity.

The geopolitical backdrop also matters. BTG said China controls more than 85% of global rare-earth processing capacity, increasing the strategic value of alternative suppliers for defense, AI, permanent magnets and energy infrastructure.

Faster permitting, financing support and greater investment in downstream processing could improve conditions for Brazilian projects and accelerate the country’s development as a strategic supplier outside China, the analysts said.

The report was prepared by BTG Pactual analysts Leonardo Correa, Marcelo Arazi and Rodrigo Gotardo. BTG said the views reflected the analysts’ judgment at the publication date and may change, while estimates and projections should not be interpreted as assurances that the scenarios discussed will occur.