Update Vale (VALE) in my long-term Jubak Picks 50 portfolio

I’d like to blame the weather. And there is no doubt that weather in Brazil’s rainy season hurt Vale’s (VALE) first quarter earnings reported on April 25.

But when the drop in quarterly earnings is the third consecutive drop in earnings, then I think you can be pretty sure something more serious is going on. (Vale is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ )

What’s most important, though, to investors who have made money on Vale in the past and have been looking to see when they might be able to make money on Vale in the future is that all these quarterly declines in earnings are setting up a potentially good second half for the stock.

Vale, reported net income of $3.83 billion for the quarter. That was down 44% from the record $6.83 billion in net income for the first quarter of 2011. Net income was also down 18% from the fourth quarter of 2011.

Part of the problem was indeed the wet weather. Wet iron ore sells for less than dry ore and Brazil’s heavy seasonal rains reduce production too. Iron-ore production did fall 2.2% in the quarter. Vale’s production costs rose 2% because the company hired more workers to do dredging and maintenance on its mines.

But the bigger problem was falling iron-ore prices on lower demand from Europe. Read more

More evidence that Brazil’s domestic economy and its export sector are headed in different directions at the moment.

Yesterday the Banco Central do Brasil reported that economic activity in Brazil climbed by 0.57% in December from November. That’s the second monthly increase in a row after growth stalled in the third quarter with the period essentially flat with the second quarter. (Year-to-year growth in the third quarter fell to 2.1%).

The news wasn’t nearly as positive from Vale (VALE), the world’s second largest mining company. (Vale is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ .The iron-ore exporter reported that fourth quarter net profit fell 20% from the fourth quarter of 2010. Sales during the quarter were down 1.2% on lower iron ore prices. After staying stable from April through September, iron ore prices have taken a dive with the Tianjin spot price in China falling to $116 a metric ton in September from a peak of $181 in July.

This is Vale’s third straight quarterly earnings miss. For the fourth quarter, the company reported earnings of 90 cents a share versus the Wall Street consensus of 95 cents a share.

Besides the 19% drop in the average selling price for iron ore from the level in the fourth quarter of 2010, Vale got hit with falling copper (down 16%) and nickel (down 20%) prices.

If you’re looking for a reason behind the price drops, you don’t need to look any further than the decline in growth in Europe from the effects of the euro debt crisis. Read more

Now that oil is a long way from the $145 per barrel peak it hit in July 2008 and nobody on Wall Street is predicting, as Goldman Sachs did in 2008, that oil is headed to $250 a barrel, we’re not hearing much about peak oil anymore.

The peak oil model, initially developed by oil geologist King Hubbert and which accurately predicted a peak in U.S. oil production between 1965 and 1970, says that the production from an oil field grows exponentially over time, then peaks, and finally declines. The model has been applied to individual oil fields, national oil industries, and global oil production. Back in 2008, the fiercest proponents of peak oil as a global model were predicting that the world would start running out of oil sometime around 2020.

Now that the world is awash in oil, the only people talking about peak oil are its opponents, who are dancing on what they depict as the grave of what they call a “theory” that was never worth the graph paper it was plotted on.

Well, I still think that the peak oil model is the most useful description of what we see happening in the oil industry today—even if West Texas Intermediate, the U.S. benchmark, closed at a twitch under $100 a barrel on Friday, February 3. (Brent crude, the European benchmark closed at $114.58.)

And, I’d go on to say that the peak oil model is the best way to understand what’s happening to the prices of other commodities, especially copper.  (Full disclosure: I predicted that oil would go to $180 a barrel shortly before it began its collapse from the $145 a barrel high in 2008. And full, full disclosure: The only one predicting $250 a barrel oil right now is Iran, which is threatening that prices will reach that level if developed economies impose tougher sanctions on the Iranian economy in an attempt to slow or stop that country’s development of a nuclear bomb.)

And I think it’s even useful for thinking about how to invest in commodities such zs iron ore that, currently, don’t fit the peak oil model at all.

Let me explain why I still find so much value in this “discredited” theory. Read more

When will billions—okay tens of billions—in new investment put an end to the current boom in iron ore prices (and in the price of iron ore stocks)?

Brazil’s Vale (VALE) said, in announcing fourth quarter earnings Friday, February 25, that the market will experience supply constraints for three to four years. Vale will invest $24 billion in 2011 to expand its output to 522 million metric tons of iron ore by 2015. (522 metric tons is roughly equal to 10 months of China’s current iron ore demand.) That’s roughly the same 2015 time frame that BHP Billiton (BHP) talked about in its latest capital-spending plan. (For my latest update on BHP Billiton see my post http://jubakpicks.com/2011/02/18/update-bhp-billiton-bhp-2/

If you want to invest conservatively—and it’s not a bad idea with iron ore prices at their highest levels since the mining boom ended in 2008—I’d say it’s safe to let your iron ore stocks run for the next two years before looking for signs that supply might be catching up with demand. (Vale and BHP Billiton are both members of my Jubak Picks 50 Portfolio http://jubakpicks.com/jubak-picks-50/ )

Vale’s results certainly reflected the current good times. Revenue for the quarter more than doubled to $15.2 billion from $6.5 billion in the fourth quarter of 2009. Net income for the fourth quarter climbed to $5.92 billion or $1.12 a share from $1.52 billion or 28 cents a share in the fourth quarter of 2009. Wall Street analysts had expected $1.01 a share. Vale said iron ore prices in the quarter rose to $122 a metric ton from $56 in the fourth quarter of 2009. Production climbed to 308 million tons in 2010. That was 29% higher than in 2009. (The company’s goal to raise production to 522 million tons by 2015 represents a further 70% increase in capacity.)

Iron ore is no longer the only story at Vale, though. Vale produced 207,000 tons of copper in 2010, up 4.5% from 2009. The company’s goal is to produce 1 million tons by 2015.

Nickel production in the quarter doubled from the fourth quarter of 2009 to 65,000 metric tons. Nickel production will decline about 5% in 2011 as the company repairs a furnace at its Copper Cliff plant in Canada.

Vale’s stock didn’t exactly soar on the news, sinking 6 cents or 0.18% instead. But it’s been hard for any Brazilian stock to get traction this year in the face of rising interest rates, climbing inflation, and forecasts of slower domestic growth. The Bovespa Index was essentially flat today and is now down 3.4% in 2011. Vale’s stock is up a scant 1.6% in 2011.

I think Vale’s fortunes are tied more closely to the performance of overseas steel-making economies in China and the European Union (a more important market for Vale than for its Australian competitors due to transportation costs) than to the domestic Brazilian economy. Depressed share prices in Brazil, which could well last for another six months or more, give investors a very extended buying window on Vale. I’d put a 12-month price target of $44 on the stock.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Vale as of the end of January. For a full list of the stocks in the fund as of the end of January see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Update BHP Billiton (BHP)

As tea leaves go, those presented to investors in BHP Billiton’s (BHP) February 16 post-earnings-report conference call could have been a bit clearer. I think the way to decide buy/sell/hold on BHP and on the mining sector as a whole is to look past the very confusing top down strategic message to the nitty gritty of the key commodities of iron ore and copper. (BHP Billiton is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ )

Let’s start with the murky top-down stuff first, okay?

CEO Marius Kloppers said the company would increase its dividend for the first half of 2011 to 46 cents (U.S.) from 42 cents. I’m not clear what that is a sign of since the increase barely keeps pace with appreciation in the Australian dollar—for Australian shareholders, in other words, the increase is no increase at all.

Kloppers also announced an expansion of the company’s current $4.2 billion share buy-back to $10 billion. That amounts to about 4% of the company’s outstanding shares.

And he said that the company wasn’t actively looking at any acquisitions right now although the company has plenty of cash and cash flow: BHP Billiton reported six month profits of $10.7 billion on February 16.

So was BHP Billiton saying that it thinks mining stocks are expensive now, so no acquisitions? Hard to tell because Kloppers may be feeling a bit burned on the acquisition front after a failed bid for Potash of Saskatchewan (POT) in 2010.

And are the increases in the dividend and in the share buy-back plan a signal that the company thinks the commodities boom is getting near an end and it’s time to pull back on investments in its business? Read more