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

Update Vale (VALE)

You’d think news that the Brazilian government is so eager for Vale (VALE) to get into the rare earth business that it was busy lining up potential customers would be nothing but good news for Vale. (Vale is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ )

You’d be wrong, however.

The move by the Brazilian government has added to fears that it wants to regain control of the company that it privatized in 1997. Government pressure was key to pushing out Vale CEO Roger Agnelli in April. Financial markets have generally reacted favorably to new CEO Murilo Ferreira, a Vale veteran who left the company in 2008, seeing him as an experienced mining executive rather than a political appointee.

But the jury is still out. The new government of President Dilma Rousseff has made moves to reassert control over Petrobras, also a partially privatized government-controlled company, and recently moved to impose price controls in the Brazilian ethanol industry. It’s clear from government negotiations with companies like China’s Foxconn, the maker of Apple’s iPhone, for a potential $12 billion investment in Brazil, that the government wants to foster a Brazilian technology industry. Being able to promise technology companies access to a supply of rare earth minerals at a time when China, the source of 90% of global supply, is restricting exports, would be a major boost to that effort.

The question for investors, of course, would be “Is this investment in Vale’s interest or are we headed back to the days when the government ran the mining company in the national interest?”

At this point it’s hard to tell for at least two reasons. 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 Vale(VALE)

And the biggest winner from Argentina’s huge natural gas from shale discovery in Patagonia?

YPF Sociedad Anonima (YPF) is certainly a winner. The find of 4.5 trillion cubic feet of gas is roughly double the Argentine company’s previous proved natural gas reserves of 2.7 trillion cubic feet. YPF already produces some natural gas from four wells at the Loma La Lata field with a daily output of 100,000 cubic meters.

Repsol YPF (REP), the Spanish oil and gas company that controls YPF, is certainly a winner. Media reports, unconfirmed by either company say the find could hold as much as 250 trillion cubic feet of gas. By contrast Argentina’s proved natural gas reserves before the find totaled 12 to 13 trillion cubic feet. (“Proved” is a much more meaningful measure than “reported in the newspaper,” I’d note.) Repsol is planning to sell 15% of YPF in a public offering.

But the biggest winner might actually be Vale (VALE). The Brazilian iron ore giant is moving to become the biggest fertilizer producer in Brazil and it’s new $4.3 billion Rio Colorado project sits in the neighboring Argentine province of Mendoza. To mine potash there Vale needs natural gas, lots of it, and until this find it looked like it was going to have to battle a tight Argentine natural gas market to get the supplies it needed or import it from somewhere. The alternative sources were all either politically iffy or likely to be very expensive. The Rio Colorado project is scheduled to begin production in the second half of 2013 with initial production capacity of 2.4 million tons and the potential for 4.4 million tons.

And now?

It’s clear now how Vale will find the gas it needs. (And in retrospect I doubt this find comes as a surprise to Vale. We are talking about a mining company that’s pretty good at assessing future resource potential.) Vale will invest $150 million along with YPF to begin developing the find with half of natural gas production going to Vale.

This is the second big deal that Vale has signed to secure infrastructure for the Rio Colorado mine. Read more