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

Update Vale (VALE)

Looking for a big shareholder friendly Brazilian commodities play?

I’d look right past Petrobras (PBR) where the Brazilian government took a bigger stake in the company (48%) after the company’s $67 billion share offering last week to Vale (VALE), the country’s big iron ore exporter. (For more on why that offer was bad news for investors see my post http://jubakpicks.com/2010/09/30/sure-petrobras-raised-67-billion-but-heres-why-i-think-investors-should-see-it-as-a-failure/)

Vale announced two important moves for shareholders last week. First, the company will pay out $2.75 billion in dividends to shareholders in three tranches by next January. The cash for this dividend payout comes from Vale’s sale of its aluminum assets to Norsk Hydro for $4.9 billion. Second, Vale will buy back $2 billion of its own shares.

The cash is nice and so is the likely appreciation from the buy back, but maybe the most important aspect of these payouts is that they reduce the likelihood that Vale will do a big acquisition that might add to the company’s $20 billion in long-term debt and further stress a management that is still struggling to integrate other big acquisitions.

Not that Vale doesn’t have further plans to expand. I think that’s what’s behind Vale’s listing of its stock on the Hong Kong stock exchange. Once it secures regulatory approval Vale plans to list depositary receipts in Hong Kong by the end of 2010. That will make the company’s name more familiar to Chinese investors—and nothing like familiarity if you want to raise capital in China.

Someday.

Iron ore prices retreat by 12% and iron ore mining stocks say, So what?, and move higher

It’s hard to imagine this happening with any other “product.”

The price of the product drops 12% for the next quarter.

And the stock market essentially shrugs it off. On a bad day for the market, August 30, when the Standard & Poor’s 500 stock index drops by 1.47%, the shares of the world’s biggest producer of this product fall by 1.29%. Shares of the second largest producer fall by 2.49%, it’s true, but that’s not unexpected since the beta of that stock (the measure of the stock’s volatility in comparison to the entire stock market) says that these shares are on average two-thirds more volatile that the stock market as a whole. (The drop in the shares is almost exactly what beta projects.)

And on a good day for the market, September 1, when the S&P 500 jumps by 3%, shares of the largest producer rocket upward by 5.5% and shares of No. 2 go up 6.1%

Guess when it comes to iron ore—and that’s the “product” in question—investors just don’t expect any price drop to last for very long.

Even after the drop iron ore prices would be120% higher than they were a year ago. So this disappointment would leave these miners still incredibly profitable. Read more