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

Update Vale (VALE)

(I’m ratcheting up my vacation a notch next week for my annual summer recharge of my batteries and taking Jubak Picks completely dark for a week or so until August 24. I will resume my regular posting schedule when I return.)

What was most interesting about Vale’s (VALE) second quarter (July 29) earnings report wasn’t how much money the mining company made—although it made a metric ton—but what it’s doing with it.

For the quarter, net income surged to $3.71 billion or 70 cents a share from $790 million or 15 cents a share in the second quarter of 2009. That really wasn’t any surprise. Wall Street analysts had pegged earnings at 70 cents a share for the quarter on a doubling in iron ore prices from the second quarter of 2009 and an increase in production at the company. Vale sold 670 million tons of ore and ore pellets in the second quarter, a 29% increase from the second quarter of 2009. (Vale is the world’s largest producer of iron ore.)

In the last two years the iron ore industry (happily) and its customers (grudgingly) have moved away from a system of annual contracts with long-term guaranteed prices to one based on often rapidly fluctuating spot prices.

The future looks solid for Vale and its industry too. Global shipments of iron ore will rise 6% to a record 961 million tons in 2010, according to Clarkson, the world’s largest shipping broker.

So where’s Vale putting its profits?

First, into a fleet of ships and new distribution centers that will enable Vale to close some of the cost gap with Australian rival BHP Billiton (BHP) in shipping ore to China. BHP Billiton and Rio Tinto (RTP) have picked up share in the market for seaborne ore because of reduced demand in Europe and the shorter distances from Australian mines to China’s steel mills. Read more

When will rising commodity prices threaten the economic recovery?

Ah, if it were only iron ore.

The big three companies that dominate the world iron ore market—Vale (VALE), Rio Tinto (RTP), and BHP Billiton (BHP)—have won price increases of 80% to 100% from Asian steelmakers. Like it or not, European steelmakers will have to fall in line. (The United States is a special case because it is the only major steel making country that also exports all the ingredients needed to make steel: iron ore, coking coal, and scrap.)

That price increase for iron ore will increase steel prices by a third, say the world’s steel makers. And that will then turn into higher prices for everything from cars to washing machines to construction machinery to construction.

But while the price increases in iron ore are so shockingly large that they’re grabbing the headlines, they’re just part of an increase in commodity prices across the board. Read more

How Vale spent $18 billion and shot itself in the foot

I always wonder what’s up when I see a normally quiet company begin tooting its own horn in ads. It’s almost never a good sign.

Today’s (March 16) Financial Times has a full page ad from Vale (VALE) headlined “Vale also transforms minerals into awards.” The text notes that Euromoney has just selected Vale as the best managed company in Brazil and then goes on to list other awards from Euromoney and The Financial Times.

The ad couldn’t have anything to do with Vale’s decision to bring in strikebreakers (AKA “replacement workers” or “scabs” depending on which side of the labor/management divide you stand on) to resume production at its Canadian copper and nickel mines. Workers at those mines, acquired when Vale bought Canada’s Inco in 2006 for $18 billion, have been on strike for eight months.

Vale Inco workers rejected the company’s latest contract offer over the weekend.

In January Vale resumed nickel production at one smelter using already-mined inventories of nickel and non-striking workers and managers. But the company’s goal now is to resume full nickel production by the end of the second quarter.

For their part unionized workers aren’t likely to go quietly. “Vale can go and get stuffed,” Wayne Fraser, a United Steel Workers union representative told the Financial Times. “We are sick and tired of foreign capitalists coming in and undermining the Canadian way of life.”

The strike is ostensibly about economic issues such as the company’s proposal to reduce a bonus tied to the price of nickel and a plan to exempt new hires from its defined-benefit pension plan. It hasn’t gotten any easier to sell those reductions when soaring iron ore prices have bulked up profits at Vale.

But as the comments from union representative Fraser make clear, the strike is also about a clash of cultures and nationalities. Read more