Excellent Piece on Vale (RIO) in WSJ Today

I need to begin calling CVRD by its new name Vale (RIO)... I am still used to the old name it has held in the past. Either name, an excellent in depth piece in today's Wall Street Journal on the company. As my "World of Shortages" theory plays out over the coming years [Sept 27: Shortages Here, Shortages There - Iron Ore is the Shortage of the Day], the "value" of the inventory in the ground that the 3 major mining titans own, will only increase. And as I've said many times it is a darn shame very few Brazilian stocks are available to American investors.

Some earlier posts on this name [Feb 19: CVRD Secures 65% Increase in Iron Ore Pricing] & [Mar 26: CVRD Pulls Out of Xstrata Deal] Again, while I like all commodities I think you cannot just throw a dart - wheat is very different from gold, which is different from copper, which is different from potash. While both copper and iron ore are base metal commodities the former is priced on the spot market, while the latter is mostly in long term contracts. Since I'm a conservative chap I like having 65% 1 year price increases locked in and not being thrown about by the hedge funds as they decide copper is worth X today and X-10% in a week and X+15% 4 weeks from now. I am actually adding a layer into my Vale position today, as the stock has pulled back to its 20 day moving average of $37. This takes it from 1.3% to 1.7% of the fund. I am hoping to see a price of $35, or its 50 day moving average, before adding in any more scale. Plus again, I still anticipate some commodities weakness shortly which should afford us some better entry points.

Unlike some of the other names in the fund this is a relatively slow mover due to its huge size but much like Brazilian brother Petrobras (PBR) one of those mega global giants that are going to be benefit for many years. While I generally don't like buying such huge companies (by market cap) since the potential for appreciation is more limited than smaller fare, these 2 are just too good to pass up. These companies also highlight another of my favorite themes - "reverse colonization" (grabbed this term from Minyanville last year so I can't take credit)- former Western powers assets are now going to be gobbled up by the formerly "2nd and 3rd" world countries they once dominated. Case in point will be the assets America has and will continue to sell off to pay for its major structural imbalances to budget. Irony at its best.



This is a very lengthy article so please click the link if you want the whole thing; some Cliffs notes below

• When Companhia Vale do Rio Doce arrived in the small Canadian mining town of Sudbury a year and a half ago, Mayor John Rodriguez recalls wondering: "Who are these Brazilians?"
• As the Rio-based mining giant muscles its way to the front of the global business stage, more and more people outside of Brazil are finding out. In 2006, Vale swallowed Sudbury's biggest employer, nickel company Inco, for $17.8 billion -- and set out on a campaign to win over the town's skeptical residents. Vale is now the world's second-largest mining company, and the biggest maker of iron ore, a key ingredient in steel.
• Late Thursday, its push to diversify beyond iron ore came back to bite it. The company reported first-quarter net profit of $2.02 billion, down 8.8%, which it blamed in part on a drop in nickel prices and losses from trading positions related to certain commodities.
• Like many mining companies, Vale is vulnerable to fluctuations in metals prices. But Goldman Sachs analyst Oscar Cabrera says Vale also struggled this quarter to boost production at the pace expected by the market, failing to produce as much iron ore and nickel as expected. During the second quarter, newly negotiated iron-ore prices are expected to boost revenue.
• Emerging-market companies such as Vale have been climbing the ranks of the world's biggest and most successful firms in recent years. With China's booming economy boosting demand for raw materials and other commodities, companies like Russian steelmaker Severstal and Brazilian pork and poultry processor Perdigão SA have prospered. Prices for Vale's iron ore have risen by double-digit percentages in four of the past five years, and this year's price hike of 65% is expected to add as much as $12 billion to annual revenue.
• Using their new financial clout, these once-obscure emerging-market companies have been buying up firms around the world. Last year, they struck $294 billion of such deals, up from $40 billion in 2003, according to research firm Dealogic.
• Brazilian steelmaker Gerdau SA bought Chapparal Steel Co. in the U.S. for $4.4 billion. Mexican cement maker Cemex SA took over Australian construction group Rinker Group Ltd. for $16.7 billion. Last month, India's Tata Motors Ltd. bought the Jaguar and Land Rover luxury brands from Ford Motor Co. for $2.3 billion. (reverse colonization)
• According to Dealogic, Vale's purchase of Inco is the largest-ever takeover by a Latin American company. In late March, Vale dropped its effort to buy Swiss rival Xstrata PLC for more than $80 billion after the parties failed to agree on takeover terms -- a deal that could have made it the world's No. 1 miner, overtaking rival BHP Billiton.
• Vale has been growing at a torrid pace. Last year, it hired 9,281 new employees in Brazil, leaving total employment world-wide at 124,013. It mined enough iron ore to fill 50,000 Olympic-size pools, and generated $39.7 billion in revenue -- nearly 10 times what it did in 2001.
• According to a February securities filing, Vale shares were the largest single holding of George Soros's Soros Fund Management LLC, which held $238 million in shares.
• Steelmakers had long held the upper hand in price negotiations with ore producers. But booming demand from China turned the tables. Suddenly "there was a Chinese on every corner looking to buy ore...and willing to pay any price," recalls Mr. Stoliar, Vale's former planning director. In 2005, the price steelmakers paid for ore rose 68.8%, nearly doubling Vale's profit that year. Ore prices have continued to rise, at a pace Vale executives admit they never imagined.
• The growing demand for metals plays into the hands of the biggest producers, which can make the investments necessary to open new mines, many in remote areas of politically unstable countries. The cost of mining also has been rising. Prices have leapt for everything from explosives to the big off-road tires used on mining trucks, which can cost about $15,000 apiece. Vale estimates that the cost of opening Southern Range, a new Brazilian iron-ore mine that isn't yet open, has risen to $10 billion, from $2 billion several years ago.

Speaking of reverse colonization, let me leave you with this graphic below. And again, as commodity prices rise worldwide, sovereign wealth funds and governments of these natural resource rich countries only gather more wealth in a great transfer of wealth [Feb 2: $2 Trillion of Petrodollars Need a Home This Year] from countries that need said resources. And they then use that money to come back and buy the assets from underneath those same countries. In the context of this chart you can see what an indignity it is that our government fights off solar investment and the like... oh well, we get what we deserve as detached voters who let the politicians run amuck. I mean we have very important things to worry about, i.e. whether Obama wears his lapel pin with American flag or if Hillary went hunting with her daddy when she was 7. Stuff like that...



(click to enlarge)

Long Vale, Petrobras in fund; no personal position