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Vale, Emerging Markets Mega-Miner Taking Production to Another Level

Companies / Metals & Mining Oct 24, 2011 - 12:38 PM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleJack Barnes writes: You might think you know everything you need to know about Vale SA (NYSE: VALE), but you don't.

This is a company that, while big, is rife with hidden profit potential.

Vale is what I like to call a "mega-miner." It's best known as the world's largest iron ore producer, but few realize that it also controls railroads, ports and shipping fleets.

Indeed, Vale is a vertically integrated company with a diverse mix of assets that includes more than 6,000 miles (10,179 kilometers) of railroad infrastructure, eight seaport terminals, five general cargo ports, and two iron ore export terminals. Beyond that, it generates its own energy through hydroelectric power plants.

And better still, Vale has the internal capital to self-fund further development.

These characteristics imbue the company with major profit potential.

So Vale SA is an unequivocal "Buy" (**).

Taking Charge of the Iron Ore Market
Vale is the world's second-largest mining company, behind only BHP Billiton Ltd. (NYSE ADR: BHP).

It's the world's largest producer of iron ore, and the world's second-largest producer of nickel. And that gives the company significant leverage in the fast-growing economies of Asia, especially China.

Historically, Vale had to battle the added costs of longer-term production contracts and short-term shipping rates. But that's no longer the case.

Last year, iron ore pricing moved to short-term contracts based on the spot market -- to the benefit of producers. And to combat shipping costs, Vale recently bought its very own fleet of large ore-carrying vessels. Now it controls its own shipping rates.

These new developments mean that Vale will no longer be held hostage to long-term production contracts or to short-term shipping rate demands.

Now that Vale has full control over its iron ore business, it can look forward to newer ventures. And it has a big-time market in its sights.

Profit Potential in Rare Earth Metals
Vale currently has vast land holdings in South America, some of which are rich in rare earth metals.

This is a vitally important market.

Rare earth metals are essential to the production of high-tech devices like computers, display screens, smart bombs, and hybrid-car batteries. However, they are difficult to produce and many rare earth production companies have moved their operations to China to capitalize on cheaper extraction costs and the nation's commitment to growing its alternative energy sector.

As a result, China now controls a staggering 97% of the world's rare earth production. And China isn't exactly playing ball. The country has repeatedly increased restrictions on its rare earth exports to keep more at home for its own industries.

That's created a huge opportunity for Vale, which recently discovered a large deposit of rare earth metals at its Salobo copper mine. Additionally, the company discovered rare earth metals in the Amazon after Brazilian PresidentDilma Rousseff invited the company to expand its exploration.

Indeed, Vale is moving forward with rare earths projects with the full support of the Brazilian government.

Realistically, it will still take Vale a few years before its rare earths production is fully online. In some cases, the minerals are already present at the mining sites, but are not being captured in the concentration process. That means Vale will need to develop the necessary capture circuits to harvest the rare earths already inherent to its production process.

Also, there may be rare earth concentrations on Vale's property that will be developed as stand-alone projects. The projects have not yet been fully delineated in company comments.

Still, this is a good thing because it means Vale - already the world's largest iron ore producer - could very quietly become one of the world's largest producers of rare earth metals, as well.

Vale stock on Friday rose 60 cents, or 2.70%, to close at $22.81. That gives it a price/earnings (P/E) ratio of 4.78, which is extremely cheap for a large, vertically integrated company like Vale.

Action to Take: Buy Vale (NYSE: VALE) (**).

Turmoil in the global markets has reduced Vale to bargain levels.

Vale can give investors exposure to rare earths without having to worry about project development issues or undercapitalized startups. It's a great company to have in your long-term portfolio.

I'd put in a buy order for one-third of my position at current market prices, and fill out the remainder on pullbacks.

(**) Special Note of Disclosure: Jack Barnes has no interest in Vale SA (NYSE: VALE).

About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed Deutsche Bank AG (NYSE: DB).

Source :

Money Morning/The Money Map Report

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