Update Vale (VALE)

08/13/2010 2:00 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

(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.

Second, Vale continues to invest in becoming a diversified mining company rather than just an iron ore mining company. Vale announced plans to buy Brazilian copper producer Paranapanema for $1.2 billion.

And third, Vale continues to build up speed in the race to secure a share of Africa’s iron ore deposits, the last really big undeveloped deposits of ore in the world. At the end of April Vale reached agreement to pay $2.5 billion for a 51% stake in BSG Resources to gain access to iron ore deposits in Guinea.

Not all this capital investment will come from profits or the capital markets. Vale will sell aluminum assets to Norsk Hydro for $4.9 billion in order to redeploy capital to faster growing businesses.

Vale is a member of my Jubak Picks 50 long-term portfolio (http://jubakpicks.com//

Full disclosure: I don’t own shares of any company mentioned in this post.
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