Update Vale (VALE)

02/16/2012 3:11 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

More evidence that Brazil’s domestic economy and its export sector are headed in different directions at the moment.

Yesterday the Banco Central do Brasil reported that economic activity in Brazil climbed by 0.57% in December from November. That’s the second monthly increase in a row after growth stalled in the third quarter with the period essentially flat with the second quarter. (Year-to-year growth in the third quarter fell to 2.1%).

The news wasn’t nearly as positive from Vale (VALE), the world’s second largest mining company. (Vale is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com// .The iron-ore exporter reported that fourth quarter net profit fell 20% from the fourth quarter of 2010. Sales during the quarter were down 1.2% on lower iron ore prices. After staying stable from April through September, iron ore prices have taken a dive with the Tianjin spot price in China falling to $116 a metric ton in September from a peak of $181 in July.

This is Vale’s third straight quarterly earnings miss. For the fourth quarter, the company reported earnings of 90 cents a share versus the Wall Street consensus of 95 cents a share.

Besides the 19% drop in the average selling price for iron ore from the level in the fourth quarter of 2010, Vale got hit with falling copper (down 16%) and nickel (down 20%) prices.

If you’re looking for a reason behind the price drops, you don’t need to look any further than the decline in growth in Europe from the effects of the euro debt crisis. Shipments of iron ore and iron pellets to Europe fell by 12.9%. European sales make up about 16% of Vale’s total sales.

Vale clearly regards the set back as temporary. The company increased annual production by 4.8% in 2011 to a record 322.6 million metric tons. The company invested $18 billion last year (excluding acquisitions) and plans to invest $21.4 billion in 212.

While you wait for those investments to bear fruit with a turn in the global economy, you might note that Brazil’s domestic economy, although not yet growing at anything like the 7.5% recorded in 2010, looks like it has turned a corner. The central bank began cutting interest rates in August when the economy looked like it might be headed for a recession. Those interest rate cuts and tax incentives for consumer spending look like they will push growth back above 3% for 2012 after annual growth dropped to 2.1% in the third quarter. The Banco Central do Brasil projects 3.5% growth in 2012; private economists are calling for 3.3%.

The central bank will release fourth quarter 2011 GDP numbers on March 6.

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 http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Cummins and Deere as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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