Mining Giants Years Away From Meeting Demand

02/28/2011 3:59 pm EST


Jim Jubak

Founder and Editor,

When will billions—OK, tens of billions—in new investment put an end to the current boom in iron ore prices (and in the price of related stocks)?

While announcing its fourth-quarter earnings last Friday, Brazil’s Vale (NYSE:VALE) reported that the market will experience supply constraints for three to four years.

In response, Vale will invest $24 billion in 2011 to expand its output to 522 million metric tons of iron ore—a total roughly equal to ten months of China’s current demand—by 2015. That’s roughly the same time frame that BHP Billiton (NYSE: BHP) talked about in its latest capital-spending plan. (For my latest update on BHP Billiton, see my post.)

If you want to invest conservatively—and it’s not a bad idea given that iron ore prices at their highest levels since the mining boom ended in 2008—I’d say it’s safe to let your iron ore stocks run for the next two years before looking for signs that supply might be catching up with demand. (Vale and BHP Billiton are both members of my Jubak Picks 50 Portfolio.)

Vale’s results certainly reflected the current good times. Revenue for the quarter more than doubled to $15.2 billion, from $6.5 billion in the fourth quarter of 2009. Net income for the fourth quarter climbed to $5.92 billion, or $1.12 a share, from $1.52 billion (28 cents a share) in the fourth quarter of 2009. Wall Street analysts had expected $1.01 a share.

Vale said iron ore prices in the quarter rose to $122 a metric ton, from $56 in the fourth quarter of 2009. Production climbed to 308 million tons in 2010, 29% higher than in 2009—and the company’s goal to raise production to 522 million tons by 2015 represents a further 70% increase in capacity.

Iron ore is no longer the only story at Vale, though. Vale produced 207,000 tons of copper in 2010, up 4.5% from 2009. The company’s goal is to produce 1 million tons by 2015.

Nickel production in the quarter doubled from the fourth quarter of 2009 to 65,000 metric tons. Nickel production will decline about 5% in 2011, as the company repairs a furnace at its Copper Cliff plant in Canada.

Vale’s stock didn’t exactly soar on the news; in fact, the stock sank by 6 cents (0.18%). But it’s been hard for any Brazilian stock to get traction this year in the face of rising interest rates, climbing inflation, and forecasts of slower domestic growth.

The Bovespa Index was essentially flat today, and is now down 3.4% in 2011. Vale’s stock is up a scant 1.6% in 2011.

I think Vale’s fortunes are tied more closely to the performance of overseas steel-making economies in China and the European Union (a more important market for Vale than for its Australian competitors due to transportation costs) than to the domestic Brazilian economy.

Depressed share prices in Brazil, which could well last for another six months or more, give investors a very extended buying window on Vale. I’d put a 12-month price target of $44 on the stock.

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 (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did own shares of Vale as of the end of January. For a full list of the stocks in the fund as of the end of January, see the fund’s portfolio here.

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