Vale’s Rare Dilemma
05/31/2011 4:55 pm EST
You'd think news that the Brazilian government is so eager for Vale (VALE) to get into the rare-earth business that it was busy lining up potential customers would be nothing but good news for Vale. (Vale is a member of my Jubak Picks 50 long-term portfolio.)
You'd be wrong, however.
The move by the Brazilian government has added to fears that it wants to regain control of the company it privatized in 1997. Government pressure was key to pushing out Vale CEO Roger Agnelli in April.
Financial markets have generally reacted favorably to new CEO Murilo Ferreira, a Vale veteran who left the company in 2008, seeing him as an experienced mining executive rather than a political appointee.
But the jury is still out. The new government of President Dilma Rousseff has made moves to reassert control over Petrobras, also a partially privatized government-controlled company, and recently moved to impose price controls in the Brazilian ethanol industry.
It's clear from government negotiations with companies like China's Foxconn, the maker of Apple's iPhone, for a potential $12 billion investment in Brazil, that the government wants to foster a Brazilian technology industry.
Being able to promise technology companies access to a supply of rare-earth minerals-at a time when China, the source of 90% of global supply, is restricting exports-would be a major boost to that effort.
The question for investors, of course, would be "Is this investment in Vale's best interest, or are we headed back to the days when the government ran the mining company in the national interest?"
At this point it's hard to tell, for at least two reasons.|pagebreak|
First, while Brazil clearly has exploitable supplies of rare earths, it's not clear how much of those deposits are relatively abundant (and therefore lower priced) rare earths and how much are rare, rare earths that are the most profitable to produce.
For example, in March, a group of Japanese and Korean companies paid almost $2 billion for a 15% stake in Brazil's Companhia Brasileira de Metalurgie e Mineracao, a producer of niobium.
By the strictest definition, niobium isn't actually a rare earth-it's a rare metal, used to harden steel, mostly-and the niobium market is very different from the rare-earth market. While China controls 90% of the world's supply of rare earths, three quarters of the annual production of niobium comes from Brazil.
That's not to say there aren't significant rare-earth deposits in Brazil. In March, Olacyr de Moraes, the world's biggest individual soybean producer in the 1970s, reported finding a rare-earth deposit in the northeast of the country that may be bigger than current reserves in China and Kazakhstan, according to press reports. The deposit reportedly contains at least 130,000 pounds of thallium, a highly toxic rare earth used in superconductors.
And second, no investor can tell know how much Vale would need to invest-or what's its return on that investment might be.
Today's news included a reminder that Vale has many projects competing for capital.
On May 31, Vale won important backing from South Africa's state lending company in support of its $1.1 billion bid for Metorex, a South African copper miner developing the Ruashi copper and cobalt mine in the Democratic Republic of the Congo. The acquisition is part of Vale's goal to increase the company's output of copper to 1 million metric tons, a fivefold increase, by 2015.
It's hard to weigh that investment against the rare-earth opportunity in Brazil in the best of circumstances. What worries some investors, though, is a suspicion that the government might have its finger on the scales.
Full disclosure: I don't own shares of any of the companies mentioned in this column 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 column. The fund did own shares of Vale as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund's portfolio here.