No Holding Back These Mining Giants

11/15/2010 1:00 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad and Yiannis G Mostrous, associate editors of Personal Finance, like the big metals suppliers as a hedge against pump priming by the Federal Reserve.

In the short term, the primary driver for metals and mining stocks is the collective effort by Western central banks, led by the US Federal Reserve, to pump up the global economy. Easy monetary policy will persist as long as spare capacity and unemployment remain elevated.

Once created, this money must flow somewhere. Emerging markets are among the most popular destinations, because that money funds growth directly. Inflows of new money will boost credit creation in these economies and, consequently, domestic growth. This will ensure that demand for metals used in construction remains strong.

Potential volatility doesn’t obviate strong long-term fundamentals; now is an ideal time to selectively add metals stocks to your portfolio.

BHP Billiton (NYSE: BHP) [did] not succeed in its bold $40-billion bid for Potash Corp of Saskatchewan (NYSE: POT). But even [though] regulators  [shot] down the deal, the Australia-based giant boasts dominant market positions in everything from coal and oil to iron ore, gold, alumina, titanium, ferro-alloys, nickel and copper.

A market capitalization of $215 billion and annual revenue of $55 billion ensure that BHP has the wherewithal to take on virtually any project. Fiscal 2010 marked the tenth consecutive year of record iron ore output and the third such year for petroleum. The company continues to deploy more than $10 billion in organic growth projects every year.

BHP’s stock is within 10% of its all-time high hit in May 2008. But it still yields more than 2% and sells for less than ten times earnings projections that reflect continued strength in commodity prices. Buy BHP Billiton, a conservative, multi-commodity bet, up to $90. (It closed Friday below $87—Editor.)

Brazil’s Vale (NYSE: VALE) is another mining giant, with a market cap of nearly $170 billion and [annual revenue of] $50 billion. Like BHP, the company is a major producer of multiple hard commodities, from iron ore and copper to nickel, coal, bauxite, aluminum, and potash. Vale’s iron ore is considered among the richest in the world.

Over the next two years, Vale will spend between $26 billion and $28 billion to bring a range of new projects online, the first half of a plan to double the company’s size by 2015.

The bulk of these expenditures will focus on increasing iron ore output in Brazil, though the firm will also spend $4.5 billion on potash production in Argentina, commence biodiesel production, and start a major nickel mine. And don’t forget the company’s investments in the vast infrastructure required to bring its output to resource-hungry global markets.

That’s good reason to expect the stock to mount a fresh assault on the May 2008 high [above $41] before seeking higher summits. Vale now pays out cash in November and February, in addition to the annual May dividend. Buy Vale up to $35. (It closed above $32 Friday—Editor.)

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