Pat McKeough responds to many personal questions on specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.
This week, one Inner Circle member asked about one of the world’s largest commodity stocks. This Brazilian giant, a leader in iron ore production, is making an aggressive move into fertilizer production. But as Pat explains, it does so in the face of a good deal of political risk.
Q: Hello Pat: Can you give me your input on Vale SA? Thank you again for all your great advice and steady hand in these markets.
A: Vale SA (ADR), (symbol VALE on New York; www.vale.com), is one of the world’s largest iron ore producers. The company gets about 59% of its revenue from iron ore. The rest comes from base metals, coal and fertilizer.
Vale was wholly owned by the Brazilian government until part of it (and part of oil giant Petroleo Brasileiro SA) were privatized in the early 1990s. The government has kept a controlling stake in Vale through holding companies, public-pension-fund stakes and other investments.
In the first quarter of 2012, Vale’s revenue fell 16.3%, to $11.3 billion from $13.5 billion a year earlier. Earnings fell 43.9%, to $3.9 billion, or $0.74 per ADR, from $6.8 billion, or $1.29 per ADR. The global economic slowdown pushed down the price of iron ore during the quarter, and abnormally high rainfall slowed Vale’s mining operations.
Asia accounted for 51.4% of the company’s revenue in the latest quarter, followed by South America (22.7%), Europe (16.7%), North America (6.0%), the Middle East, (2.4%) and the rest of the world (0.8%).
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Commodity stocks: Brazilian president looks to exert greater control over Vale SA
Vale continues to expand into fertilizer production. Demand for crop nutrients is growing strongly in Brazil, which is the world’s leading grower of sugar cane, coffee and oranges.
Recently, the company paid $1.4 billion to buy the 15.7% of its fertilizer-production company, Vale Fertilizantes SA, that it didn’t already own.
Vale trades at 5.8 times this year’s forecast earnings of $3.33 per ADR. The ADRs yield 5.9%.
Brazil is developing into one of the world’s biggest economies, but Brazil’s left-leaning president, Ms. Dilma Rousseff, aims to exert greater control over former state-owned enterprises like Vale and Petroleo Brasileiro.
Ms. Rousseff was a socialist in the 1960s; following the 1964 military coup, she was affiliated with left-wing groups and Marxist guerrilla groups. However, she says her political thinking has evolved from Marxism to “pragmatic capitalism.”
In early 2011, Vale replaced its CEO, Roger Agnelli, who had long resisted government intervention in the company. The new CEO, Murilo Ferreira, is thought to be the choice of Ms. Rousseff.
In the most recent Inner Circle Q&A, Pat assesses the political risk that Vale faces, including the fear that it may be pushed by the government into money-losing projects in the remote Amazon. He also looks at the high development costs of its fertilizer and potash projects in Brazil. He concludes with his clear buy-hold-sell advice on the stock.
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