Seeking Alpha: Is It Time To Bottom-Fish For Vale SA?

If your company produces significant quantities of iron, you've had a tough year in the stock market. If your company only produces iron, it's been a pretty ugly year. Diversification has helped Rio Tinto (NYSE:RIO), BHP Billiton (NYSE:BHP), and Anglo American (OTCPK:AAUKY), but Vale (NYSE:VALE) and Fortescue (OTCQX:FSUGY) have seen their shares weaken significantly (down about 19% over the past twelve months) as iron prices continue to test predictions of just how low prices can fall before finding a floor.

It's dangerous to assume that commodity prices can't continue to fall once they've crossed the threshold where many/most producers operate at a loss (ask investors in met coal or uranium mining companies), but Vale is one of the rare iron ore miners that can still make money at current prices. With low prices starting to lead to production cutbacks and deferred mine expansion plans in various parts of the world, maybe this is a time to consider Vale shares. Brazil's election cycle still represents a risk, as does China's economy and the significant amount of low-cost iron supply available in Australia, but these shares do seem to hold some upside here.

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Is It Time To Bottom-Fish For Vale SA?

Seeking Alpha: Mount Gibson Iron Still Needs To Buy Its Future

I wasn't overly fond of Mount Gibson Iron (OTC:MTGRF) back in January of this year, as I wasn't enamored of the company's production outlook, its corporate governance, or the need to redeploy cash on the balance sheet to improve its mining assets. The shares have underperformed Fortescue Metals (OTCQX:FSUGY) since then (by around 10%), and while I do think Mount Gibson could better withstand further weakness in iron ore prices (and deploy its capital to add reserves/resources), I'm not as bullish on the shares.

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Mount Gibson Iron Still Needs To Buy Its Future

Seeking Alpha: Iron's Free Fall Has Rusted Fortescue Metals

My bullish calls on copper producers Hudbay Minerals (NYSE:HBM), Taseko (NTGB), and First Quantum (FQFLV) have definitely worked out, but the same cannot be said of Fortescue Metals (OTCQX:FSUGY) as a roughly 30% decline in benchmark iron ore prices and wider discounts have sapped the company's earnings and cash flow leverage.

I believe Fortescue can stay free cash flow positive at or above realized prices of $70/mt, but there's a major valuation difference between "survive" and "thrive" and the behavior of Chinese steel mills is not encouraging for the near term. While there are smaller Australian iron ore companies with even more leverage to an iron ore price recovery, Fortescue is a good way to play that basic thesis. I believe the market is factoring in a pretty bearish long-term outlook for iron prices, but this is a risky stock given its reliance on stronger prices.

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Iron's Free Fall Has Rusted Fortescue Metals

Seeking Alpha: Mount Gibson Iron Offers A Curious Twist On The Mining Sector

Australia's Mount Gibson Iron (OTC:MTGRF) (MGX.AX) offers investors a curious twist on the prevailing story among junior miners today. Instead of being a mining company with an attractive portfolio of prospective mining assets but insufficient capital and liquidity, Mount Gibson is long on capital and cash but short on mining properties. The extent to which Mount Gibson can add economical reserves at its existing facilities and/or deploy its cash to acquire shovel-ready projects has everything to do with the value of these shares.

I have some concerns about Mount Gibson, and it's not my first pick in the mining sector. I do believe the shares are a little undervalued today, and I do acknowledge the potential of the company's NAV heading higher if the company announces good news in exploration or value-adding deals. Compared to more established miners like Fortescue (OTCQX:FSUGY), Rio Tinto (RIO), and Vale (VALE), though, I don't find the value proposition to be compelling enough for my own funds.

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Mount Gibson Iron Offers A Curious Twist On The Mining Sector

Seeking Alpha: If There's Any Life Left In Iron, Fortescue Ought To Do Well

Is the commodity supercycle dead, or just sleeping? That's more than just a rhetorical question when it comes to Australia's Fortescue Metals Group (OTCQX:FSUGY).

On one hand, it seems hard to believe that China will re-accelerate its infrastructure and capital spending programs to such a degree as to bring back the commodity glory days of just a few years ago, not to mention there's a lot more supply online now to deal with it. On the other hand, Chinese steel mills still source a lot of their iron ore needs from high-cost domestic mines that simply cannot compete with Brazilian and Australian imports.

In the case of Fortescue, I believe there are multiple factors that should drive a higher multiple. The company has passed the point of peak spending and peak debt, and yet offers an attractive simultaneous one-two punch of rising output and falling costs. Fortescue also has a rich pool of resources that should continue to add to reserves, not to mention a strong owned and operated infrastructure network. Although the shares have already nearly doubled from the midsummer lows, I believe Fortescue could climb another 40% and still be undervalued relative to its larger peers in iron ore mining.

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If There's Any Life Left In Iron, Fortescue Ought To Do Well

Investopedia: Down In The Vale

As I've mentioned in other recent pieces on Investopedia, these are tough times for commodity producers as the incremental Chinese demand that pushed prices so far for so long has faded. With that, demand for steel inputs in particular (met coal and iron ore) has come into much better balance with supply and prices have weakened considerably.

Although high-cost iron ore suppliers are looking at some tough times in the coming years, Vale's (Nasdaq:VALE) low-cost assets should serve the company well. Investors don't really want anything to do with this giant iron miner today, but patient investors who can take the risk of conditions getting even worse in the short run may like the long-term potential offered by this company.

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http://www.investopedia.com/stock-analysis/062513/down-vale-vale-rio-bhp-fcx.aspx

Commodity HQ: A Deeper Look At Australia's Commodity Industry

One of the wealthiest countries in the world, and the richest in Asia in GDP per capita terms, Australia is an unusual mix of a modern market economy with a large commodities-driven export infrastructure. Despite the influx of wealth created by its natural resources, Australia has never been particularly successful in developing a large manufacturing base. What’s more, the country has run large and persistent current account deficits for over a half-century. Nevertheless, Australia has very significant and efficient mining and agricultural sectors, and ranks highly in the world in many categories.

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A Deeper Look At Australia's Commodity Industry

Commodity HQ: A Deeper Look At Australia's Commodity Industry

One of the wealthiest countries in the world, and the richest in Asia in GDP per capita terms, Australia is an unusual mix of a modern market economy with a large commodities-driven export infrastructure. Despite the influx of wealth created by its natural resources, Australia has never been particularly successful in developing a large manufacturing base. What’s more, the country has run large and persistent current account deficits for over a half-century. Nevertheless, Australia has very significant and efficient mining and agricultural sectors, and ranks highly in the world in many categories.

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http://commodityhq.com/2012/a-deeper-look-at-australias-commodity-industry/

Investopedia: Near Tangible Book, Teck Is Worth A Look

Commodity companies can do nothing to change the sometimes-devastating cyclicality of their markets, but that same cyclicality gives investors multiple chances to play the same stocks. Right now there's a great deal of worry about global growth, and particularly growth in markets like China, Brazil and Europe. Although no investor should fool themselves about the risks involved, the fact that Teck Resources (NYSE:TCK) trades near tangible book value ought to be of interest to investors looking for potentially over-punished commodity stocks.

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http://stocks.investopedia.com/stock-analysis/2012/Near-Tangible-Book-Teck-Is-Worth-A-Look-TCK-FCX-SU-TOT0524.aspx

Investopedia: The Vale Between Two Peaks

Whether it's the anticipated end of QE2, ongoing growth in emerging markets, the economic recovery in North America and parts of Europe, or the fact that hundreds of companies are furiously digging new holes around the world, there are a lot of crosscurrents in the commodity space. 


Although commodities have pulled back in early May, it seems early to call an absolute end to the secular rally. With that in mind, maybe Brazil's Vale (Nasdaq:VALE) is still worth a look for value-oriented investors who want some commodity exposure. (For more, see Investing In The Metals Markets.)


A Disappointing Start to the Year
The first quarter is virtually always the weakest for this huge iron ore and nickel producer, but this quarter was even weaker than analysts had in mind. All of that said, "weak" is a relative notion. Revenue was still almost double the year-ago level, while adjusted EBITDA climbed over 3.5 times from last year's first quarter. So although that EBITDA figure was about 10% below the consensus, clearly it is not as though Vale is scraping bottom. 



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http://stocks.investopedia.com/stock-analysis/2011/The-Vale-Between-Two-Peaks-VALE-GGB-SID-AA-CLF-BHP-RIO0510.aspx

Investopedia: Will Aussie Flooding Rain On China's Parade?

Australia's summer has brought more than its usual wet season to parts of the country. This year the large northeastern state of Queensland has seen devastating flooding; the sort of flooding that leads to world news clips of people paddling boats through streets and animals seeking refuge wherever they can from the waters. Though the human toll of the disaster is likely to be severe for Australians, there are economic impacts that will stretch beyond the country and be felt throughout 2011. 

Trouble In Coal
Australia is a major producer of metallurgical coal, and mines in Queensland produce about half of the country's supply of this critical steel component. In particular, China is critically dependent upon Australia's met coal mines to feed its ever-hungry steel sector. With about 90 million tonnes of met coal already subject to force majeure, it would seem that steel customers in Asia are going to have to scramble (and pay up) to find the coal to fuel their blast furnaces.

BHP Billiton (NYSE:BHP), Rio Tinto (NYSE:RIO), Wesfarmers and Xstrata all have major met coal operations in Australia. Even for those companies and mines that are relatively less affected, there is the issue of the ports and rails - flooding has damaged infrastructure and delayed ship loadings, and it will take some time to work through the backlog. While companies like Xstrata do have other producing areas (South Africa for Xstrata, for instance), there is only so much coal to go around. Likewise, for companies like Peabody (NYSE:BTU), which does have some operations in New South Wales (in addition to Queensland), there is only so much they can do to increase mine production in the short term.
 

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http://stocks.investopedia.com/stock-analysis/2011/Will-Aussie-Flooding-Rain-On-Chinas-Parade-RIO-BHP-BTU-TCK-ANR-MEE-CZZ0107.aspx

I realize this isn't really "news" anymore ... unfortunately, it got held up in queue. 

2010 - A Year Of Only Modest Recovery In Steel

As much as people want to write about the "new economy" and the new rules of economic development, the fact remains that steel is a key component. When economies are strong, there is higher demand for steel in non-residential construction, automobiles and all manner of industrial and consumer goods. To that point, 2010 was a challenging year for steel companies and steel stocks as soft demand capped not only shipment volume but restrained companies from fully pushing on the impact of higher input prices. 

A Rare Laggard In Materials
In almost every other respect, 2010 was a great year for materials companies. While the steel sector still did relatively well (basically tracking the S&P 500), much of that came from a late rally after third quarter earnings and rising optimism about higher prices in 2011. Relative to gold, copper, coal and other industrial metals, steel was a laggard for the year as a whole.

It made relatively little difference whether a company was an integrated global steel producer or a mini-mill. World-leaders like Korea's POSCO (NYSE:PKX) and Europe's ArcelorMittal (NYSE:MT) both saw their stocks decline by double-digit percentages, while U.S. mini-mill operators Nucor (NYSE:NUE) and Steel Dynamics (Nasdaq:STLD) did a fair bit better on a relative basis. American integrated producers U.S. Steel (NYSE:X) and AK Steel (NYSE:AKS) had very mixed performance, as AK Steel's stock fared quite poorly and U.S. Steel did relatively well. (For more, see Is Now The Time To Invest In Steel?.)


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http://stocks.investopedia.com/stock-analysis/2010/2010-A-Year-Of-Only-Modest-Recovery-In-Steel-STLD-NUE-MT-X-AKS1224.aspx

Vale Still Looks Iron-Clad

Experienced investors know that the market is always playing a game of "he loves me, he loves me not" when it comes to commodities and commodity companies like Vale (Nasdaq: VALE), but this Brazilian iron ore giant has nevertheless managed to produce impressive long-term gains for shareholders. While the company's ever-increasing size argues that it will be more beholden to global commodity cycles in the future, the company's growth plans suggest that further growth is still possible. 

A Hot Third Quarter
Much to the chagrin of steelmakers like U.S. Steel (NYSE:X) and POSCO (NYSE:PKX), iron ore prices are hot right now. Much to the delight of Vale shareholders, the company translated higher prices and production into more than double the level of last year's sales and 46% sequential growth. Earnings were also far higher on an annual basis, and up 63% sequentially, while adjusted EBTIDA nearly tripled annually and increased almost 60% sequentially.

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http://stocks.investopedia.com/stock-analysis/2010/Vale-Still-Looks-Iron-Clad-VALE-X-PKX-RIO-BHP-FSUMY1029.aspx

Compromise on Australian Taxing

No real surprise here - with the change in prime ministers in Australia, a compromise on the controversial mining tax was soon to come.

The deal that came out of this process is a pretty typical compromise, meaning both sides have reason to gripe. The tax was pulled back on minerals; it will now cover iron ore and coal at a 30% rate. Onshore oil and gas, though, will still carry the 40% rate. Keep in mind, this is 30/40% *after* the companies have earned a 6% return.

Certainly this is good news for BHP Billiton (NYSE: BHP), Rio Tinto (NYSE: RTP), Xstrata and the like. It's also exceptionally good news for producers of minerals like copper (Xstrata is big there), gold, zinc, rare earth elements, and so on.

Ultimately this still knocks Australia down a few rungs in the ranks of most mining-friendly nations, but it's clearly not as bad as it could have been. For the rare earth and gold miners, it's basically a win. Too bad, then, for companies like Fortescue and Macarthur which are much more leveraged to iron and coal, respectively, but 30% is still better than the original 40%.

Good-Bye Rudd

So, Australia's PM Kevin Rudd, he who presided over the idea to launch a new mining tax, has stepped aside and Julia Gillard is now the PM of Australia (the first woman to hold that job, I believe).

Rudd learned something that I would have thought to be completely obvious to an Australian - if you take on the mining industry, you're going to get run over and run out of town. Mining is a huge chunk of the Aussie economy, and a major part of the reason that Australia has come through this global recession in much better shape than most other countries.

Now, before holders of BHP Billiton (NYSE: BHP), Rio Tinto (NYSE: RTP), Xstrata and so on get too excited, keep in mind that Gillard is also Labor and arguably "more left wing" than Rudd. So, the idea that she is going to be a softy on mining is probably way too much to hope for right now. But, since it wasn't her idea in the first place, there may be more room for compromise without losing face or looking like she backed down from the fight.

One way or another, the mining tax is coming. That's bad news for the aforementioned companies, others like Barrick Gold (NYSE: ABX), Newmont (NYSE: NEM), Fortescue, Lynas, and so on. It's also still, arguably, good news for companies like Freeport McMoran (NYSE: FCX), Teck Resources (NYSE: TCK), Anglo American, Vedanta, and Vale (Nasdaq: VALE) who don't have big exposure to Australian assets.

Is it going to hurt Australia? Probably, but only to a point. While companies like Xstrata have certainly threatened to halt and curtail investments in Australian assets, these companies are going to face a pretty hard reality. Australia is a country with high-quality mining assets, very familiar rule-of-law, excellent stability and infrastructure, an educated homogenous workforce, and physical proximity to major markets like China and India. Compare that to a country like Congo or Mynamar and suddenly the extra tax doesn't seem so bad. After all, nobody in Australia worries about a government just seizing assets or an outbreak of bloody civil war.

Oh, and these companies that were so worried about the tax? Turns out that their stock prices are pretty much all more or less back (or better) than they were when news of this mining tax came out. So, lots of sound, lots of fury, but probably not a whole lot of long-term significance.

Australia Proves Taxing To Miners

The latest article on Investopedia:
http://stocks.investopedia.com/stock-analysis/2010/Australia-Proves-Taxing-To-Miners-RTP-BTU-FSUMY-ABX-NEM-FCX-VALE0506.aspx

I'll be very curious to see how debate in Australia shapes this issue. Mining is a major source of income for the country and Australia derives huge benefit from being a modern and mineral-rich nation relatively close to China. Here's hoping they don't strangle the golden goose. 

One of the biggest risks that go along with investing in mining stocks is the risk that sovereign governments will change the rules midstream. More than a few mining projects in Africa and South America have been canceled or curtailed by governments suddenly changing the rules, typically by tearing up contracts demanding a larger slice of the pie. Historically, Australia has been seen as a very mining-friendly country, but a recent proposal to change tax rules in that country has sent some major ripples through the sector.


The TaxAs part of a comprehensive tax policy review, the Australian government has proposed a new "resource super profit tax" of 40% that would be levied on companies with on-shore mining assets in Australia. In short, this tax would increase the effective corporate tax rate for mining in Australia to about 57%. Another way to look at it is that basically makes the government of Australia a 40% partner in all resource projects starting in the summer of 2012.   
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