Cia. Vale do Rio Doce fell 27 percent this year in Sao Paulo, heading for the first annual decline since 2000. Now analysts say the world’s largest iron-ore producer is poised for its best performance in a decade.

Vale may double in the next year, more than twice the expected gains for the world’s biggest mining companies, BHP Billiton Ltd. and Rio Tinto Plc, according to the median of six analysts’ forecasts compiled by Bloomberg.

While Deutsche Bank AG, Credit Suisse Group AG and Goldman Sachs Group Inc. predict iron-ore prices will rally 20 percent in 2009, Rio de Janeiro-based Vale will benefit more than its competitors as demand from Chinese steelmakers rises and freight rates fall. BHP and Rio won bigger price increases from China this year than Vale because they ship most of their ore from Australia, not Brazil.

“Vale is set to outperform its peers,” Credit Suisse’s Roger Downey, the top-ranked metals and mining analyst in Latin America last year by Institutional Investor magazine, said in a telephone interview from Sao Paulo. “Iron ore is the metal that’s most likely to surprise the market.”

Analysts’ Forecasts

Vale will jump 101 percent to 74.17 reais ($44.75) in 12 months from today’s closing price of 36.89 reais on the Sao Paulo stock exchange, according to the median of six forecasts compiled by Bloomberg. The company’s shares rose more than 80 percent on an annual basis three times — last year, in 2002 and in 1999, when they surged 222 percent.

Rio Tinto’s shares will increase 39 percent, and BHP will rally 32 percent, estimates show. Rio Tinto dropped 9.2 percent in London trading this year, while BHP advanced 2.1 percent in Sydney.

Higher iron prices would help Vale more than other producers, said Tony Robson, an analyst at Toronto-based BMO Capital Markets. The metal will account for 67 percent of Vale’s sales next year, compared with 35 percent for London-based Rio and 22 percent for BHP in Melbourne, he said.

In the first half, Vale sold $9.89 billion of iron ore, or 54 percent of revenue, company filings show. Rio Tinto generated $3.74 billion from iron ore, or 31 percent of its total, and BHP had $3.58 billion, or 14 percent.

Discounted Shares

Vale, owned by the government until it sold shares to the public in 1997, trades at a discount to its peers. Vale’s American depositary receipts sell for 6.5 times forecast 2009 per-share profit, compared with at least 7 for BHP and Rio.

“Now is the time” to buy, said Deutsche Bank analyst Jorge Beristain in New York, who was second in the Institutional Investor ranking. Moody’s Investors Service cited the “strength of the iron-ore market over the next year” when it raised the rating on Vale’s debt to Baa2, the second-lowest investment grade, from Baa3, on Aug. 29.

Vale shares, which rose 88 percent in 2007, lag behind those of rivals partly because the $16.7 billion acquisition last year of Inco Ltd. made it the world’s second-biggest nickel producer just as prices tumbled. The stock also fell after the company sold more than $12 billion of shares in July to finance expansion, diluting existing shareholdings.

Average nickel prices declined 43 percent in the second quarter from a year earlier. Nickel is “of minor consequence to BHP and Rio, but of big consequence to Vale,” said Charles Bradford, a Soleil Securities Corp. analyst in New York who has covered the industry for more than four decades. The metal will account for 14 percent of Vale’s revenue next year, compared with 8 percent for BHP, said BMO’s Robson.

Profit Growth

The slump will limit Vale’s profit growth to 37 percent in 2008 and 19 percent next year, based on the average of six analysts in a Bloomberg survey. Rio Tinto’s earnings will increase 71 percent and 26 percent in 2009, the data show. Analysts forecast a 53 percent rise for BHP in the fiscal year that ends in June 2009.

By 2010, Vale’s growth will be the quickest, analysts say. Earnings will rise 16 percent that year to $22.4 billion, compared with 11 percent at Rio Tinto and little changed for BHP, analysts’ estimates show.

“Demand for iron ore and demand for nickel remain very strong,” Vale Chief Executive Officer Roger Agnelli, 49, told reporters in Brasilia on Aug. 28. Spokesman Fernando Thompson declined to comment on stock performance.

China

Wall Street is increasingly bullish because China remains short of ore supplies that have enough iron to meet international manufacturing standards for steel. The nation’s economy grew 10.1 percent in the second quarter, the fastest pace of the world’s 20 biggest economies.

Vale’s supplies are preferred because they have the highest metal content, said Marcelo Aguiar, an analyst at Goldman.

Ore from Chinese mines contains about 30 percent iron, compared with as much as 65 percent in Australia and 67 percent at Vale’s Carajas mine in the Amazon region, said Joachim Schroder, chief executive officer of RCG Research & Consulting Group in Zurich. Carajas has the world’s highest iron content and the lowest level of silica, a compound that reduces the hardness of steel, Aguiar said.

Vale has a “good negotiating position” for contract talks with China next year, said Will Landers, who manages $7 billion of Latin American stocks at BlackRock Inc., the largest publicly traded U.S. fund manager, in Plainsboro, New Jersey. “Its iron- ore quality is the best.”

Price Increases

Vale increased contract prices as much as 71 percent this year, less than the 97 percent Rio and BHP secured, partly because steelmakers demanded a discount to offset record shipping costs. Freight rates make up more of the cost of Vale’s ore because Brazil is three times as far from Asian markets as Australia, where BHP and Rio produce the bulk of their metal.

“It’s a lot more economically viable for the Aussies to ship to China than the Brazilians,” Soleil’s Bradford said.

Chinese steelmakers are willing to pay about $10 more per ton for Vale’s ore, Downey said. The drop in shipping costs means Asian buyers pay about $105 a ton for the ore and freight from both Brazil and Australia, giving Vale more room to charge a premium, he said.

The benchmark Baltic Dry Index, which doubled in 2007, dropped 45 percent since May 20. It will fall 40 percent next year and another 47 percent in 2010 because of slower economic growth and increased shipping capacity, Goldman Sachs forecasts.

`Very, Very Cheap’

The cost of shipping ore from Brazil to China fell $36.58 a metric ton from a June 4 record to $72.17 on Aug. 28, according to the London-based Baltic Exchange. The cost from Australia dropped $22.92 from a June 5 high to $27.93.

Profit margins also may improve as Brazil’s currency drops after a six-year rally that eroded Vale’s dollar-denominated sales. The real will weaken 7.9 percent against the dollar by the end of 2009 after the country posted a record current account deficit in the first half, according to the median forecast of 18 economists in a Bloomberg survey.

“If you think the iron-ore market is going to be tight, Vale gives you the best exposure,” said BMO’s Robson in a telephone interview. “Vale looks very, very cheap.”

source : bloomberg online

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