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Companhia Vale Is Digging In

Posted: Feb 03, 2009 13:54 PM by Gregory S. Davis

Tickers in this Article: BHP, RTP, RIO

People know that manufactured steel is in the cars they drive, the buildings they work in and possibly the frames of the homes they live in. What people may not know is that the iron ore mined by one of the world's largest miners, Companhia Vale (NYSE:RIO), is the main component used in manufacturing steel. Vale has chosen to invest in its future during the global economic slowdown to position itself and its workers ahead of a rebound in demand for commodities. Let's take a closer look at how Vale and other miners may fit into your portfolio. (To learn more about investing in commodities for both downside protection and upside potential, read How To Invest In Commodities and Commodities: The Portfolio Hedge.)

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Capital Expenditures
Vale has announced plans to invest $14 billion in 2009 in efforts to capture future demand for its iron ore, coal, nickel and other metals. Despite a recent downturn in demand for commodities, Vale's current investment is $4 billion over last year's investment to capture growth.

BHP Billiton
Late last year Australian-based miner BHP Billiton (NYSE:BHP) dropped its $66 billion offer to acquire London-based Rio Tinto (NYSE:RTP). Falling commodity prices and a swarm of regulatory issues were enough to scuttle the acquisition attempt. For the time being, rather than growing through acquisition, BHP has 28 expansion projects either in the feasibility stage or the execution stage. The $24.8 billion endeavor is meant to help BHP expand its production of multiple business lines emphasizing petroleum, coal and iron ore supplies.

Rio Tinto is taking more of a defensive posture given a recent sale of potash and iron ore assets to Vale. It is committed to reducing net debt by $10 billion and net capital expenditures from over $9 billion to $4 billion in 2009 while remaining open to future growth opportunities.

Vale Diversifying Into Potash
On January 30, Vale announced its intention to acquire those iron ore and potash assets from rival Rio Tinto. Potash is used to help crops improve yields by fending off disease and drought conditions. Food price inflation has not been a hot topic lately as oil prices have fallen below $45/barrel, but Vale anticipates solid future demand for potash imports from large importers including the U.S., China, Brazil and India as the necessity for crop efficiency takes shape.

Layoff Review
At the end of its fourth quarter last year, Rio Tinto announced the largest number of staff cuts among the trio of miners mentioned, totaling 14,000 jobs (8,500 contractors and 5,500 employees). In January BHP announced plans to eliminate 6,000 jobs (approximately 4,200 contractors and 1,800 employees). Before the end of 2008, Vale announced its intention to lay off 1,300 employees and place an additional 5,500 on paid leave.

Final Thoughts
The demand for commodities may have taken a reprieve, but all of the miners mentioned are making adjustments to position themselves for future profits. Vale's approach through its diversification into potash, its attempts to hold onto employees and its expansion investment may put the company one step ahead of its competition.

By Gregory S. Davis

Gregory S. Davis is an investment writer and consultant for his company G.Davis Capital Inc. His core methodology for choosing investments include patience, diversification and asset due diligence. Gregory is a graduate of the Wharton School of Business. He is also a board member of StoriesWork, a non-profit organization based in Durham, NC that uses storytelling to empower youth and individuals to utilize alternative dispute resolution tactics.

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