Mining Operations: VALE, Interactive Mind Map

Interactive Mind Map based on Mining Operations of VALE.

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Mining Operations VALE, Interactive Mind Map

Bayovar Phosphate Mine Project and Vale

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Brazil's Vale starts production at US$566-mln Bayovar phosphate mine..

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Bayovar Phosphate Mine Project and Vale

Mosiac (MOS), as seen on IKN

We wrote on Thursday:

The news out of Brazil caught the headlines of all newswires, with Bloomie's 'Mosiac Climbs After Report Vale May Bid $25Bn' and Reuters with 'Vale mulls bid for Cargill's Mosiac' pretty typical of the bunch. But when your humble correspondent clicked open the stories it turns out that the source for the story is the newspaper O Estado de S. Paulo, a medium second to none for its unfounded bullshit and made up stories about takeovers, movers and shakers.

So if you want to get out of MOS, do it today.

We read on Bloomberg Friday afternoon:

Vale Denies Fertilizers Acquisition; Mosaic Falls (Update2)

By Carlos Caminada

July 17 (Bloomberg) -- Vale SA, the world’s biggest iron- ore miner, said it hasn’t made any offers to acquire fertilizer assets. Shares of fertilizer producer Mosaic Co. fell CONTINUES HERE

We see the reaction in share price:

Toldya.

Memo to shareholders of Mosiac (MOS)

Woof Woof

Get on your knees and thank the market gods for the chance to sell out today.

The news out of Brazil caught the headlines of all newswires, with Bloomie's 'Mosiac Climbs After Report Vale May Bid $25Bn' and Reuters with 'Vale mulls bid for Cargill's Mosiac' pretty typical of the bunch. But when your humble correspondent clicked open the stories it turns out that the source for the story is the newspaper O Estado de S. Paulo, a medium second to none for its unfounded bullshit and made up stories about takeovers, movers and shakers.

So if you want to get out of MOS, do it today. Any other source and I'd be expecting the deal to happen, but as it's O Estado the chances drop to 25% maximum. I mean, why should Vale buy a fertilizer play right now when anybody with a brain sees the potash cartel prices cracking and a big drop in revenues in the very near future?

UPDATE: Right on cue, Forbes published this report this afternoon on the soft earnings outlook for the major fertilizer players, including MOS of course.

Things wot caught my eye

I agree with Salmon's take on the US unemployment figures. He picks one sub-category to highlight (i.e. male unemployment) but there are others. Basically, away from the headline number things are far worse than they seem (yes, we know about the lagging indicator theory of unemployment figures). I also noted with a nod of the head the commenter on the post, who pointed out the US Bank stress test model called for US unemployment to top out at 8.9%...we're already there, folks! 10.5% here we come.

This Bloomie headline about Vale (VALE) made me smile. "Vale "Ready to Explore" Alternative Iron Ore Pricing". I mean, do you really need me to translate that into real English?

Chile's CenBank drops rates 0.5% to 1.25%...a record low.

Peru's CenBank drops rates 1% to 4%...plenty more to come, too.

But it's not all bad, folks. Brazil's telco Vivo (VIV) posted strong results. Notice that VIV is now managing to feed the bottom line from its revenue pile..the sign of a maturing telecoms market in Brazil. Basically, the major investment period is over and its payback time...we've seen this pattern many times before (Argentina, Mexico) and now Brazil, a country that has (somewhat surprisingly) lagged other regional telco markets is getting its turn at bat.

Businessy things

The big LatAm company story is Vale (VALE) who missed on earnings, with revenues of $1.36Bn to an analyst expected $1.66Bn. Here's the bloomie report that sums up the most interesting numbers and the necessary reactions (you'll note from the report that VALE is slightly up in European tradign this morning...bull is as bull does, y'know).

Meanwhile, for once I feel like dipping in my toe to the bigger paddling pool that you guys splash around in up there. It's more fun to watch the spin you get, cos it's on a whole other level to the stuff we get. It's like comparing Monty Python to people falling over.

I liked the starting line to this note in the Austraian Daily Reckoning: "Happy days are here again. It’s like someone turned back the clock to 2007. You’re a crank and a nutjob if you think there are serious problems in the financial system". Yep.

That Daily Reckoning article sure makes juxtaposition to this one from AP yesterday. "Stocks jump as fears ebb about bank stress tests' is a neat chronicle of how the US bank-Feddy people pulled a cute number on the market by drip leaking the necessary info with perfect timing and planning. It really was a masterful use of financial media yesterday.

Also, note how businesses have managed to bring great relief with their "smaller sales declines in April". Phew! For a minute there I thought they'd sold less!

Finally, for traders getting carried away by the rush of market love, Lucas has a very interesting post that might help you home in on a method of playing the bull. Logically he's found an interesting way of screening for stock trading opportunities and his comments are smart, too....well, that's expected from the dude. Go have a look, traderypeople.

Chart of the day is.....

..iron ore production at Vale (RIO) per quarter since 2007.

This is a follow-up to this post dated January 24th that featured the same subject. At the time I wrote "Gawd help 1q09 and onwards" and as it turns out RIO is going to need all the help Gawd might offer. The 46.9MMT production figure for 1q09 sucked harder than the bilge pump on the Titanic and considering that Chinese iron ore demand has fallen off a cliff again (now the restocking is over) there's no reason to think the rest of 2009 will be anything better.

Think this recession has bottomed out already? I laugh in your face.

Saturday Mailbag (RIO and AUY)

Two mails this week that show your humble correspondent doesn't have all the answers.

Firstly, after calling short on Vale yesterday, reader LR points out I'm going against Marc Faber and sends along a link to prove it. So Faber holds RIO, that's interesting for sure. For me it's a call on overestimating the extent of the Chinese 2009 growth season. Let's see how it goes, but I'm still going short on it Monday if Mr Market gives me $13. I note he's also long Nadagold, so even if he's right by liking the junior gold sector his understanding of company fundamentals is obviously sketchy. What's the point in holding a junior that, unless gold goes to $3k/oz never be able to produce gold with its properties? And with gold at $3k the good companies rise first. Nadagold is a heavily promoted joke that's giftwrapped specially for people that don't understand gold mining. Nuff said.

Second mail. After noting the good results posted by Yamana (AUY) this week, I received the following from...well let's just call this person "market professional". I enjoy reading a mail that takes a contrary position to mine; I especially enjoy one that comes with solid reasoning and basicaly betters my call. So here's what market professional wrote, FYI (permission to reproduce this section was granted).

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.....in light of your recent commentary on Yamana I wanted to add a bit of colour on their fourth quarter results.

As has been the case with most of the earnings season thus far, Yamana’s results were noisy. The headline number of $0.25 included numerous one-off and non-cash items. Obviously analysts have no way of predicting the size or nature of these items so when the results are reported we back these items out to get a “truer” earnings number (an “apples to apples” if you like). Boosting Yamana’s results this quarter were foreign exchange gains ($131mln), unrealized gains on derivatives ($139mln) and proceeds from the sale of the copper hedge ($47mln). Offsetting this was a write down at Sao Francisco ($58mln), other investment writeoffs ($14mln) and provisional pricing adjustments ($74mln). Obviously deciding what items to adjust for is a subjective process and thus analysts will always report different adjusted earnings numbers. The most controversial item this quarter for Yamana was the provisional pricing adjustments. My view is that provisional pricing is always going to influence the business and thus should not be backed out. Besides, companies rarely make mention of it when they benefit from rising prices yet when prices fall all of a sudden they claim the negative impact is a one-off item!

After backing out all the noise estimates on the street ranged from $0.03 to a loss of $0.08 so the quarter could be described as a miss. Of course this makes it difficult to explain the strong share price movement on the day other than if it traded off its headline number or simply benefited from a gold price up on the day and a recent bounce in the copper price.

Anyway, I just thought I’d provide a bit of colour on the quarter and hopefully put things in perspective. If you have any questions or want any further info please let me know.

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Now that's what I call a good mail. Thanks MP

Vale (RIO): Very shortable here

I'm now looking for the right price to short RIO. Fundamentals suck (Inco in bad shape and more layoffs at an office admin level announced this week) and recent news out of China strongly suggests that the recent pickup in steel production is a forced governmental move that has no basis in true demand, thus causing ever greater stockpiling of finished product.

Sorry brazilguys, I know your RIO is big and meaty and I know you've already dropped a long way, but there's plenty of reason to see RIO as a major hedge play to balance longer stuff.

Here's Reuters with a short report to whack home the issue:

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BEIJING (Reuters) - China's crude steel output was 1.42 million tonnes a day in February, equivalent to about 520 million tonnes a year and a "worrying oversupply", Deng Qilin, chairman of the China Iron & Steel Association, said on Friday.

According to a Reuters calculation, that means February output totalled 39.76 million tonnes, a 5.2 percent increase on the 37.79 million tonnes produced in December 2008, a longer month and the last month for which data is available.

Deng, who is also president of Wuhan Iron & Steel Group, said his company would cut output by 15-20 percent and aimed for sales of 120 billion yuan ($17.55 billion) this year. ($1=6.839 Yuan)

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UPDATE: Not short yet, will look for $13 on Monday

Just how bad is the downturn in iron ore production?

Answer: Very bad.

I read this report from BN Americas this week that started like this:

Brazilian miner Vale's (NYSE: RIO) iron ore output in 2008 slipped 0.5% from the previous year to 302Mt, the first time since 2000 the company's production has dropped.

"From 2001-07 iron ore output grew at an average annual rate of 13.4% as a consequence of productivity gains and large investments to increase capacity," Vale's annual production report said, adding that the company shut down several mines in Minas Gerais state due to dwindling demand caused by the financial crisis yada yada continues here

So as the slump only really happened at the end of 2008 the note had caught my eye. "Hmmm...just how bad did it get?" thought your inquisitive numbers wonk, so off I trotted to the RIO website to check out the figures. Now this isn't looking at copper, or nickel or any of the other RIO products, just its core industry of iron ore production. Here's the chart.

Holy Moley, that's one helluva drop in the last quarter, especially when you remember that the cuts didn't even start until November, with the second wave of layoffs happening in the first week of December. Gawd help 1q09 and onwards. And even though Vale manged to beat the clock and raise capital at the right time in 2008, frankly I'd rather hold Osama Bin Laden's dick than RIO shares right now. I mean look at the 12 month chart:

For sure it had the waterfall drop just like all the others, but since November people have actually been buying the stock. So take a look at the five year chart and see where the company can go when things get tougher....and they're going to get tougher.

LatAm commodities are now just one big sector

The squealing is coming from all sectors and all countries this morning.

Oil down (Therefore Venezuela, Ecuador and Brazil are toast)
Metals are down (Therefore Chile and Peru are toast)
Soft commods down (Therefore Argentina and Brazil are toast)

So it occurred to me to look at a few stocks that cover both LatAm and commodities of various shapes and sizes. What I saw was a real eye-epener:

This chart compares the ten day stock price performance of Southern Copper (PCU, the black line), soybean play Bunge (BG, the red line), iron ore and other metals play Vale (RIO, the blue line) and Brazil's Petrobras (PBR, the region's biggest traded oil play).

What this shows is that current share price action has nothing repeat nothing to do with real market forces like supply, demand etc. It shows that political risk factors are being totally ignored. It shows that the market has no idea about what it is truly buying or selling. This because the only thing that can be concluded from this chart is that all commodities are but one thing, and according to the crazy price action and the crazier people that drive it, all the LatAm states involved with their production are just one big, homogenous risk.

You telling me that chart up there is logical? Because if so, my investment recommendation to you is simple. Don't trade stocks ever again. Put your money in a time deposit fund and learn to surf, or play piano, or join a salsa dance class or something. You need a different pastime. However, if you agree with me and see the asinine way in which commodity stock are being treated right now, maybe you'll think about finding the arbitrage advantage amongst all that mess.

Personally, and as an example, I think PBR at U$28 is a great price now (if you take a medium-term perspective); It may go lower (re-test $25?) but oil has a profit floor these days, thanks to things like Canadian Oil Sands. And when Obama gets in, do you really think OPEC will keep the spigots wide open? Think about it.....