Recently, Brazil’s largest miner, Vale S.A. (VALE), declared a capital investment budget of $24 billion for fiscal 2011, more than double the $10.7 billion invested in the year ended September 30, 2010.
The increased investment is expected to support 15 new approved projects, projects in queue and existing operations. Vale will focus more on organic growth and, therefore, 81.3% of the total budget will be spent on Research & Development (R&D) as well as Greenfield and Brownfield projects. Vale is also going to emphasize rail and port expansion, coupled with an increase in coal production.
The increase in production will be supported by the recent improvement in market demand. During the third quarter of fiscal 2010, net earnings increased to $6,038 million from $1,677 million in the corresponding quarter of fiscal 2009 and $3,705 million during the previous quarter, due to the increase in demand for minerals and metals based on the global economic recovery.
Demand for iron ore is usually related to the worldwide demand for steel, which is expected to climb 5.3% in 2011. China, the biggest iron ore importer in the world, is expected to increase its steel consumption by 3.5% in 2011. China is also expected to remain the largest consumer of metals in the years to come. Hence, the medium-term outlook for metal commodities remains encouraging.
The increase in demand for minerals and metals has forced up metal prices to their all-time high. We believe that the company’s risk/reward profile is balanced and we see limited upside from the current level. We remain Neutral on the ADS. In the shorter term, Vale currently retains its “Hold” rating, which equates to a Zacks #3 Rank.
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