BlackRock Sees Vale as Best Stock in Brazil on Weaker Real

Vale SA (VALE3), the world’s largest iron-ore producer, is the best Brazilian stock for investors as a weakening real boosts profits and China’s expanding economy stimulates demand for steel, according to BlackRock Inc. (BLK)

Vale is the “most obvious” stock to buy in the South American country, Will Landers, who manages $7 billion in Latin American equities at New York-based BlackRock, said in an interview today. The falling real is increasing the Rio de Janeiro-based company’s profit margin and he expects the company to benefit from Chinese attempts to speed up its economy in the second half of the year.

The company is the largest stock in Lander’s fund, accounting for about 10 percent of the weighting at BlackRock’s Latin America Fund. Brazil’s real fell 1.4 percent to 2.07 a U.S. dollar at 5:15 p.m. in Sao Paulo, the weakest intraday level since May 2009. Vale prices most iron-ore sales in dollars while most of its costs are in reais.

Vale will sell as much iron ore with the real at 2 at it would with the real at 1.6, “but they just will make a lot more money,” Landers said during an interview at the Rio Investors Day 2012 conference.

New Leadership

Vale Chief Executive Officer Murilo Ferreira, who took over from Roger Agnelli a year ago, says he’s planning to return capital to investors as difficulties executing the company’s investment plans frees cash for investors.

The company last year paid a record $9 billion in dividends, more than double its initial target, and bought back $3 billion worth of stock. The company said Jan. 16 that it will pay at least $6 billion of dividends this year, 50 percent more than the initial goal established in 2011.

“I expect capital discipline,” said BlackRock’s Landers. “If there is excess cash, I have no doubt they are going to return it to shareholders.”

The new CEO’s strategy will please investors, Landers said. “It’s going to take a while for his footprint to be on the company but when you see the amount of money he has returned to shareholders via dividends, the capital discipline that he is showing around, the investment program, I think that’s all positive,” he said.

“It was a very good year in a turbulent year for Ferreira,” Landers said.

Vale, the world’s second-largest mining company, hired Bank of Nova Scotia and Citigroup Inc. (C) this month to sell its oil and natural-gas assets in Brazil to focus on metals production as its profit margin in non iron-ore assets shrink.

Rising Prices

Iron-ore prices will probably recover during the second half to an average of $150 a ton from current levels of close to $130 as Chinese steelmakers resume purchases. Prices for the key raw material to make steel may average $165 a ton in 2013, Marcelo Aguiar, a mining equity analyst at Goldman Sachs Group Inc. (GS), said in an interview yesterday.

Miners are boosting output to meet growing Chinese demand as the country’s expansion stokes the use of steel in automobiles, appliances and construction. Chinese steel production reached a record in March.

China’s steel demand will grow until at least 2025 and production will rise to about 1.1 billion tons by 2025 from about 700 million tons currently, the Australian mining company BHP Billiton Ltd (BHP) said in March. Brazil, which counts iron ore as a key export product, shipped 330.8 million metric tons last year.

Infrastructure Approval

The China Securities Journal today reported the country plans to accelerate approval of infrastructure projects. This year’s investment plans must be submitted before the end of June and the government may allocate construction funds earlier than scheduled, the newspaper said.

China’s crude-steel production declined 1.6 percent in April to 60.57 million metric tons after soaring to a record 61.58 million tons in March, the World Steel Association said yesterday.

Vale declined 1.1 percent to close at 36.43 reais today in Sao Paulo. The stock has fallen about 17 percent in the past 12 months, more than the 12 percent decline of the Brazilian benchmark Bovespa Index.

To contact the reporters on this story: Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net; Nathan Crooks in Caracas at ncrooks@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net

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