A leading producer and exporter of iron ore and pellets, Vale has mining operations in 21 countries.
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Recs
VALE, BHP, RIO
Iron ore prices are at an all time high. The largest consumer of iron ore is China. The very high level of construction activity there will eventually have to slow down, which will lead to decreased ore demand and prices. Every ore producer is also investing in increased production, leading to a glut on the supply side.
Increasing supply + decreasing demand = price collapse
What is missing in the prediction of price collapse for iron ore is 1) When? (Of course demand will decrease "sometime" evrything changes but how long will it reasonably take to reach a critical point? & 2) iron ore, copper, etc. is not the only thing mined by these companies & China is not the only customer. China slowdown does not = world collapse. China slowdown does not = demand collapse. The equation: "increasing supply + decreasing demand = price collapse" does not include nearly all the variables in this situation. If the "sky were falling" that would be a problem too. What are the chances?
Obviously, the timing is an issue. It's hard to time it, so this is a long range pick. Sometimes, you just have to be early. The fact that I accidently gave this a "Thumbs Up" is also issue! LOL. It was late at night. :O
But I'll address the other points you raised. Vale has many lines of business.
If we look at the latest 6-K report
http://www.secinfo.com/dsvr4.qpvf.htm
on Page 108, "Results by segment" - we see that Vale derives almost all of it's profits from the "Bulk Materials" segment, which is iron ore mining and ore transportation.
Looking at the "Net income of the period" line, we see that all of Vale's other businesses combined don't generate a net profit.
On the same page, we see "Sales classified by geographic area". We see here that China accounts for 43% of the revenue of the Bulk Materials segment. But China is also the world's largest iron ore producer. In 2009, China produced 880 MMT out of 2240 MMT produced worldwide. If China demand goes down, they can rely on domestic supplies for their remaining demand, cutting off foreign imports of ore. That will be enough to slash prices on the international market.
There's never been a better time to be an iron ore miner. Prices are high, and demand is strong. Vale is making a lot of money. If they returned more of that dough to investors, via fat dividends and stock buybacks, I could see more value in the stock. Instead, it looks like they are pouring money into capital expenditures. They spent $10 billion ordering 33 huge dry bulk carriers. And they are expanding mine production. These are their production targets:
2011: 311 MMT
2015: 522 MMT
Iron ore demand is already very high, but we're going up another 68% in production? Too bad Rio and BHP have the same idea!
If you pour money into capital expenditures today, it doesn't affect net income now. But it will show up as depreciation in future years. If the bottom drops out of the iron ore market in the future, revenue will drop, but depreciation will still be climbing. That will crush net income.
Not too many bears on Vale, so I'm really going out on a limb with this call! This may take time to play out. Could be 2-3 years.