Companhia Vale Do Rio Doce (nyse: VALE)

Supplying China's Materials Need

Hot Stock of the Week | June 1, 2009

What's helping to drive emerging markets is the rise in the price of raw materials, owing both to the steep drop in the value of the U.S. dollar since March and the rekindled demand for economic inputs like oil and steel.

That brings us to a China-related stock idea.

You need iron ore to make steel and Brazil's Companhia Vale Do Rio Doce (nyse: VALE) is a key supplier to China and the rest of the world. Its shares have doubled off of the bottom, bouncing 128% from $8.80 last November to $20.44 at Monday's close.

Rudy Martin, editor of Latin Stock Investing says it's not too late to buy.

"The stock still sells at 40% of its May 2008 high," says Martin. "As a basic momentum trade this stock is 20-25% undervalued."

In a recent trade bulletin to subscribers, Martin outlines his rationale for buying the stock:

The pricing process is less of a concern now. In the past, iron prices were set annually through negotiations. Now, a market-based spot price allows for a more transparent setting of expectations from both buyers and sellers. The spot iron ore prices have stabilized at a 30% discount to the current annual benchmark iron ore prices. The problem has been that steel producers had incentives under the old annual price setting approach to defer new purchases and get lower rates. Vale has declined to directly participate in this year’s benchmark negotiations. This barrier to new business should fall as fewer contracts are made using the old benchmark prices.

Vale’s margin focus should help earnings. The company is closing low-grade high-cost operations and cutting production capacity by 25% this year. Maximizing the value of current contracts and reducing production costs is likely to buffer the impact of lower overall iron ore prices.

Chinese trade is alive and well in Brazil. China has become the leading trading partner to Brazil. This unique lock-down of resources between China and Brazil assures growth for the future. It also creates opportunities for investors seeking the leading partners to China as investments.

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