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Avoid Vale Shares for a While

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The jousting over iron ore prices between Brazil's Vale (NYSE: VALE  ) , Anglo-Australian Rio Tinto (NYSE: RIO  ) , and BHP Billiton (NYSE: BHP  ) -- the three biggest producers of the key ingredient in steel manufacturing -- and their expanding Chinese customer base has been worth the price of admission.

With ore prices bobbing about like a cork in a storm -- or a tsunami, if you'd like -- it's been a tough assignment for investors to zero in on the best play among the trio of suppliers. But help appears to have arrived: With hardnosed but capable Roger Agnelli having been summarily dislodged after a decade at the helm of the Rio de Janeiro-based Vale, my inclination is to watch the company, but not to build a position, at least for a while.

Was Agnelli inept in his performance? Not if you consider that under his stewardship Vale became the world's second-biggest mining company (after BHP) on a market cap basis. It also earned a whopping $17.3 billion in 2010. But Agnelli committed an unforgivable sin in Brazil: He generally didn't give in to the demands of the government of Luiz Inacio Lula da Silva, until recently Brazil's president.

Lula, as his closest friends call him, was replaced at the beginning of this year by now-President Dilma Rousseff, who pushed Agnelli aside in favor of Murilo Ferreira, whom she had known when she served as energy minister and he was a Vale executive.

Agnelli's specific transgression apparently boiled down to placing his company's best interests ahead of those of the government. For instance, he resisted pressure to invest heavily in a hydroelectric dam, the design of which would have prevented it from ever turning a profit.

Ferreira, however, is no stranger to Vale, having served the company for 10 years, starting in 1998, when he signed on as director of its aluminum businesses. He later was posted to Canada, when he headed the company's unit there.

To indicate the importance of keeping government-types happy in Brazil, Jose Sergio Gabrielli, the CEO of Petrobras (NYSE: PBR  ) , Brazil's biggest company, has walked the straight and narrow from the government's perspective. For instance, he agreed to benefit the local economy by building drilling rigs in Brazil, despite higher costs than he could have negotiated elsewhere. Beyond that, he's obviously gotten on well with foreign operators, from ExxonMobil (NYSE: XOM  ) on down. That carries over to the oilfield services group, such as Diamond Offshore (NYSE: DO  ) , which now has 15 of its 47 rigs working off Brazil's shores.   

It's too early to tell what Vale's course might be under Ferreira. Nevertheless, until that issue becomes clearer, I'd urge Fools to watch Vale and direct their mining investments toward BHP. That's especially the case since, given escalating oil prices, the Australian company is the only major miner with an active international energy unit.

Petrobras is a Motley Fool Income Investor pick. The Fool owns shares of Petrobras and ExxonMobil. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies named above. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 08, 2011, at 9:35 PM, lgcret wrote:

    The word FOOL is correct, if you aren't buying shares NOW! But, you must have been buying shares two years ago and more for the last twenty.

    Care to tell us your cost average?

  • Report this Comment On April 09, 2011, at 8:05 AM, ame261 wrote:

    Dear writer,

    At under 7 times forward earnings in this raw materials environment, why would one totally avoid VALE and choose instead a company with a forward PE ratio of 16? One could buy some of both. Even the Brazilian government would not be foolish enough to ruin something this good for investors and them.


  • Report this Comment On April 10, 2011, at 8:15 AM, qjoeq wrote:

    Dear Writer,

    Curb your speculation.

    Frankly, I found this article reckless. Saying one should "Avoid" Vale, with no real convincing financial indication in your advice, will remind me not to another David Lee Smith article.


  • Report this Comment On April 11, 2011, at 8:32 AM, Pepperstein wrote:

    Dear Writer,

    With an expected EPS of around $5 for 2011, record level iron ore prices, plus they also mine nickel a little gold a new copper aquisition in Africa . . . . hmm, I say buy on weakness. Even if they do help the Brazillian government, these guys will turn a hefty profit.

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