"And when she shines she really shows you all she can. Oh Rio, Rio dance across the Rio Grande." -- Rio, Duran Duran
Some companies just make your life easy, and Brazilian miner Companhia Vale Do Rio Doce (NYSE: RIO ) is one of them. Not only does the company do a good job of communicating with U.S. investors, but it presents extremely detailed financial information (in accordance with U.S. generally accepted accounting principles) -- something many American companies fall far short of.
By now, it's probably not going to surprise anybody to hear about another mining company that delivered stellar results. Companhia Vale Do Rio Doce grew revenue almost 44% in the fourth quarter, and net earnings were up about 167%. Even though the company invested heavily in the business during 2004, free cash flow still came in at $1.5 billion -- far ahead of last year's $200 million.
Companhia Vale Do Rio Doce benefited from a one-two punch of solid production increases (shipping 11% more iron) and higher prices (over 20% higher on average). In addition to the strength in the company's core iron business (roughly 60% of the company's total revenue), results were strong in other ferrous materials, as well as aluminum and copper.
If the global metals market is about to roll over, Companhia Vale Do Rio Doce's management isn't seeing it. Not only has the company secured strong pricing on new contracts (70%-plus price increases) with customers like Nippon Steel and Arcelor (OTC BB: ARLOY), but also management sees a fundamental supply deficit for metals like iron, copper, and aluminum.
While acknowledging that companies are investing in new capacity, management believes that the fundamental supply-demand imbalance will probably remain in place for at least the next two years. What's more, management does not see a major slowdown in China yet and doesn't believe that the Chinese government is particularly anxious to crash-land its economy.
Although Companhia Vale Do Rio Doce is one of the world's three large iron ore producers, along with Rio Tinto (NYSE: RTP ) and BHP Billiton (NYSE: BHP ) , it is trying to broaden its revenue base. The company is investing in new copper assets, building a hydroelectric plant (energy is a major expense for the company), and looking to invest abroad.
The company has purchased a concession to explore for coal in Mozambique in what could be the largest unexplored coal reserve in the world. It will also be exploring for potash in Argentina, bauxite in Brazil, and phosphates in Peru. All told, the company is hoping to reduce its ferrous metals business to less than 60% of the total by 2010.
Given the wealth of information that the company provides, I can't hope to present all of it here. Consequently, I strongly encourage anyone with an interest in Companhia Vale Do Rio Doce (or mining in general) to visit the company's website.
Whether Companhia Vale Do Rio Doce is a good investment today depends largely on your outlook for the commodities market. With a solid return on equity, good dividend yield, good management, and a favorable supply/demand imbalance, there's much to like about a company with a trailing price-to-earnings ratio of 14. On the flip side, if this bull run in commodities is indeed long in the tooth, current valuations just confirm that we're near a cyclical peak.
For more on metals, try these other Foolish Takes:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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