CVRD, BHP Billiton: Asian Demand Boosts Sales and Profits

 |  Includes: BHP, VALE
by: Tim Iacono

The virtues of buy-and-hold investing in a secular bull market become pretty clear after looking at the two biggest mining companies in the world - CVRD (NYSE:RIO) and BHP Billiton (NYSE:BHP).

These companies fell out of favor with investors after the May 2006 sell-off in base metals and now, with higher prices for copper, nickel, and iron-ore amid the broader realization that the global economy continues to boom, their share prices have risen dramatically.

Anyone buying shares last summer would now be sitting on significant gains, particularly with CVRD whose acquisition of nickel miners Canico and Inco have provided a boost to the bottom line as nickel prices continue to make new all-time highs.

Companhia Vale do Rio Doce

Based in Brazil, Companhia Vale do Rio Doce, more commonly referred to as CVRD, is one of the largest metal and mining companies in the world. Created by the Brazilian Federal Government in 1942 and privatized 1997, the company sports a market capitalization of $104 billion.

CVRD's main business is iron ore production which is used to make steel. It is the world's largest exporter of iron ore controlling 35 percent of the market, followed by Rio Tinto with a 25 percent share and BHP Billiton at 20 percent. Prices for iron-ore are set annually and, over the last few years, the negotiations between CVRD and Chinese steel producers have effectively set the world price with hefty increases seen each year.

Most of CVRD's production is in Brazil, the home of high-grade ore and a relatively low-cost labor force that has enabled the company to post spectacular earnings over the last few years and increase its dividends to shareholders.

Its still relatively low P/E ratios of 16 (trailing) and 10 (forward) after the share price has almost doubled are further confirmation that most investors still don't believe in the continuing bull market in natural resources.

BHP Billiton

Australian-based BHP Billiton is the world's largest diversified resource company maintaining a total labor force of over 40,000 employees working at more than 100 operations in 25 countries. With a market capitalization of $151 billion, it is the 27th largest company in the world.

The company is a leading supplier of iron-ore, the world's third largest copper producer, third largest producer of nickel, fourth largest producer of uranium, and maintains substantial interests in aluminum, diamonds, silver, and titanium as well as being a significant producer of oil and natural gas.

Since bottoming a number of times last year in the high $30 range, after metal prices began to rise again earlier this year and the company announced a huge share buyback plan, the stock price has risen sharply.

Shares of BHP Billiton rose last week after a note from Merrill Lynch suggested that they may be the target of a private equity takeover bid. While it is believed that the company is too big for any such deal and that a bid is unlikely to materialize, just the mention of the possibility of such a transaction is further evidence of the tremendous amount of money and credit available to private equity firms and the resurgent interest in the natural resource sector.

As more and more of the financial media note that growth overseas can offset a slowing economy in the U.S. (rather than the other way around) these two companies, along with others in this sector, continue to be excellent long-term holdings.

Their sales and profits are driven by demand from Asia more than ever before - copper prices about the make new all-time highs at the same time that U.S. home construction remains in a virtual free-fall should make this point abundantly clear.

Full Disclosure: Long RIO and BHP at time of writing.