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Wanting to see the money up front, Credit Suisse prefers Rio Tinto to Vale

  • Even as Rio Tinto (RIO -0.2%) has risen 23% in the past year while Vale (VALE +0.8%) has slipped 9%, and Rio trades at 10x forward earnings vs. Vale's 6.5x, analysts at Credit Suisse does not see a bargain opportunity for investors eyeing Vale.
  • The firm sees Rio as the safer bet between the two, figuring investors prefer to see the money up front that at a time when iron ore pricing is soft.
  • Also, Rio already has gone through large capital investments and is expected to step up sales volumes this year, but Vale is where Rio was a year ago and is not expected to ramp up production until 2016.
Comments (3)
  • User 25810593
    , contributor
    Comments (2) | Send Message
     
    The reasons are actually quite simple:
    - Rio is a multi-metal miner, whereas Vale is predominantly dependent on iron ore
    - China is the main market for both their iron sales, but the distance from Brazil (=Vale) to China happens to be a bit longer than the Australia (=Rio) haul
    - Sales price to China is expressed on a CIF basis, meaning all cost to produce and ship are for account of the seller. Consequently Vale has to spend USD 24,50 per m/ton on freight whilst Rio only pays some USD 10.

     

    Consequently, on every m/ton of iron shore shipped with a fixed price, Rio has a competitive advantage over Vale of US$ 14,50, added directly to the bottom line.
    This makes the prospects for Rio much brighter than for Vale.
    9 Jun, 01:34 PM Reply Like
  • MacJava
    , contributor
    Comments (23) | Send Message
     
    Have held shares in Rio since 1969
    currently Rio is making little from its other interests apart from iron ore but the cycle for these other products - aluminum,copper , titanium, uranium,diamonds,are bound to recover and cannot be fully discounted from the increase in iron ore (one million tonnes per day) within a couple of years ) - then Guinea will come on line at 100M tonne per year
    9 Jun, 10:41 PM Reply Like
  • gmmpa
    , contributor
    Comments (500) | Send Message
     
    It seems to me that if Vale can maintain its current 6% yield while it is still trading near its 52 week lows the longs can afford to wait it out until two new US steel plants come on long next year. The USA steel industry will recover soon enough even before the Obama administration takes its long awaited hike. All the political signs are there.

     

    Vale is the second largest mining company in the world behind BHP. I just cannot see their management waiting around for China's sales to pick up without making new catalysts toward future growth. Most analysts including Credit Suisse are historians not predictors of future economic and business cycle trends. Vale has much more upside than down and the 6% yield is a good parking lot for some of my money especially when inflation starts to show its ugly head.

     

    Why would you buy Rio Tino at a current PE of 26 and a 4% yield? Isn't the rule Buy Low sell High?
    15 Jun, 03:49 AM Reply Like
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