Vale Will Sink On Lower Copper Demand

| About: Vale S.A. (VALE)
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Vale SA (NYSE:VALE) has started mining copper at what could be the largest copper mine in Brazil. Phase I of the Salobo Mine in the Carajas mining district in the Brazilian state of Para is now open for business. This first phase of the project should produce around 100,000 tons of copper concentrate a year. If it is built, the mine's phase II would produce another 100,000 of copper concentrate a year.

Vale thinks it can increase copper production in Brazil to 1 million tons per year by 2016, according to the company's website. Some news reports indicate that Salobo contains the biggest copper deposit in Brazil. Vale also boasts that it's vision is to transform Brazil into a major copper exporter.

Vale has one other major copper mine in Brazil at Sossego, and it has plans for another copper mine at Cristalino in the same area. The company's board of directors has not decided whether to move forward with that project or not. It is likely that Vale will delay expansion plans at Salobo and new development if Chinese copper demand stays low.

Vale mines copper at its nickel mines in Canada and at Tres Valles, Chile. Vale is developing one new copper mine in Zambia at Konkola North. The Konkola Project, of which 50% is owned by South Africa's African Rainbow Metals (OTCPK:AFRBY), is the company's first copper project on that continent.

Vale's attempts to make Brazil into a major copper exporter could further depress copper prices. After all, demand for copper is falling in the biggest market in China, and there is no sign that it will pick up anytime soon. So, it is hard to see where Vale expects to find a market for all that copper.

The only hope for producers like Vale would be for a rebound in the U.S., particularly in the U.S. housing market. Contracts for new homes in the U.S. did hit a two-year high in March, according to Reuters. Unfortunately, the levels of new home construction are far below what they were during the boom of the mid-2000s.

Some experts think housing is on a slow rebound, as all the empty houses left over from the mortgage meltdown are slowly sold off. Part of the reason why housing demands and copper sales in the U.S. have been so slow was all the empty houses on the market.

Small U.S. housing recovery could help copper

Unfortunately, the U.S. housing recovery is mixed and only seems confined to certain areas. Some news reports indicate that only certain segments of the housing market, such as multifamily housing, seem to be coming back. There have also been signs of limited recovery in some regions, such as Colorado and Southern California.

A housing recovery would be good news for copper because of all the copper used in plumbing and electrical systems in homes. It would take a fairly long and sustained U.S. housing recovery to have a real effect on copper prices. The current economic uncertainty in the U.S. makes that unlikely, particularly since the housing market is still very depressed in some areas, including Georgia.

House prices are still falling dramatically in some U.S. cities, including Portland, Oregon, Providence, Rhode Island, Boston, and Salt Lake City. That seems to indicate that the foreclosure crisis is still ongoing with no end in sight. Still, even a limited housing recovery in the U.S. could be good news for copper in the long run.

Freeport CEO bullish on copper, despite low profits

One person with faith in copper's future is Freeport-McMoRan (NYSE:FCX) CEO Richard Adkerson. In his conference call on the Q1 2012 earnings report, Anderson told analysts that large scale infrastructure projects in China will fuel demand for copper. Adkerson also said he believes that low inventories of copper in the U.S. and Europe will drive up prices.

The recovery in manufacturing, particularly auto manufacturing in the U.S., is also increasing copper demand, Adkerson noted. Adkerson is so bullish on copper that he said his company intends to increase copper sales by 25% in the next three years.

Adkerson's claims seem very bold, given his company's recent performance. The Associated Press reported that Freeport's first quarter profits fell by 49%. The fall in profits was caused by labor troubles at the Grasberg mine in Indonesia, Freeport's largest.

Adkerson did not say how his company plans to deal with the ongoing labor troubles at Grasberg. Nor did he mention what it plans to do about the escalating violence in the area around the mine in Papua, New Guinea. In recent months, gunmen have shot up Freeport convoys and taken pot shots at planes.

Freeport did see some good news at its mine in Morenci, Arizona. The company's Arizona subsidiary settled a lawsuit brought against it by the U.S. Department of the Interior for $6.8 million. The federal government and the state of Arizona filed a claim that alleged the company had released hazardous waste into the water supply around its historic Morenci mine in Arizona.

On Tuesday, Freeport and the U.S. Justice Department filed a descent decree with a Federal Court. Under the terms of the decree, Freeport agreed to pay for the clean up of wildlife habitat and water it supposedly contaminated. It's obvious that $6.8 million is chump change to a company like Freeport, so this settlement will not affect its operations.

Barrick sells stake in Highland

Barrick Gold (NYSE:ABX) has sold the 20.4% stake it owned in Highland Gold Mining Limited (HGM). Despite its name, Highland is a Russian company whose major holdings are in Siberia. Barrick's share in Highland was worth around $130 million.

A Barrick Gold press release stated that the company's management felt that a stake in Highland was distracting it from its core business. That could mean that Barrick is trying to refocus itself on the mines that it owns. Some of which don't seem to be doing that well at the moment.

Production is down and costs are up at Barrick's Buzwagi Mine in Tanzania. The cause of this seems to be high energy costs caused by frequent power outages. That has forced the company to use a more expensive generator to keep the lights running in the mine. Analysts claimed that the problems at Buzwagi would lower profits at the entire company and eventually stock values.

Nova spins off copper subsidiary

Canadian gold producer NovaGold Resources (NYSEMKT:NG) has launched a publicly traded subsidiary called NovaCopper, which NovaCopper will trade on the AMEX and the Toronto Stock Exchange. Its purpose is to develop two copper deposits in the Ambler District in Alaska. NovaCopper does not have approval for either project yet.

NovaGold is developing the Galore Creek copper/ silver/ gold project on the Alaska/ British Columbia border. This project is reportedly one of the most expensive in the world.

Out-of-this-world competition

Earth bound mining companies could get some out-of-this-world competition in the years ahead. A company called Planetary Resources wants to use robots to mine minerals from asteroids.

So far, this outfit does not seem to have the technology to accomplish its goals. Instead, it has a plan to launch a telescope to look for asteroids rich in minerals, like platinum, into orbit. The main thing Planetary Resources has is some very rich backers. They include Google (NASDAQ:GOOG) co-founder Larry Page, Ross Perot, and former Microsoft executives Charles Simonyi and Eric Schmidt.

The company has a team of advisors that include director James Cameron (of Aviator fame), some ex-NASA officials, and a former astronaut. It seems to have a lot of knowledge about space and computers, but little knowledge about mining. Not a single one of the individuals listed on its website seems to have any knowledge of mining. The closest thing it has to a mining expert is James Cameron (who has made a couple of movies about mining companies in space). You would think they might hire at least one mining engineer or executive.

If the Planetary Resources website is anything to go by, BHP Billiton (NYSE:BHP) and Freeport-McMoRan have little to worry about anytime soon. When I see that somebody like Eike Batista is investing in Planetary Resources, I will start taking it seriously.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.