CVRD. Better than gold?

Why has CVRD, world No 2 miner, gained $25bn in market value in just over a week?

JOHANNESBURG - 

Companhia Vale do Rio Doce (NYSE: RIO, $48.32 a share), the world's No 2 mining company, after BHP Billiton (BLT.L, £13.78), has gained more than $10 a share in the past five or so trading sessions, adding around $25bn to its market capitalisation. The gain alone is close to the entire value of Barrick (ABX, $32.13), by far the world's most valuable gold digger.

CVRD's stock price, now just 9% off its 12-month high, ranks it as one of the world's best performing mining stocks. Diversified resources stocks are down by an average of 15.7%, while global mining stocks as a whole have lost close to 30%, mainly during the recent bout of nerves over credit market liquidity. The Dow Jones Industrial Index, Standard & Poor's 500, Nasdaq Composite and FTSE 100 are down by between 5.7% and 8.7% from 12-month highs.

CVRD's performance has been based mainly on the group's ranking as the world's No 1 producer of iron ore, with 33% of the seaborn market. Iron ore is used almost exclusively in steel making, and remains in heavy demand in China, which overhauled Japan as the world's largest buyer of iron ore in 2003. China is far from alone among developing economies in notching up significant annual rates of increase in its use of steel and related products.

CVRD's recent stellar stock price performance follows a series of upbeat forecasts for iron ore contract prices into the medium- and long-term. Last month UBS said it had increased its iron ore price forecasts to 25% in 2008, from 10% previously; Goldman Sachs JBWere last week increased to 30% from 9% previously; Credit Suisse Group is looking for a 25% gain, and RBC Capital Markets this week raised to 35% from 10%.

The price of benchmark Hamersley fines, produced by Rio Tinto (RIO.L, £33.39) has increased from around $30 a ton in 2003 to $80 currently, and may increase to around $100 next year and $120 in 2009, according to RBCCM. RBCCM has increased its long-term fines price, beyond 2013, to some $45 a ton.

The global iron ore sector is dominated by CVRD, BHP Billiton and Rio Tinto, followed a long way behind by other producers such as Kumba Iron Ore (JSE:KIO, R203), in which Anglo American (AAL.L, £27.69) holds a large stake. Developers, spurred as in most other mining sub sectors by the protracted bull market in commodities, are dominated by Australian stocks: Midwest (MIS.AX, A$2.60 a share), Murchison (MMX.AX, A$4.84), Sphere (SPH.AX, A$3.10), Fortescue Metals (FMG.AX, A$41.67), and Grange Resources (GRR.AX, A2.15$). 

CVRD's recent stock price performance has been in spite of its substantial nickel division, where spot prices have been mauled in the past few months. CVRD, however, also maintains substantial operations in copper, and integrated aluminum (bauxite, alumina and primary aluminum), and also produces kaolin, and potash. Earlier this year CVRD acquired AMCI Holdings Australia, consolidating its metallurgical and thermal coal production. 

Note: Apart from its RIO listing on the NYSE, CVRD can be found on the same exchange under RIOPR, on the São Paulo Stock Exchange BOVESPA (Vale3 and Vale5) and on the Madrid Stock Exchange Latibex (XVALP and XVALO). Aggregate average daily trading in CVRD stock, of which about 70% is classified as free float, was around $766m in the second quarter of 2007.

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