Investors are scooping up bonds sold by Vale SA (VALE5), the world’s largest iron-ore producer, on speculation that a rebound in the steel-making ingredient from a two-year low will reverse a slump in profits.
Yields on the Rio de Janeiro-based company’s $2.25 billion of notes due 2022 have dropped 0.34 percentage point to a 13-month low of 3.91 percent since June 16, when ore prices bottomed, data compiled by Bloomberg show. Vale’s notes have returned 2.4 percent in that period, eclipsing gains in the debt of rivals BHP Billiton Ltd. and Rio Tinto Group, the world’s two largest mining companies by market value.
Bond traders are betting rising iron-ore prices will help Vale rebound from a bigger-than-forecast drop in first-quarter profit that was fueled by plunging demand for the metal. Ore has climbed 8.9 percent since falling to $89 a ton on June 16 and is now set for a “dramatic recovery” in the second half as China’s economy improves and high-cost producers curb output, Sanford C Bernstein & Co. said in a report last week.
“People look at the credit of Vale and they are very comfortable buying the yield that it was showing and holding on to it,” Fabiano Santin, a fixed-income analyst at XP Investimentos CCTVM SA, said in a telephone interview from Sao Paulo. “For the short term, it will probably reflect what the economic indicators of China have been showing.”
Biggest Buyer
Vale’s stock price has rallied 8.4 percent since June 16, reducing the year-to-date decline to 16 percent.
Vale, the world’s third-largest mining company, will report second-quarter sales of 24.5 billion reais ($11 billion) on July 31, up 9.5 percent from the previous three months, according to the average of analyst estimates tracked by Bloomberg. Net income before extraordinary items will rebound in the third quarter to 5.7 billion reais, the most in a year, according to the estimates.
Gauges of manufacturing in China have climbed to the highest levels this year, according to the Purchasing Managers’ Index (CPMINDX) released by the government June 30. Continued strength in China’s economy, the world’s biggest buyer of ore, could result in Vale’s bonds rallying further, Santin said.
Rio de Janeiro-based Vale’s press office declined to comment on the performance of its bonds when contacted by telephone and e-mail.
Peak Prices
Ore with 62 percent content delivered to the Chinese port of Tianjin was unchanged at $96.90 a dry ton on July 11. While prices have rebounded, they’re still about 50 percent off the peak in 2011.
Michael Roche, an emerging-market strategist at Seaport Global Holdings LLC, said it will take time for iron-ore demand to recover.
“Capacity has been expanded over the past couple years, you’re caught with effectively a buyer’s market,” Roche said by phone from in New York. “Usually these things persist for quite some time.”
The company is rated A- by Standard & Poor’s, the fourth-lowest investment grade and three steps higher than Brazil.
“If you need something safe in Brazil, Vale is great,” Russ Dallen, a managing partner at Caracas Capital markets, said by phone from Miami. “It’s just a good, solid, plodding performer.”
Source: Bloomberg
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