The biggest drop in iron-ore prices in five years is a signal to Barclays Plc and Seaport Group that Vale SA (VALE5)’s outperformance in the bond market is about to end.
The $2.25 billion of bonds due 2022 returned 9 percent in the past six months, exceeding the 7.4 percent average gain for notes from emerging-market mining companies with investment-grade ratings. The Vale bonds yield 4.06 percent, the least relative to similar securities from London-based Rio Tinto Group since September, data compiled by Bloomberg show.
Vale, which gets about 95 percent of earnings from its ferrous business, posted a bigger-than-forecast drop in first-quarter profit after selling its ore for 25 percent less than the benchmark global price, which fell to the lowest since September 2012 on May 30. Investors should sell after the bond rally as reduced demand cuts prices for iron ore, according to Michael Roche, an emerging-market strategist at Seaport Group, which this month started recommending clients buy debt from Southern Copper Corp. instead of Vale securities.
“I’m still worried about China, I’m still thinking global growth is very muted, I’m still worried about Europe,” Roche said in a telephone interview from New York. “I am going to take that superior performance over the last six months and take a profit.”
Iron-Ore Plunge
Prices for iron ore entered a bear market in March and have dropped every month since December in the longest run of losses on record as the world’s biggest mining companies expand production in Australia and Brazil. Ore with 62 percent content delivered to the Chinese port of Tianjin has dropped 30 percent during 2014 to $94.30 a dry ton today.
Vale bonds yield 0.54 percentage point less than notes from similarly rated Latin American companies, making them unjustifiably expensive given lower iron-ore prices and plans for the company to increase investment during the year, Christopher Buck and Autumn Graham, analysts at Barclays Plc, wrote in a May 19 report.
“Considering tight valuations, negative momentum in iron-ore prices, and expectations for modestly increasing leverage, we think investors should tactically lighten exposure in Vale bonds,” the analysts wrote. The company “is the most exposed major Latin American miner to falling iron-ore prices.”
Buck didn’t reply to an e-mailed request for comment.
Brazil’s real gained 0.9 percent today to 2.2273 per dollar as of 2:46 p.m. in New York.
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