The long steel segment within the Latin American metals and mining sector is favored over the flat steel side due to issues from overcapacity, as well as cost and price pressures, says Jonathan L. Brandt, CFA, an Analyst at HSBC Securities (USA) Inc.
“I think long steel demand in Brazil will be very good over the next couple of years,” he said. “Remember, long steel is generally construction. Flat steel is more for manufacturing. If you look at the long steel side, Brazil has a lot of infrastructure projects with the World Cup and the Olympics coming. There are some government programs there that will require construction.”
Brandt points to Vale S.A. (VALE) as a favorite name, although it is rated “neutral,” and he is a little hesitant to upgrade it to an “overweight” because a lot of its production growth isn’t coming on for three to four years. He also says for Vale, he looks at its competitive advantages, and they have low-cost iron ore assets.
“Vale tends to produce iron ore somewhere between $30 and $35 per ton and sells it for $120 or $130 per ton. They have very good margins. They have very attractive valuations, trading at 3.5 times to four times EBITDA, maybe 5.5 to six times p/e; and they have a 5% dividend yield,” Brandt said.
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