A Brazilian Commodities Play On Asia

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

CVRD holds exploration claims that cover 8.7 million hectares in Brazil, as well as 9.8 million hectares in Angola, Argentina, Australia, Chile, Gabon, Guinea, Mongolia, Mozambique, Peru, and South Africa. With approximately 7,981 million tons of proven and probable iron ore reserves, CVRD is the world’s number one seaborne supplier of iron ore.

Here’s why we believe that CVRD will continue to be the strongest-performing diversified commodities play in global markets over the coming months.

First, thanks to relentless demand from Asia, CVRD has no problem in selling all the ore that it can produce. With China growing at 9-10% per year, demand for steel — and the iron ore that CVRD produces — will continue to leap ahead as far as the eye can see. In 2005, CVRD produced 234 million tons of iron ore, expanding to 271 million tons in 2006. That’s up 60% from the 2001 total. And, thanks to China’s demand, prices are rising as well. Sinter feed iron ore prices have climbed 162% since 2003 — and they are expected to continue rising.

Second, CVRD’s financials have been solid and are only improving. CVRD reported earnings of 90 cents per share in the recent quarter — a 33% gain from a year ago. And the current quarter’s earnings — scheduled to be announced on May 3rd — are expected to jump a whopping 121%. Trading at a P/E of 15 and with annual EPS growth of more than 66%, CVRD’s stock is a bargain.

Third, CVRD is a pure commodity play and should move in lockstep with the price of its underlying commodities. These are headed in the right direction, with prices for nickel alone rising 46.75% just this year. As a result, investment bank Goldman Sachs last week upgraded CVRD to a "buy" based on increased demand for iron ore and nickel. The investment bank also put a target price of $50 on the stock that is more than 25% above CVRD’s recent closing price.

So buy CVRD (ticker: RIO) at market today and place your initial stop at $33.00. For potentially even bigger upside, I recommend the June $40 call options (RIO-FH).


Five of six positions in our Global Bull Market Alert portfolio are profitable. Global cell phone play Millicom (MICC) is up 109%. Move your stop to $70.00 to lock in some of your profits. Korean Steelmaker Posco (PKX) is up 7.3% in just two weeks, while its options are up 38%. Move your stop to $92.00. Latin American cell phone play NII Holdings (NIHD) is up 5.59%. Move your stop to $68.50.

All of our current recommendations remain buys at these levels.

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