TECK - If The Fed Slashes Rates Too Soon Vale Could Spike Higher

2024-07-18 23:33:43 ET

Summary

• A Fed rate cut in September may ignite a monster rally in industrial-related commodities like base metals.
• Vale is the clear valuation winner in the diversified mega-cap mining group, opening up tremendous upside if iron ore, nickel, and copper climb appreciably and unexpectedly in price.
• The trailing 12% dividend yield and 14% free cash flow yield proposition, from one of the world's largest and lowest-cost metals miners, is hard to pass up.

I have been quickly warming up to Vale S.A. ( VALE ) ADRs, the largest iron ore and nickel producer in the world, with sizable copper mining operations, based in Brazil. The main argument is I am worried Federal Reserve Chairman Jay Powell has all but guaranteed a September rate cut for U.S. banks is coming (current futures trading odds are 93% for quarter-point rate cut vs. 7% for half a point), before a recession appears or inflation has been licked. It shouldn't be a shock, as many of the world's central banks have started cutting rates already.

The Vale buy thesis is demand for industrial metals both from investor's looking to hedge an untick in inflation (a weaker U.S. dollar reaction to an easing Fed) and manufacturers/users witnessing better-than-anticipated consumer spending could flip supply balances from minor surpluses to major shortages rather quickly. And, with base metals underperforming other commodities since 2012, rather sizable price upside could be the end result in 12-18 months for Vale's mined product.

The impetus for the Fed's change of heart has been the slow pullback in inflation rates, which still remain well above the Fed's 2% annual target rate. My issues are the target rate is not ZERO, while 2% is supposed to be counted over the whole economic cycle. 2% for a handle over just a few months, with higher rates at all other times, will not be acceptable to U.S. bond investors....

For further details see: