Vale S.A. (VALE)

It's a multi-year move--a long-term investment--though he prefers Cleveland Cliffs. He recommends VALE.

This is a Brazilian company, very big in iron ore. They own Inco in Canada. He got out when the Brazilian government said that it wanted to get involved in Vale’s operations. As long as the Brazilian government has a major say in Vale, they will be looking out more for Brazil and less for the shareholders. He will not invest under such circumstances.

He is not involved in this company because of its holdings in iron ore and nickel. The iron ore cycle from the 2000’s has played out the same way that it did in the cycle in the 70’s. A lot of capacity has been added. It’s a capital-intensive business. Once the capacity was added, that was the end of the cycle, and these cycles don’t come back for 20 years. He should be more positive about nickel but he feels that the Chinese have ruined the business. There are no labor or environmental laws to increase the cost of mining for nickel in China and this has put a lid on the price of nickel. When mining goes on hold, it does so for a very long time. On average, down cycles last about 20 years.

He likes some of these material names. This is in iron ore and metallurgical coal. Some of these names still have room to run. The shares are trading at around $13. Further back the stock was a lot higher. It has broken up above its 200 and 50 day moving averages.

A typical base metal stock and seasonality is normally around the beginning of February right through until around the middle of July. Watch your short-term momentum indicators very closely, such as stochastics, RSI and MACD. As soon as they start to roll over, that will be your opportunity to take your profits.

One of those commodity stocks that has rallied up because the US$ has taken off. It certainly has potential to go up from here. If the US$ does firm up a bit, it may take a little bit of wind out of their sails in the short term, but you can’t replace these mines at anything near where the stocks are trading at right now. It is just a matter of time until we get going again.

If you are a trader, you can position yourself for a trade here, because there should be a countercyclical rally at some point. You may want to give it a bit more time, or if you are going to Buy, just buy a small portion and then see what happens. This company has a great opportunity because it is such a big conglomerate with so many assets. They can clean the debt side of their balance sheet by selling some of those.

There are so many question marks with Iron Ore. China is so over supplied. They are not diversified.

One of the key challenges is that they are diversified and that it is iron ore that pays the bills. There is a risk that it could go a lot, lot lower.