Petrobras and Vale: The Keys to Brazil's Growth

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As I mentioned in part one of this series, the economic growth story of Brazil starts with energy and minerals -- more specifically with Petrobras (PBR) and Vale (RIO). Any discussion of this former Portuguese colony is incomplete without acknowledging these titans of industry.

Brazil is blessed with an abundance of natural resources, ranging from oil to iron ore, and understands one important fact -- the world needs more energy and basic materials.

Am I stating the obvious? Yes, of course, but I am constantly amazed at how many companies don't share this same understanding of supply and demand (Exhibit A is ExxonMobil, in my opinion).

More important, these Brazilian conglomerates have become world-class institutions with the management foresight and financial savvy to monetize their resource bounty.

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Vale is the foundation of the Brazilian mining and mineral commodity complex, and its upside story is basic and uncomplicated. It is the world's largest producer of iron ore and second-largest producer of nickel, with the largest nickel reserves in the world.

The company is expanding its coal production as well, aiming to double to 16 million tons over the next five years. Demand for iron ore and everything that Vale produces continues to surge. Without a doubt, China is primarily responsible for the demand, but I believe that expanding global growth will drive demand from other emerging markets (think Africa and East Europe) and domestically in Brazil.

As for the energy sector, if you want to get me excited, just say the word "Petrobras," sing the words "Tupi oil field," and I will be in investor heaven. But please forget about Chevron (CVX) and don't bore me with ExxonMobil (XOM). These corporate sloths don't deserve the light of day until they can actually grow their reserves and production.

To me, Petrobras is now the global energy leader and "energy market tell." Is it just me, or does it seem like Petrobras announces a new energy discovery every couple of weeks?

On the other hand, while companies like ExxonMobil have been recording record profits, I don't believe they're as well positioned for the future as is Petrobras. As an example, XOM has spent more money in the past year on buying back stock than prospecting for more oil (as defined by capital expenditures).

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