Color on Lehman's Overweight Rating on Vale (RIO)

Lehman Brothers initiates coverage on Vale (NYSE: RIO) with an Overweight rating and a $45 price target.

The firm said shares of Vale look attractive at current levels as the company "is very well-positioned to benefit from the ongoing mining super-cycle..." Lehman sees Vale reporting FY08 EPS of $3.02 and FY09 EPS of $3.96. The Street estimates are currently $3.17 and $4.11 for FY08 and FY09, respectively.

While Lehman's estimates are below the Street estimates, the firm cites "significant earnings growth from 2007 to 2008 due to iron ore contract price increases (starting April 1, 2008) of 65% for its medium quality standard fines, 71% for its high quality Carajas fines, and 86.7% for its direct reduction and blast furnace pellets."

Interestingly, Lehman believes Vale could revive its talks with Xstrata plc "because it is the 'best fit' for the Brazilian company." Specifically, the firm cites Vale's recent announcement that it would sell $15 billion in equity in order to raise funds as suggesting that Vale could be building "a war chest to attempt to acquire Xstrata when credit markets improve."

With shares of Vale around $36.90 in pre-market trading, Lehman's price target represents a potential return of almost 22% from current levels.

Companhia Vale do Rio Doce (Vale) is a metals and mining company. The Company is also a producer of iron ore and iron ore pellets.

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