Vale again mulls base metals spin-off after sale of VNC

Mining major Vale is again considering spinning off its base metals business after reporting strong first-quarter earnings on soaring metals prices.

Speaking at an earnings conference call on Tuesday April 27, Vale chief executive officer, Eduardo de Salles Bartolomeo said the recent sale of Vale New Caledonia was one factor prompting Vale to again consider spinning off its base metals assets.

“One of the things that triggers us [to think about spinning off the base metals unit]… is the sale of VNC. It unleashes us to think differently about the business,” Bartolomeo said.

The Brazilian miner announced the conclusion of its long-sought sale of VNC, a costly, troubled South Pacific nickel mining venture, on March 31–the last day of the financial reporting period.

Vale, which had been trying since 2016 to “exit” VNC, paid almost $1 billion to do so, having paid $555 million to the buyer, the Prony Resources New Caledonia consortium, having already devalued the asset by $400 million in the first quarter of 2020.

Bartolomeo also alluded to the fact that Vale was still “recovering” from a deadly and costly iron ore tailings dam disaster outside the Brazilian city of Brumadinho in January 2019 and has agreed to pay $7.03 billion in reparations related to the incident.

The quarter was also momentous for Vale since it reported soaring quarterly profits of $5.55 billion, up from $239 million in the first quarter of 2020 on strong gains in metals prices this year.

Just under six years ago, Vale said it would await “appropriate prices for nickel and copper,” before spinning off its base metals unit.

The still rising LME Copper Cash Daily Official price was $9,898.50 per tonne on April 27, up from $5,765 per tonne on June 24, 2015, when Vale said any spin-off would be conditional on metal prices.

And the LME Nickel Cash Daily Official price was $16,914 per tonne on April 27, 2021, up from $12,780 per tonne on June 24, 2015.

LME copper prices are now 72% higher than in mid-2015 and nickel prices 32% higher.

Vale’s base metals earnings before interest, taxes, depreciation, and amortization (Ebitda) in the first quarter rose by 81.83% year-on-year, with Vale benefiting from the spectacular 146% increase in copper prices.

As a result, Bartolomeo said, Vale would now revisit its 2014 proposal to spin off its base metals assets, but with a “better foundation” and a “better narrative.”

“We are in the midst of the foundation of recovering the business and we believe we are on the right track,” Bartolomeo said.

“We have, first of all… to work on the foundations and on the narrative,” he said, responding to a question from Alex Hacking, equity research analyst at Citi Investment Research, on the potential for a base metal spin-off and the kind of transaction Vale was considering.

“We are in the initial phase of going back [to the] view that we had in 2014, but in a much different way,” Bartolomeo said, without offering much detail besides mentioning, as an example, that Vale must decide how to handle “intertwined” base metals and iron ore assets in Vale’s Carajás Mine in Brazil.

Vale is particularly bullish on future copper demand for electric vehicles at a time when many observers feel we are entering a global commodities boom, but Vale and metals generally, “this metal story” Bartolomeo said, “are undervalued.”

Mark Travers, Vale’s executive vice president of base metals, who was also on the earning call, said “the path, really, is to make sure that we get the
optimal value for base metals.”

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