Driving growth: How Brazil's Vale looking to give impetus to its copper and nickel operations

Bnamericas Published: Friday, January 13, 2023
Driving growth: How Brazil's Vale looking to give impetus to its copper and nickel operations

Brazilian mining titan Vale, one of the world's largest iron ore producers, has been trying to give a greater focus to its nickel and copper operations in recent months.

As part of this process, the company is looking to restructure its base metals unit, separate from its iron ore division and bring a partner on board. It has already started talks on selling a minority stake in the area, which includes nickel mines abroad, copper production in Brazil, as well as stakes in cobalt and other metal operations.

Vale is expecting significant growth in long-term copper and nickel demand amid the energy transition and also wants investors to have more clarity about the potential of this part of the company.

Felipe Volcato Ruppenthal, a senior equity research analyst and specialist in the mining sector at investment house Eleven Financial Research, talks with BNamericas about Vale's initiative.

BNamericas: What does the possible entry of an investor, with new funds, mean for Vale's business in the area of base metals?

Ruppenthal: Vale is a major cash generator with abundant resources.

The differential provided by a [new] investor will be much more significant because of their knowledge of the base metals business rather than the fresh funds that would enter the company.

Based on recent company statements, we see that this is what Vale is looking for, a partner that will help it improve its base metals operation and take it to another level. The entry of a partner will also help to price this unit better within Vale, unlocking important value and better pricing the company as a whole.

BNamericas: Once the entry of a new investor materializes, will the company accelerate its investment plans to increase copper and nickel production?

Ruppenthal: Yes, the company will probably step up investments in this unit, which has been chosen to be the company's growth vehicle, with double-digit compound annual growth for the coming years.

BNamericas: Once a minority investor enters the division, do you think that the company will continue with its plans to carry out an IPO of this unit, raising even more funds? And, if so, why?

Ruppenthal: I believe that with the entry of an investor, at first, plans for an IPO of the unit will likely be postponed or assessed together with the new investor to calculate the capital requirements required to raise the unit to new heights and achieve its growth plans.

BNamericas: In recent presentations with analysts, Vale executives have said that they see the possibility that the base metals area could become the company's largest business unit in the long term. Do you think that forecast is realistic?

Ruppenthal: For the base metals unit to become the largest unit within Vale, it will depend heavily on the prices of base metals and they are very cyclical and difficult to predict, in addition to a substantial improvement in the efficiency of the operations. It would probably be a fairly long horizon.

In terms of quantity, it's very difficult to surpass production of iron ore, currently at 307Mt per year considering production of 4Mt per year of base metals from basic businesses.

BNamericas: In terms of Vale's net revenues, would it be possible for the base metals area to grow bigger than iron ore, since copper and nickel have greater added value?

Ruppenthal: Today, iron ore revenues account for 79% of the total and 94% of the company's Ebitda and it has an Ebitda margin much higher than that of base metals: 48% versus 18% in the third quarter of 2022.

Carrying out an exercise at constant prices and margins, with annual growth of 0.5% in iron ore and 15% in base metals, even so, in 20 years the Ebitda of base metals would still only be 26% of the total and would be 64% lower than the Ebitda of the iron ore unit.

So, we calculate that the issue of base metals prices and improved efficiency in the operation is essential to become the most important unit within Vale.

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