Vale SA plans to sell up a 10-per-cent stake in its underperforming base metals unit, as the big Brazilian miner attempts to cash in on a worldwide rush for battery metals.
Vale plans to raise billions from the sale of the minority stake, and use the proceeds to expand output, so it can feed demand from the auto industry for copper and nickel used in electric vehicle (EV) batteries.
Ahead of the sale, the miner intends to legally separate the base metals unit from Vale’s much bigger iron ore division. The unit includes copper and nickel operations in Brazil, Indonesia and Canada, where Vale has large mines in Sudbury and Voisey’s Bay, N.L.
Base metals will function as a stand-alone entity, have its own board of directors and fund itself. Currently, Vale can divert profits from the highly profitable iron ore division to the less-profitable base metals division, a dynamic that has dragged down the company’s share price.
While Vale’s copper segment is on an upswing, with production expected to jump next year by as much as 42 per cent, nickel performance has been spotty.
For 2023, Vale is forecasting a drop in nickel production, owing in part to a delay in a ramp-up of a Voisey’s Bay mine, and capital improvements at the Creighton mine in Sudbury. On top of that, Vale has a history of missing its production forecasts.
“We know that we’ve not achieved the results that we’ve been guiding over the years,” said Deshnee Naidoo, head of Vale’s base metal operations, in a presentation to investors in New York on Wednesday.
“What we are focused on, almost fixated on right now, is improving the safe reliability of the operations.”
Over the past decade, nickel production has plummeted in Canada, with Vale forced to mine deeper into the earth to harness lower-grade ore. The fall occurred even as Vale spent billions of dollars to modernize mines that have been in production for more than 50 years.
But the company is currently in the midst of a turnaround effort in Sudbury aimed at boosting productivity and cutting costs. This fall, Vale completed a $945-million expansion of the Copper Cliff nickel and copper mine, a five-year endeavour that should see the mine double its output.
Gustavo Pimenta, chief financial officer of Vale, said on Wednesday the company is looking for a partner with strong technical skills for its base metals unit, but also one that can elevate the company’s environmental, social and governance profile.
Vale has stumbled on the environmental and safety front in recent years. In 2019, a tailings dam breach at a Vale facility in Brazil killed 270 people and caused an environmental catastrophe.
Vale did not specify a buyer it has in mind for a minority stake in the base metals unit. In the past, analysts have speculated that Vale might strike a joint venture with Glencore PLC, another huge international mining company that has significant base metals operations in Canada.
In recent years, automakers such as General Motors Co. have also started taking equity stakes in miners, as they seek to guaranteed supplies of EV metals.
Vale already has big plans to become a player in the EV industry by selling Canadian-mined nickel to North American and European manufacturers. This year, the company signed offtake agreements for nickel with Tesla Inc., Swedish battery maker Northvolt AB and GM.
Vale also has plans to build what would be the first battery-grade nickel refinery in Canada. Over the long term, it hopes to sell up to 40 per cent of its Class 1 (high purity) nickel to the EV industry, compared with the current 25 per cent.
Christopher LaFemina, an analyst with Jefferies, wrote in a note to clients on Wednesday that it is of paramount importance for Vale to hit its three-year forecasts in for nickel and copper production, as well as its cost-reduction targets.
“Based on its track record, we remain cautious,” he said.
Not in the cards at Vale for now is a previously-discussed initial public offering of the base metals operation, as the miner instead concentrates on increasing the value for the unit to maximize any future proceeds from an IPO.