Copper prices have pulled back this year, but as supplies dwindle around the world, some investors are betting a price surge is set to come. Meanwhile, Vale (NYSE: VALE) seems to agree. The iron ore mining company is reportedly getting set to spin off its base metals business, comprising copper and nickel, in a bid to capitalize on its potential growth trajectory.
According to a Reuters report, Vale’s CEO Eduardo Bartolomeo said the company is reconsidering a near-term spinoff of its base metals business and eventual public listing.
Vale originally planned to sell all or part of the segment but now hopes to build the business as big as Vale is today and take it public. Bartolomeo made the comments at the FT Mining Summit.
Bartolomeo noted there is "huge growth" in base metals, whereas iron ore is a mature business.
What Does Vale SA Do?
Vale is the world's largest iron ore miner and, along with BHP and Rio Tinto, is one of the largest diversified miners.
Vale SA produces and sells iron ore, pellets, manganese, alloys, gold, nickel, copper, kaolin, bauxite, alumina, aluminum, and potash.
The company is based in Brazil, where it owns and operates railroads and maritime terminals. Vale also has operations in Australia, Canada, Oman, Indonesia, Japan, China and Malaysia.
In recent weeks, Vale has become the first of the world’s biggest mining companies to test 100% electric 72-ton trucks as it aims to reduce its emissions. These trucks will be used in its Indonesian mines.
How Does Vale Make Money?
Vale makes most of its money from its bulk materials division, primarily from selling iron ore and iron ore pellets, with manganese and coal also contributing.
The company’s base metals division brings in less cash but, as a spin-out, has longer-term potential. Its base metals segment includes nickel mines and smelters, along with copper.
Copper Outlook
Copper and nickel are key components of green tech, including batteries for electric vehicles, solar panels and wind turbines.
Copper has been in a bear market this year, and China’s zero-COVID policy has compounded this by reducing demand. With Xi Jinping securing another term, there are debates about when demand from China will return.
Nevertheless, the big-picture outlook for copper remains strong if the energy transition is to remain on track.
Yesterday Bloomberg reported that China’s multi-billion-dollar bonded copper stockpiles are at their lowest level in decades. JPMorgan Chase & Co. and ICBC Standard Bank Plc have halted new business in the region, and several sources believe the cash for copper trade to be dead for now, thanks to the global fall in demand.
But given copper’s role in the global energy transition, those investors with a longer time horizon see the likelihood of copper price spikes ahead.
If or when China reopens and resumes purchasing, copper prices could skyrocket, given China’s current stock depletion.
David Lilley, chief executive of hedge fund Drakewood Capital Management Ltd, said:
The physical market is so tight, it’s like a room full of gunpowder — any spark and the whole thing could blow, [Without the Shanghai bonded inventory], we are living without a safety net.
Back in 2011/12, China’s bonded copper stockpile totaled around a million tons of copper. It’s now around 30k tons.
The price of copper has plummeted in recent months, but the market is tight in China, and traders are paying a premium for immediate supplies.
But it’s not just China. Years of underinvestment in copper mining, ESG mandates, and regulatory crackdowns have led to the depletion of copper supplies worldwide.
With this dearth in supplies, copper buyers are attempting to secure longer-term deals to ensure their future supplies. Chilean miner Codelco recently signed copper contracts for three and five-year deals. Codelco is owned by the Chilean government.
VALE Stock Financial Metrics
VALE reports quarterly earnings on October 27. FactSet analyst estimates provide an EPS consensus of $0.56 and a sales consensus of $10.14bn.
Over the past year, VALE stock has traded between $11.16 and $21.29. Today it trades at around $13.65. Year-to-date, the Vale stock price is down -1%, while the S&P 500 is down -20.05% over the same period.
FactSet analysts have a consensus Overweight rating on VALE stock with a target share price of $17.06.
VALE stock has a price-to-earnings ratio (P/E) of 3.21. Its price-to-book-value (P/BV) is 1.77. Better still, VALE stock comes with a whopping dividend yield of 10.46%.
In 2021, the company reported annual sales of $54.39bn and net income of $24.7bn. This is projected to slip to revenues of $43.94bn and profits of $15.32bn in 2022.
Vale Growth Potential and Risks
Vale is a $64bn company with a fixed presence in several international jurisdictions. This makes it susceptible to forex fluctuations. Its commodities are in long-term structural demand, but short term, it faces multiple headwinds.
Inflation is hitting Vale's bottom line, as are falling commodity prices. If geopolitical circumstances worsen or China’s lockdowns continue far into the future, commodity prices could have much further to fall.
But the opposing view is that demand will far outpace supply, and Vale is positioning to capitalize in the future.
Is VALE Stock a Good Investment?
Vale is shareholder friendly. The company has been buying back shares and reducing debt while paying a generous dividend. Its financial metrics point to an undervalued stock, and the Vale share price is closer to its 52-week low than its high, making it attractive to investors.
Nevertheless, Vale’s future returns are highly dependent on commodity pricing, which is cyclical. That’s why investing in mining stocks is risky and only for investors who understand the business and believe in a growing demand for the underlying assets.
Vale's quarterly earnings this week will be worth watching to hear how it's coping with inflation and suppressed commodity prices.
Meanwhile, alternative copper mining stocks include Freeport-McMoRan (NYSE: FCX), BHP Group (NYSE: BHP), and Glencore (LON: GLEN).