2023-04-21 15:01:16 ET
Summary
- Vale S.A. announces earnings on 4/26, with EPS estimates at $0.59 (normalized) and $0.61 (GAAP), and revenue estimated at $9.12 billion.
- Vale is considering separating its base metals business, with potential investors including General Motors, Mitsui & Co., and Saudi Arabia's Public Investment Fund.
- Teck Resources Limited is on a similar path, receiving a lot of interest from Glencore, Vale, Anglo-American, and Freeport McMoRan for its base metals business.
- Vale is in talks to sell a 10% stake in its base metals unit, with final bids expected by mid-April, and a possible IPO or spin-off in 2024.
- I put on a speculative position in the options expiring the 28th, as I don't think a possible announcement is fully reflected in the options prices.
Vale S.A. ( VALE ) is announcing earnings 4/26 post-market and it holds a conference call on the 27th. EPS estimates are $0.59 (normalized) and for $0.61 ((GAAP)). Revenue is estimated to come in at $9.12 billion. I don't really have a view on VALE earnings, but I do think it could be interesting to buy volatility (through options) ahead of this earnings date. Vale has been trading down. The latest news is iron ore continues to decline, and inventories at Chinese ports are piling up.
Meanwhile, Vale S.A., the world's largest iron ore miner, continues to generate free cash flow. Notably, The company is also considering separating its base metals business, with potential investors including General Motors Corporation (GM), Mitsui & Co., Ltd. (SMFG), and Saudi Arabia's Public Investment Fund.
Teck Resources Limited ( TECK ) is a bit further along a similar trajectory, where it is separating its undesirable coal business from its desirable base metals (battery metals) business. Teck has received interest from, surprisingly, Vale itself, Anglo American ( AAUKF ), and Freeport McMoRan ( FCX ) for potential deals for its base metals business, provided the company proceeds with its planned split.
Glencore plc ( GLCNF ) wants to strike ahead of the split and swallow the whole thing up now to engage in split itself where it would package up its own coal business alongside Teck's coal business. The rationale is likely this saves a lot of restructuring costs which can remain in shareholders' pockets.
A landmark resource deal happened last year when Rio Tinto ( RIO ) acquired the 49% stake in Turquoise Hill Resources it didn't own yet for $3.3 billion. Copper (and I'd argue energy transition metals) are very desirable long-term investments in the eye of strategic and increasingly carefully watched by governments.
Vale has progressed in segmenting its business into Iron Solutions and Energy Materials Transition segments and appointed ex-Tesla executive Jérôme Guillen as the first Independent Director for the latter segment. A stake sale could potentially lead to an IPO for the Energy Materials Transition segment, which would help meet the capital requirements for the base metal side, estimated at $20 billion. That would be a very attractive valuation given Vale's $60 billion market cap. Its energy transition materials segment contributed only around 15% of its EBITDA when I last calculated it. If the company successfully sells this segment for $20 billion, it would represent about 33% of its market cap in value.
Vale would likely IPO or spin off the segment, and it will be interesting to see what it will do in the market ( as per Bloomberg ):
Vale SA is considering a spinoff or initial public offering of its sprawling base metals business after it completes the sale of a minority stake, according to people familiar with the situation.
The Brazilian mining giant is in talks to sell a 10% stake in the unit and expects final bids in that process to be submitted by mid-April, said one of the people, who asked not to be identified because the deliberations are private. Once the transaction is completed, Vale will likely list the unit or spin it off in 2024, the person said.
The final bids should be in if we believe Bloomberg's timeline. It could be wrong, but it lines up nicely for Vale to be able to finalize a deal for its earnings call on 4/26 and go into detail on the value it is creating and the details of a potential partnership.
A very speculative trade that I think could be interesting is to buy a straddle or calls on VALE expiring on March 28. I believe the market for large base metal assets from reputable companies is sizzling hot. I wouldn't be surprised at all by a significant number coming out of these discussions. If you are less bullish on battery or base metals than I am, you could consider a straddle where you balance calls with puts at the same date. For example, I was able to buy VALE $15.50 calls for $0.04 each. It is just a tiny position because the volatility seems underpriced.
If you buy puts and calls on the same date (not necessarily the same strike) you are buying volatility. If the stock moves a lot more than the market is pricing in, the position will be profitable. The implied volatility in the VALE's option chain on that date looks cheap to me given the above dynamics between a hot copper market and Vale potentially wrapping up a minority stake deal. It is possible the announcement will be a nothing burger (which is essentially what I argued in my previous article ). However, Vale is now a few dollars cheaper and the market is paying a lot of attention to these big copper deals. In addition, there is a chance Vale executes something dramatic instead of just a stake sale (not my base case though).
In the very long term, I'm quite bullish on Vale S.A. as well, but I'd like to have some more visibility into the spinoff before I'll consider putting a longer-term position on. Especially because there are a lot of other situations that require capital.
For further details see:
Vale Base Metals Business Stake Sale Could Result In Outsized Move At Earnings