2023-05-30 08:17:45 ET
Summary
- Vale is considering separating its base metals division from its core iron ore business, potentially unlocking value and attracting a broader investor base.
- My SOTP valuation approach suggests 23% upside potential.
- Timing of the separation and potential IPO should be carefully considered, as the current environment of rising interest rates may not be optimal.
Vale ( VALE ) has been signaling intentions to separate its base metals division from the core iron ore business in a pursuit to create value. I think the move makes sense - metals like copper and nickel are at the foundation of energy transition and could attract a broader investor base, including strategic investors. The binding offers that Vale received, imply value of the total base metals business of around US$25B, while I valued the core iron ore business using 3.5x EBITDA multiple. This results into fair values estimate of US$16.32/share or 23% upside potential. At the same time, the timing of the base metals division should be carefully considered and may be a source of additional risks.
Separating the base metals business
The mining major has been considering the separation of its base metals (copper and nickel) business from as early as 2021. The company has been carefully planning and preparing for this and recently assigned the former CEO of Anglo American ( OTCQX:AAUKF ) as a Chairman of the Board of the base metals division. Initially, two options were being discussed - a spinoff or an equity carve-out through an IPO. From the latest earnings call , it looks like that management is more tilted towards the IPO rout, although a final decision is yet to be taken.
First of all, I think, as you mentioned, I always said that, actually in one of our meetings, I said, eventually, and I understood that eventually in English is we are going to go, obviously, an IPO down the road, is a liquidity event that you could pursue.
- Eduardo Bartolomeo, CEO
Meanwhile, negotiations for the sale of 10% minority stake in the nickel and copper unit are underway. Vale received binding offers for the stake, believed to be worth around US$2.5B. This would imply US$25B value for the total base metals division.
Value unlocking potential
Separating the base metals business from the iron ore core operations makes sense. Some institutional investors for example could want to avoid iron ore exposure for ESG reasons, while be more than open to get exposure to copper and nickel, which are cornerstones of the energy transition. It's interesting to note, that Vale started referring to its base metals division as energy transition metals unit, likely for PR purposes. Looking at the implied value of the division of US$25B, it appears that the implied EV/EBIDA multiple is quite high at almost 10.8x, given TTM Adjusted EBITDA of US$2.3B.
Adjusted EBITDA (US) | Q1'23 | Q4'22 | Q3'22 | Q2'22 | TTM |
iron solutions | 3 320 | 4 721 | 3 773 | 5 147 | 16 961 |
energy transition metals | 573 | 775 | 364 | 603 | 2 315 |
others | -206 | -495 | -135 | -216 | -1 052 |
Total Adjusted EBITDA | 3 687 | 5 001 | 4 002 | 5 534 | 18 224 |
energy transition metals (%) | 15.5% | 15.5% | 9.1% | 10.9% | 12.7% |
*Prepared by the author using Vale's data
This is much higher than the current EV/EBITDA multiple of VALE of around 3.7x. An idea about at what multiple could possibly trade the core iron ore business, I looked at two pure-play iron ore miners - Fortescue Metals Group ( OTCQX:FSUMF ) and Champion Iron Limited ( OTCQX:CIAFF ).
Their 3-year average EV/EBITDA multiple is around 4x. However, as both companies are registered in top-tier mining jurisdictions - Canada and Australia, the market likely assigns some premium to them over Vale, which is a Brazilian company. So I'll use a slightly lower EV/EBITDA multiple of 3.5x, which implies value of the iron ore unit of around US$55.7B.
Unit | ||
Base metals implied value | US | 25.00 |
Core business implied value | US | 55.68 |
Net debt | US | 8.23 |
Implied Equity value | US | 72.46 |
Shares outstanding | B | 4.44 |
Implied FV/share | US$/share | 16.32 |
Current market price | US$/share | 13.26 |
Upside potential | % | 23.07% |
* Author's own calculations
Risks
The first consideration should be that the iron ore business will not trade at multiples close to its peers, following the business separation. This could happen mostly for political risk reasons, if the situation in Brazil worsens.
Another important point is the timing of the potential IPO, if that route is chosen. Right now, interest rates are rising and capital is becoming more expensive. That being said, I don't think that the current environment is optimal and the company should probably wait for monetary policy shift towards easing before tapping the markets.
Conclusion
Separating the base metals business from the core iron ore operations makes sense and could unlock considerable value. My SOTP model suggests 23% upside from the current share price. However, I believe that the company should not rush with the separation, especially if the IPO route is chosen and wait for the monetary policy cycle to shift back to easing.
For further details see:
Vale: Separating The Base Metals Business Could Unlock Value