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Vale to Preserve Nickel Optionality: Expects Electric Car Boom

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Preserving optionality in nickel

On Vale Day on December 6, 2017, Vale (VALE) pared back its production forecasts for nickel (DBB) for the next five years. It cut its nickel volumes estimate by 15% to 263,000 tons in 2018. Its focus is to shift to a smaller footprint in nickel as it improves the competitiveness of the business. Its strategy is to align investments and production based on market conditions. At the same time, the company wants to preserve its optionality in nickel ahead of the expected boom in electric vehicles (TSLA). Nickel, cobalt, and lithium are used in rechargeable batteries in electric vehicles. Vale’s executive director of base metals, Jennifer Maki, said the market forecast suggests that electric vehicles would represent 7%–20% of the global auto market by 2025, up from 1% in 2017.

Reflecting current market conditions

To ensure that all of its assets contribute to cash flow, Vale is doing asset reviews. In light of these reviews, Vale has closed several of its projects, including Stobie mine and Sudbury mine in May 2017, Birchtree Thompson in October 2017, and Kaohsiung nickel refinery in November 2017. It’s also progressing toward a closure decision of its precious metals refinery in 2Q18.

Decision on New Caledonia

The company also stated that it would decide by the end of next year whether to put $500 million into its Vale New Caledonia (or VNC) project over the next four years. It’s currently focusing on improving stability for its VNC operations. VNC is continually ramping up in 2017 with a forecast for production of 40,000 tons. The company also mentioned that it’s progressing toward an EBITDA (earnings before interest, tax, depreciation, and amortization) neutral level in recent months with 3Q17 EBITDA of -$7 million.

In copper, the company is focused on increasing production. In addition to Salobo III, Vale has two other copper projects—Victor in Sudbury, Canada, and a new discovery in Indonesia. Copper prices have been very volatile in 2017. Freeport-McMoRan (FCX) has risen 6.8% year-to-date. The stock has underperformed the broader metals and mining space this year. Looking at other copper miners, we find that Glencore (GLEN-L) and Antofagasta (ANTO) have risen 30% and 40%, respectively, this year. Southern Copper (SCCO) has risen 35.1%, while First Quantum Minerals (FM) has risen 16%.

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