Vale: Will Salobo Mine’s Gold Sale to Silver Wheaton Corp. Bring any Good?

Vale: Will Salobo Mine's Gold Sale to Silver Wheaton Bring any Good?
Silver Wheaton agreed to purchase 75% of Salobo mine’s gold from Vale

Yesterday, Vale SA (ADR) (NYSE:VALE) announced that it has entered into an agreement with Silver Wheaton (Caymans) Ltd. which is the subsidiary of Silver Wheaton Corporation. As per this agreement, the former will sell an additional 25% of the Salobo mine’s gold production to the latter through the mine’s lifetime.

Original Purchase Agreement

The original purchase agreement between the two parties took place in February 2013, whereby Silver Wheaton Corp. (USA) (NYSE:SLW) agreed to buy 25% gold from Brazil-based Salobo mine. This agreement was later amended on March 18, 2015, when Silver Wheaton agreed to purchase further 25% of the gold. Yesterday's agreement is the third amendment in the agreement, through which Silver Wheaton’s ownership has now increased to 75% of the gold stream in copper concentrate.

On the other hand, Vale will receive an initial $800 million cash payment as part of the deal. Furthermore, it has an option value worth $23 million from 10 million Silver Wheaton warrants that have been held by Vale since 2013 with maturity in 2023. Additionally, Silver Wheaton will also pay either $400 or market price, whichever is lesser, against per ounce gold delivered gold in future lifetime. Vale has announced to utilize the earned amount in debt reduction.

Beside this agreement, Silver Wheaton may also pay additional cash between $113-$953 million range, against its Salobo copper ores’ capacity expansion to above 28 million tons per year (Mtpy) before 2036. Currently Salobo I and Salobo II copper ores are ramping up. These two are projected to process 24 Mtpy of run-of-mine (ROM). The payment amount will be dependent upon timing, ore grade, and expansion size.

Vale’s Debt Reduction Attempts

In February 2016, Vale CEO, Murilo Ferreira had implied the company’s assets sell off for the first time, when he declared $12.1 billion loss for the first time in Vale’s history since 1997. During the same earnings call, the CEO also revealed that the company required $10 billion through the year against its liabilities.

Since then, Vale’s top management is constantly striving to reduce its surging debt. Besides entering into long term agreement with Silver Wheaton, the company announced today that it also intends to offer promissory notes that will mature in August 2026. The notes will be offered through its wholly-owned subsidiary, Vale Overseas, whereas Vale will guarantee these notes. The cash proceeds received from these offerings will be utilized to pay some portion of 6.250% notes due 2017 that were issued by Vale overseas, and guaranteed by Vale. These notes are slated to mature in January 2017.

This is not the only attempt, on June 17, the company had also entered into negotiations with Mosaic Co (NYSE:MOS) for the sale of its fertilizer business divestment. As per news in the market, these negotiations may lead to a $3 billion cash-and-stock deal.

Besides this, on June 16, 2016, the news broke that Vale had been on table talks with certain Asian mining companies for its Brazil-based iron ore’s minority assets sale. The assets had an estimated value of $7 billion.

​BMO Capital’s Take

BMO Capital took a review of this agreement in its today research report. The firm noted that the sale of a further gold streaming agreement with Silver Wheaton, and better iron ore prices has changed the year-end forecast for CY16. Taking these factors under consideration, the sell-side firm increased its target price from $2 to $4 for the company’s stock. However, it continued to reiterate Underperform stance for Vale shares due to the fact that the company is currently highly indebted. Additionally, iron ore prices might also observe downturn during 2HFY16 amid weaker global economy.

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