Vale eyes possible return of ‘Inco’ to Canadian market
Brazilian mining company may sell part of its base metals unit in an IPO
TORONTO Eight years after it disappeared, Inco Ltd. could be poised to return to the public markets in some form.
Brazilian mining giant Vale SA, which paid nearly $20 billion for Inco in 2006, said Tuesday it may sell part of its base-metals unit in an initial public offering, likely on the Toronto Stock Exchange. That confirmed an earlier report from Reuters, and follows years of speculation that Vale could divest the business.
There are two logical reasons to consider it now. First, Vale wants liquidity as it plans a huge capital spending program next year amid low iron ore prices. More important, these assets are completely lost inside the huge Brazilian company.
“We believe there’s hidden value there,” chief executive Murilo Ferreira said in a news conference in New York. “We believe this value has to be better expressed.”
Vale calls itself a diversified mining company, but the vast majority of its profits come from iron ore. Even with iron ore prices plunging this year, that one commodity made up 80 per cent of the company’s adjusted pre-tax earnings in the third quarter. It accounted for 97 per cent of adjusted earnings in the same quarter a year ago, when prices were much higher.
The base metals unit is highly profitable — it generated $781 million US of adjusted pre-tax profit in Q3. But analysts and investors pay little attention to it. Vale believes the business may be worth $30 billion to $35 billion US, which is not much less than its current market value of $43 billion US. The company is looking to sell a minority stake in the business, maintaining a controlling interest.
“I think it’s eminently logical for Vale to spin back Inco, and for Rio Tinto to spin back Alcan,” independent analyst John Tumazos said in an interview.
“The iron ore business has grown so much over the past decade, both in volume and price, that it dominates those companies.”
Vale has not yet taken the spinoff proposal to its board of directors. But if it does go ahead with an IPO, Ferreira said the Toronto Stock Exchange would be a logical place to launch it. The company’s base metals business is run out of Toronto.
“When you have such important base-metal units as we have in Canada, it’s very important that country participates when we seek access to the capital markets,” he said.
That would be a welcome development for institutional investors in Canada, who have been looking for more large-cap mining companies to buy following the takeovers of Inco, Alcan and Falconbridge Ltd. last decade.
But if Inco does return, it would look a lot different than the company investors remember from 2006.
Vale’s nickel mine in New Caledonia (known as Goro in the Inco days), is finally up and running. The massive Voisey’s Bay mine in Labrador, which was still in its infancy when Vale bought Inco, is running at full blast and planning an underground expansion in the near future.
Vale opened a new mine in Sudbury in February called Totten, the company’s first new mine in the region in four decades (including the Inco days).
Vale also has many interesting base-metal assets that were not part of Inco. They include the Onça Puma nickel mine and Salobo copper project, both in Brazil.
If Vale does decide to float a base-metal IPO next year, timing will be key in order to realize a high valuation. Base-metal prices are currently depressed, and it is uncertain when they will rebound.
Nickel prices traded close to $10 US a pound in May, but are now down around $7.40 US. Likewise, copper prices traded above $3.30 US a pound in January, but now sit at $2.95 US.