Vale considers spin-off of its base metals arm

Vale is reportedly considering listing its base metals business as iron ore prices fall and costs begin to bite.

According to unnamed sources close to the situation, the miner may look to an IPO of the businesses – retaining a majority stake – as a way to prop up its under pressure iron ore division which makes up the majority of the resources house's business, Reuters reports.

This was later confirmed by Vale's CFO Luciano Siani, who told Bloomberg the unit could be listed, and may fetch between US$30 to US$35 billion.

“An IPO could be considered,” Siani told Bloomberg TV. 

“We want to be ready sooner rather than later to take the opportunity when it presents itself very clearly if that’s the case.”

Vale is not the first miner to go down this route as commodity prices decline.

BHP announced plans to spin out its underperforming assets into a new company earlier this year, retaining its iron ore, copper, coal, and petroleum divisions, whilst spinning out the rest of its assets into a new company in which it will hold a significant stake.

AngloGold Ashanti also started down a similar route, looking to spin out its non-African assets before it backflipped in the wake of a shareholder revolt.

The majority of Vale's potential spun out unit would be be built of nickel and copper assets, which have been more stable than iron ore commodities.

The metal has seen a continual decline in price, dropping below US$70 per tonne last week, for the first time since 2009. 

This is a drop of 2 per cent from its previous low of $US70 a tonne.

“The biggest problem is on the supply side as majors like BHP and Rio are pushing huge volumes into the lacklustre demand environment,” an analyst at Sanford C. Bernstein & Co told Bloomberg.

“To me $65 feels like a floor.”

The iron ore price slump has already seen two iron ore operations in Australia close with fears there are more to come as break-even costs are being tested.

In regards to nickel's performance, the metal has finally seen a modicum of stability.

According to IBISWorld "trends in US dollar nickel prices, the value of the Australian dollar and in the volume of nickel production will continue to drive industry performance during the five years through 2018/19".

Speaking to David McCombe, BNP Paribas managing director energy and natural resources investment banking Asia-Pacific, he told Australian Mining there is likely to be a net deficit in the metal moving out which will drive the price up.

"In 2015 we expect the price to sit around the mid US$18 000 mark, and then it will slowly move up to approximately US$19 000 by 2019," he said.

Perth based Alto Capital expects the price to hit approximately US$20 000 per tonne next year, creating a better market for Vale's potential demerged assets.

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