Vale (NYSE:VALE), the world’s second largest nickel producer, has recently had to declare force majeure after its Goro mine met an accident in its sulfuric acid plant.  With the commodity prices going south, this may hurt the company nickel business even further. In an another event, Indonesia banned export of certain ores, which we have discussed in a separate article here.
While Vale is safe as of now, the move has only fueled concerns about political risks for the company. But, Vale’s competitor Freeport McMoRan (NYSE:FCX) could be significantly affected due to its exposure to Indonesia. Apart from nickel, Vale’s diversified product portfolio encompasses iron ore, copper, aluminum, precious gems, and fertilizers. Below we take a look at these developments. We have a $34 price estimate for Vale, which is around 30% ahead of the market price.
- Vale’s Q4 2016 Earnings Preview: Favorable Commodity Pricing Environment To Drive Earnings Improvement
- Vale’s Q4 2016 Production Review: Rising Iron Ore Production Bodes Well Amid Favorable Pricing Environment
- Here’s Why Nickel Prices Fell Sharply This Week
- The Year 2016 In Review: Vale Well Placed To Benefit From Gradual Improvement In Business Conditions
- Vale’s Successful Cost Reduction And Capital Expenditure Rationalization Initiatives Prompt Revision In Our Price Estimate To $8
- Vale’s Q3 2016 Earnings Review: Success Of Company’s Cost Reduction Initiatives Bodes Well For The Future
Vale Declares Force Majeure
An accident at a sulfuric acid plant in the Goro mine at South Pacific island of New Caledonia has forced it to declare ‘Force Majeure’ on its nickel shipments from the mine. A Force Majeure is a legal clause that a company can enforce should it miss to meet deliveries due to circumstances beyond its control. However, the production loss cannot be ascertained at this point of time.
The Goro mine has capacity to produce as much as 60,000 metric tons a year of nickel and and 4,300 to 5,000 metric tonnes of cobalt a year. The mine is expected to become the world’s largest nickel mine.
Nickel contributes about 18% to our price estimate and any unforeseen delay to resume operations will significantly hurt the company value in short term.
Indonesia Ban Could Pose Future Problems
The Indonesian government has suddenly banned the export of 14 unprocessed raw minerals, effective May 6. The new rules, which mainly ban the export of copper, iron ore, gold, nickel and bauxite, will not affect Vale as it processes ore into refined products before exporting them. But after looking at Indonesia’s recent moves, we are increasingly nervous that Indonesia could extend this ban at some point in the future which would have huge implications for Freeport and Vale.Notes: