Vale Secures US$690 Million in Cobalt Streaming Deals

Brazilian miner Vale (NYSE:VALE) has agreed to sell future cobalt production from its Voisey’s Bay mine to Canadian companies Cobalt 27 Capital (TSXV:KBLT) and Wheaton Precious Metals (NYSE:WPM), the company announced on Monday (June 11).

The streaming deals, worth US$690 million combined, are for output starting in 2021 from Vale’s nickel mine in Newfoundland and Labrador, where cobalt is mined as a by-product. The metal is a key component in the lithium-ion batteries used to power electric cars.

The transaction is set to be the world’s biggest cobalt stream to date, with Vale selling 75 percent of future cobalt production from Voisey’s Bay.

The Brazilian miner will use the money to fund the underground expansion of the mine, as the existing operation runs out of ore. The company will invest a total of C$2 billion in the project, which will increase the mine’s life by 15 years.

“By unlocking the value of the cobalt by-product at Voisey’s Bay through this streaming deal, Vale has found a way to resume substantive work on the underground project,” Eduardo Bartolomeo, Vale’s base metals executive officer, said in a statement.

Toronto-based Cobalt 27 will pay US$300 million to Vale upon closing the transaction, while Wheaton Precious Metals will pay US$390 million.

In addition, the companies will make ongoing payments of 18 percent of the Metal Bulletin market price per cobalt pound delivered until the balance of the upfront cash consideration is reduced to zero. After this time, the ongoing payments will increase to 22 percent of the cobalt reference price.

“Cobalt 27 is very excited to partner with Vale to advance future development of Voisey’s Bay,” said Anthony Milewski, chairman and CEO of Cobalt 27.

Vale will deliver an amount of finished cobalt equal to 32.6 percent of cobalt production to the Canadian company starting in January 2021. After reaching approximately 10.8 kilotonnes of cobalt, the proportion of cobalt delivered to Cobalt 27 will be reduced to 16.3 percent.

“Following our recent investment in Ramu, this transaction builds on our commitment to add high quality streams and royalties and represents a strong step forward in diversifying our portfolio with the Voisey’s Bay mine, a world-class, low-cost and long-life nickel/copper/cobalt asset located in a low political-risk jurisdiction,” he added.

Meanwhile, Wheaton Precious Metals will receive 42.4 percent of Voisey’s Bay cobalt production until the delivery of 31 million pounds of cobalt. After reaching that amount, the company will start receiving 21.2 percent of cobalt output.

The company’s attributable cobalt production from Voisey’s Bay is forecast to average 2.6 million pounds per year for the first 10 years and 2.4 million pounds for the life of mine.

“While our focus has been, and always will be on precious metal streaming, we welcomed the opportunity to invest in another low-cost, long-life asset with a partner of Vale’s caliber,” Wheaton Chief Executive Randy Smallwood said in a press release.

At spot cobalt prices, the stream could potentially generate US$75 million in cashflow per year beginning in the year 2021, and increase annual corporate cashflow by more than 10 percent, analysts at CIBC said in a research note to clients.

“The new cobalt stream is a relatively safe way to gain exposure to one of the hottest commodities by buying future production from an established mine,” the analysts added.

On Tuesday (June 12), shares of Cobalt 27 were down 14.1 percent to close at C$9.51. Meanwhile, Wheaton Precious Metals closed neutral at US$22.15.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.