Abstract
ABSTRACT The case “Vale S.A. — Cobalt Streaming” describes a transaction that has taken place at Vale, a Brazilian mining company, and one of the most important in its segment. The transaction was developed to de-risk an important project for an expansion of a mine in the province of Newfoundland & Labrador in Canada. By streaming the cobalt production, Vale was able to get a competitive internal rate of return for the project compared to the lower level of risk the project would then offer. The case detailed the negotiation since the beginning until the company faced the challenge of choosing from the final proposals. The case allows the discussion of important aspects regarding project valuation: risk mitigation through the streaming negotiation, several different types of risk influencing the main issue of the case, decisions about the assumptions used, discussion about debt/equity characteristics on the overall project from Vale’s perspectives, and the evaluation of a project with non-conventional cash flow, given a substantial upfront revenue due to the streaming contract. So, the case is recommended for the disciplines of Financial Management, Project Valuation, or Risk Analysis in post-graduate courses of Business Administration and Finance.
Highlights
It was a beautiful sunny morning in Rio de Janeiro in late May 2018
The following set of questions could be used to stimulate the analysis of the case: 1. What was the variation in the Project Power economics for the different scenarios?
The professor should recommend the students to calculate the economics of their analysis
Summary
It was a beautiful sunny morning in Rio de Janeiro in late May 2018. Luciano Siani Pires, Chief Financial Officer (CFO) of Vale, a Brazilian mining company and one of the largest in the world, was preparing for a meeting with his team to decide the future of a large and meaningful project. Over a month after receiving initial Phase II feedback, the company proposed an agreement with the highest price but for a lower volume than the 75% stream required by Vale, and still with a higher risk of not closing. While getting to the meeting, Luciano was revising his main objective with the streaming — de-risk the mine expansion He wished Vale could receive an initial payment for 75% of the cobalt production from Voisey’s Bay upfront at the time of the agreement. The partner would provide additional payments of 20% of cobalt prices as the product is delivered in the future In this way, the investor would share with Vale the production and geological risks of the Voisey’s Bay expansion project.
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