Back in 2020, Tesla CEO Elon Musk made a plea for miners to invest in increased production of nickel, a key component – and an expensive one – in the batteries that power EVs. He even promised companies a “giant contract for a long period of time,” should they mine the metal in an environmentally friendly way.
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Maybe there were no takers to Musk’s offer, because earlier this year, a Reuters report signaled that Tesla might be readying to open a factory in Indonesia, in return for nickel mining rights. In case you are wondering, Indonesia is the world’s biggest nickel producer, while the southeast Asian country also has a ban on exporting raw nickel.
Tesla is obviously eyeing an opportunity to lower costs but it’s certainly not the only company to think mining nickel is a good idea. With EVs set to become increasingly popular, other companies focused on the endeavor could reap the rewards.
Here’s a look at one company that could take advantage of growing nickel demand and an increasing number of EVs on the road, potentially making money for investors. Wall Street also sees upside in this name.
Vale SA (VALE)
Vale is a mining company based in Brazil that holds a leading position in the mining industry. While rankings can shift year-to-year due to changes in overall output, Vale consistently ranks among the top three world producers of both iron ore and nickel, and the company saw more than $43 billion in net operating revenues for 2022.
Of particular interest for investors focused on nickel and EVs, Vale reported three major business updates last year that will cement its position as a major supplier of nickel to the EV industry. First, in March of 2022, Vale signed a multi-year agreement with Sweden’s Northvolt AB, a maker of lithium battery cells, to provide the low-carbon nickel needed for that firm’s products. In May, Vale followed up with affirmation of a contract to supply nickel to Musk’s Tesla. And finally, this past November, Vale entered into a long-term agreement with General Motors, which makes the Brazilian firm GM’s prime supplier of battery-grade nickel sulfate. Vale will provide GM with 25 kilotons per year from 2026.
More recently, Vale released its sales figures for 4Q22. The numbers showed year-over-year declines in iron ore and copper production, but a 6% y/y increase in the company’s nickel output. For the quarter, nickel production hit 179 kilotons. The increase in production was complemented by increases in sales; Vale saw a 31% quarter-over-quarter increase in nickel sales.
Looking at the company’s finances, we find that Vale’s quarterly revenue was down year-over-year, by 9% to $11.9 billion. At the bottom line, the company’s proforma adjusted EBITDA came to $5 billion, down from $6.9 billion in 4Q21. Vale’s Q4 EPS came to 82 cents. The current revenue and EPS figures beat the Street’s expectations, EPS by 19 cents, or 30%, and revenue by $560 million, or 5%.
VALE also pays a dividend that fluctuates quite wildly, although based on the present $0.35 payout, it yields an impressive 8.87%.
Among the bulls is Jefferies analyst Christopher LeFemina who lists several reasons why Vale is one of his favorite names.
“Based on consensus earnings upgrade potential, upside risk to spot iron ore prices as China recovers, upside to Vale’s capital returns, and the company’s long-term growth in Base Metals, Vale is one of our top picks,” LeFemina said. “The company does have high operating risk and its shares are likely to be especially volatile… but we also believe these shares are undervalued at the current price.”
In line with this outlook, LaFemina gives VALE shares a Buy rating, with a $21 price target that suggests a one-year upside potential of ~32%. (To watch LaFemina’s track record, click here)
Overall, Vale’s stock gets a Moderate Buy rating from the analyst consensus, based on 8 recent reviews that break down 5 to 3 favoring Buys over Holds. The stock is currently priced at $15.94 and its $18.69 average price target implies that it will gain ~17% in the next 12 months. (See VALE stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
