Vale (VALE): Another case for Tesla (TSLA)’s Nickel shortage

I have found another case that Tesla (TSLA) could partner with Vale (VALE), another Nickel producer.

  • VALE is the largest nickel producer in the entire world, with Tesla constantly calling for more Nickel production, the partnership potential for these two companies is a match made in heaven.
  • VALE notified creditors on September 14th that it was paying off it’s $5 billion debt, suggesting a large deal leveling them an insane amount of capital.
  • VALE’s trading volume is up 37% from it’s average and has bullish whale activity in the options chain.
  • Earlier this month, VALE announced that they would be paying an extra dividend, on top of their regularly scheduled dividend, reinforcing the thesis of a strong balance sheet
  • Tesla and VALE already have a history of being bidirectional business partners for over a year.
  • Conservative estimates reveal Tesla’s growth plan leaves VALE’s competitors ill equipped to deal with the demand for nickel Tesla needs to produce it’s vehicles within five years.

The following points are largely circumstantial evidence, however when stacked together create an extremely powerful narrative and points toward the extreme likelihood of VALE actually having lined up a revolutionary deal with Tesla.

“There’s so much to be excited about. It’s really hard to kind of fit into this call, but the sheer amount of hardcore engineering, especially on the autonomy and the manufacturing/engineering front is mind-blowing. And then of course there’s Battery Day, which is coming up pretty soon. And I think that’s really going to surprise people by just how much there is to see.”

Elon Musk

AND

“Yeah. The real limitation on Tesla growth is cell production at affordable price. That’s the real limit. So that’s where — we’re going to talk about — a lot more about this on Battery Day because this is a fundamental scaling constraint. And any part of that supply chain or processing at the cell level will be a limiting factor. So whatever it may be, anywhere from mining to refining — there’s many steps from refining to cathode and anode, cell formation. Whatever the choke point is, that will set the growth rate. And so we expect to expand our business with Panasonic, with CATL, with LG, possibly with others, and there’s a lot more to say on that front on Battery Day.”

Elon Musk

AND

“Well, I’d just like to re-emphasize, any mining companies out there, please mine more nickel. Okay. Wherever you are in the world, please mine more nickel and don’t wait for nickel to go back to some long — some high point that you experienced some five years ago, whatever. Go for efficiency, obviously environmentally-friendly nickel mining at high volume. Tesla will give you a giant contract for a long period of time, if you mine nickel efficiently and in an environmentally-sensitive way. So hopefully this message goes out to all mining companies. Please get nickel.”

Elon Musk

AND

“Like the thing that bugs me the most about where we are right now is that our cars are not affordable enough. We need to fix that. So we’re all making progress in that regard, just sort of steadily gaining progress. So yeah, we need to not go bankrupt, obviously. That’s important, because then we’ll fail in our mission. But we’re not trying to be super profitable either, obviously, profitability is like 1% or something, just 1% or 2%. It’s not crazy. Last quarter, it was only like 0.1%. So we want to be profitable. Like I think just we want to be like slightly profitable and maximize growth, and make the cars as affordable as possible, and that’s what we’re trying to achieve.”

Elon Musk
$TSLA $VALE
Battery breakdown

“Yes, good afternoon. Thank you. You mentioned a few times about the constraint to growth is battery capacity still. And I was hoping you could clarify the scope of the Berlin plant you’re building right now. Will there be — the battery capacity consistent with the amount of assembly volume you expect to come out of Berlin? And if not, will you be able to source your battery requirements out of Europe? Will you have to import batteries from outside Europe to ensure production in Berlin?”

Philippe Houchois, Analyst at Jefferies

“Okay. We can’t say too much about this, except that there will be local cell production, and that will serve the needs of the Berlin factory. Drew, is there anything…” said Elon Musk.

Vale mines nickel in Brazil, Canada, Indonesia and New Caledonia making it the LARGEST producer of nickel. VALE has joint-venture refineries in China, South Korea, Japan, the UK and Taiwan. These locations will help deliver nickel to the Tesla factories in North America, Berlin and China.

The demand and future of nickel will continue to grow for the foreseeable future with Elon calling it the new gold. Electric vehicles and other modern technology NEED nickel to function.

“With demand expected to increase from 2.2 million metric tons to somewhere in the range of 3.5 million to 4.0 million metric tons by 2030, the nickel market could become constrained.”-McKinsey and Company By Marcelo Azevedo, Nicolas Goffaux, and Ken Hoffman.

TSLA, VALE
Nickel demand

Elon Musk’s emphasis on environmentally friendly

Elon emphasizes the demand for an “environmentally friendly” mine. Historically, we all know mines have run into trouble with being friendly toward the environment. Today more than ever, a company’s concern for the environment must be vocally expressed and physically acknowledged. If not, the reporters and media will bash Tesla for not being environmentally sensitive.

Elon Musk understands this and is aware that the nickel company Tesla chooses must at least appear as if they are environmentally “sensitive”. Vale’s website has information on how they are sustainable and conscious of the controversies surrounding the mining industry.

“Given Tesla’s focus on sustainability, the company is likely to prefer to buy from miners of higher-grade nickel sulphide, which requires less power to process than laterite ore, said Lachlan Shaw of National Australia Bank.”-Reuters, Yilei Sun, Melanie Burton

“There are three key suppliers – Brazil’s Vale VALE3.SA, which operates in Canada using some hydropower, Russia’s Norilsk Nickel GMKN.MM and BHP Group’s operations BHP.AX in Western Australia. “Vale is in the box seat,” -Reuters, Yilei Sun, Melanie Burton

Just the appearance and attempt to be environmental is enough to scare away most journalists who are looking to make a hit piece on Tesla. To wrap it up, Vale has the efficient, sustainable, and environmental mining that Elon Musk is looking for.

Cash flow

The increasing and regular cash flow has built a very strong balance sheet for VALE and the consistent high yield will keep the loyal investors around. In addition to this year’s regular dividend, VALE is paying investors an extra dividend of 1.63% on the same day as the regular. According to research firms such as CFRA, the management team has been very active and engaged to keep the company moving in the right direction despite COVID-19 setbacks and a decrease in steel demand.

TSLA VALE

Competition

Giga Metals (HNCKF) a competing mining company fell 18.84% today after being in the news about potentially being a candidate for Tesla’s nickel demand. Currently, at a conservative rate, Giga’s mine would stop being able to satisfy Tesla’s Nickel needs by 2025, assuming they would be able to begin mining operations immediately. On the other hand, yesterday (Sept. 16), Vale announced that they had created buffers to reach production of 400 million metric tons of total mineral mining per year in a filing that was part of an investor tour presentation. Nickel is one of the five metals Vale mines.

Pricing

After calculating a very conservative estimate of how much nickel Tesla would be needing in the future, these were the results… (see figure below)

With a conservative estimate of a $43 billion dollar contract, $43 billion minus the operating margin (38%)= $16.5 billion. This gives the stock 28% upside. The price target for VALE is $15.36 with a 5% variance giving a low at $14.80 and a high of $16.00.

Not to mention the stock market acts very irrational in times of hype, the stock could very well overreact to $20+CFRA’s current 12 month price target for VALE is $15.00, whom most likely have not anticipated Tesla news. (If they get the news, this thing will FLY based on what we have seen this year)

TSLA VALE
Conservative nickel projections

This is not taking into account that the price of nickel is lagging in comparison to its current and future demand. Current nickel price as of 9/16/20: $15,229.50 per ton

TSLA VALE
Nickel Price: $15,229.50 per ton

Once the demand for nickel goes up and the supply grows scarce, that’s easy economics theory, nickel price goes up.

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Tim Rolle
Investor of 6 years and Managing Editor of Money Midnight, a news outlet focused on highly profitable investment ideas and bold underground research.
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