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Vale closer to $9 billion Chinese streaming deal – report

The world’s top iron ore producer Vale (NYSE:VALE) is getting closer to inking a commodity streaming deal with Chinese companies that could afford the Brazilian giant an up to $9 billion upfront payment.

Bloomberg reported over the weekend a deal with China Investment Corp, the country’s $814 billion sovereign wealth fund, could see Vale sell part of its future iron ore output to the Chinese over 30 years:

These deals are usually done at a deep discount to ruling prices and the long-term nature of any agreement could also dampen the outlook

According to the report citing people familiar with the matter other Chinese companies and Japanese trading houses have also held discussions with Vale and considered alternative agreements including acquiring a minority stake in the company’s iron ore assets:

“A so-called streaming transaction would allow CIC, owned by the government of the world’s biggest iron-ore importer, to profit from a recovery in commodity prices without bearing all the operational risk associated with owning mines. Vale, which has said it will consider the sale of $10 billion of its best assets by the end of next year, would get immediate cash while staying in charge of valuable assets.”

Hit by its first annual loss since 1997, the Rio de Janeiro-based company said in February it wants to reduce its net debt to $15 billion within 18 months and would look at selling core assets to do it. The Samarco dam collapse in November last year, which killed 19 people and became Brazil’s worst environmental disaster, is also weighing down the company as the operation  remains suspended.

The impact of a Vale–China deal on the iron ore price could be negative as these deals are usually done at a deep discount to ruling prices and the long-term nature of any agreement could also dampen the outlook for the steelmaking raw material.

Iron ore prices have defied skeptics and continues to trade above $60 a tonne on the back of record-breaking imports by China this year. Cargoes headed to China could top 1 billion tonnes this year, representing some three-quarters of the seaborne trade, as domestic production continues to shrink.

Streaming deals are common in the precious metals industry, often when gold or silver byproducts of copper mining are sold forward. Vale has an agreement with Silver Wheaton (NYSE, TSX:SLW) regarding its Salobo copper mine in Brazil. Earlier this month Vale and Silver Wheaton tweaked the deal, so that the portion gold sold to Silver Wheaton rises to 75 percent from 50 percent. Vale will receive an upfront payment of $800 million.