Saudi Arabia’s $2.6bn Vale deal opens new doors for the mining sector

July 31, 2023 (MLN): A $2.6 billion deal announced last week has set the stage for a potential landmark shift in the metal and mining investment landscape: the arrival of Saudi Arabia as a pivotal player, as Bloomberg reported.

The agreement with Vale SA gives the kingdom a 10% slice in one of the world’s crucial suppliers of nickel and copper, essential metals needed to decarbonize.

It has also held other talks, including with Barrick Gold Corp. about investing in a big Pakistan copper mine, according to people familiar with the matter.

Speaking privately, executives at top miners said the value of Thursday’s deal made clear that the Saudis are ready to splash the cash around, it added.

The move comes as the question of who controls the commodities needed to both sustain and decarbonize the world’s economies has turned into a global flashpoint, jumping to the top of agendas in the US and Europe.

China has for years been the dominant buyer and a key source of funding, as it sought to secure supply for its rapid industrialization.

But as tensions with the West have mounted, the mining industry is now facing increased pressure to look elsewhere.

Saudi Arabia is seeking to take minority stakes in global mining assets that will over time help provide access to supplies of strategic minerals.

The country also is looking to build a metals-processing industry that could in turn make it more attractive for international miners to exploit its mineral deposits, a central pillar of Saudi efforts to diversify the economy away from oil.

The kingdom has invested heavily in industrial and financial assets and even turned the world of sport upside down by essentially buying the game of professional golf and piling into soccer.

However, the Vale deal announced last week is its first major foray into mining.

Manara Minerals, a new venture between the kingdom’s sovereign wealth fund and state mining company, will get a stake in Vale’s base metals business, giving Saudi Arabia an interest in mines from Indonesia to Canada producing copper, nickel and other industrial metals.

For western producers, the kingdom offers access to deep pools of capital, which are appealing as Chinese funds become less politically palatable, but also as some institutional investors have turned less comfortable with mining over environmental concerns.

Investors from the region, Qatar is already a major backer of Glencore Plc, are now likely to become one of the most important financiers for the capital-hungry sector, according to serial mine builder Robert Friedland, who spent the last few years developing one of the world’s biggest copper operations, in the Democratic Republic of Congo, with the help of Chinese funds.

“Now, probably, the largest supply of capital to the mining industry will come from the Middle East,” he said in an interview last month.

But Saudi Arabia offers something else beyond cold cash: political backing for companies looking to expand into the Muslim world as deposits in more traditional jurisdictions are depleted.

Canada’s Barrick has been in talks with the Public Investment Fund about a potential stake in its Reko Diq copper project in Pakistan, which is a relatively untouched frontier for the international mining industry, according to people familiar with the matter.

Bringing the Saudis on board would not only ease Barrick’s funding burden but also introduce a partner that has significant political influence in Pakistan, the people said.

Saudi Arabia’s deep pockets may also present some challenges for the biggest producers who are looking for deals of their own.

Keen to get more exposure to copper and nickel, miners have started writing the biggest checks in more than a decade.

BHP Group and Rio Tinto Group, the two largest, have just completed multi-billion dollar deals to grow in copper, while Glencore Plc tried to buy Teck Resources Ltd.

For years, the big producers have found themselves repeatedly outbid by Chinese companies when it comes to buying mines.

China’s state-owned metal and mining companies have been willing to pay valuations that Western firms simply couldn’t match.

Saudi Arabia now seems willing to do the same, potentially putting some deals beyond the reach of the industry’s traditional buyers.

Executives at two of the biggest mining companies, which have spent years assessing base metal assets such as those owned by Vale, said privately that they were surprised by the price tag in last week’s deal, which valued the unit at $26bn (RBC Capital Markets said it was worth about $21bn.)

Still, unlike Chinese companies, Saudi Arabia is currently more interested in securing stakes, and guaranteeing the future supply of critical minerals, rather than buying outright and then operating the assets.

Saudi Arabia set down a marker earlier this year when it announced the new firm to invest in mining assets globally, with $3.2bn for initial investments.

The country holds an annual mining conference, which this year featured the CEO of the world’s biggest mining company, BHP’s Mike Henry, as well as the chairman of no. 2 producer Rio Tinto, a major step up from past speakers.

CEOs from other top miners are expected to attend next year.

For mining companies looking for funds, the US and Canadian governments’ recent crackdown on Chinese investment in key metals companies has changed the investment landscape.

That has given an opening to Middle Eastern countries like Saudi Arabia to fill the gap.

“The American government has an ‘ABC’ policy: Anything But China. So the American government instead goes to rulers in the Middle East and says, “You should be giving the African people an alternative for financing mines in Africa. Recycle some of those petro-dollars.”

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