Brazil big blow for Anglo

2012-07-29 13:43

Johannesburg. – The Minas Rio iron ore project in Brazil – which would have brought Anglo American [JSE:AGL] in line with its competitors in terms of this important resource – has been put off for a year.

This is the third postponement for this enormous project.

Investors will be considerably more disappointed by this news than by the 46% decline in the group’s headline earnings compared with the first half of 2011.

On Friday the news and the poorer than expected interim results caused Anglo’s share price to fall by 4.87% to a closing price of R243.35.

On Thursday evening chief executive Cynthia Carroll had a meeting with Brazil’s President Dilma Rousseff to object to the delays.

In 2008 and 2009 the Minas Rio project cost $5.7bn when Carroll, less than a year after her appointment as chief executive, bought the project from Brazilian billionaire Ike Batista.

An estimated $5bn would be required to complete the project, but this amount later rose to $7bn.

The project involves mining an enormous iron-ore deposit in the mountains to the north-west of Rio de Janeiro, enriching it to 66% iron and then mixing it with water.

It will then be pumped through a pipeline about 520km to Brazil’s coastline, drained at the Acu harbour, which Anglo is constructing, and shipped. The total production cost will be less than $50/tonne, which makes it an exceptionally attractive project.

At the time, Carroll received great opposition to the project because of concern about Brazil’s infrastructure regulations.

The first iron ore was to have been shipped early this year.

Three years ago Carroll announced that the project would commence production only in 2013 and two years ago it was said that it would become operational only in late 2013.

But on Friday the announcement was made that Minas Rio would be put into operation only in the second half of 2014.

Meanwhile capital expenditure at Minas Rio has increased tremendously – to almost $10bn.

Such massive delays can be a deathblow to many projects because of the costs involved.

On Friday, an analyst who did not wish to be named said a one-year delay in a project such as this could incur enormous expense.

Apart from the inflation on the capital already consumed, it means that people have to be employed for a year longer to get the project operational, as well as the production which is deferred. This impacts the business’s capital flow and  structure which, in turn, accumulates interest payments.

He calculated that the project’s construction costs could now easily rise to $14bn – but Anglo declined to expand on the figure.

“To pay $14bn for a mine producing 26.5m tonnes of iron ore is definitely a waste of money,” said the analyst.

Carroll, who faced heavy criticism regarding the purchase because the deal was signed shortly before the resource markets crashed in August 2008, did her best on Friday to sweeten the news, but the London investor community was irritated and not at all impressed.

She explained that she had pointed out to President Rousseff that more than 50 mining projects in Brazil were being delayed owing to regulatory uncertainty.

Paulo Castellari, chief executive of Anglo’s iron ore unit, then explained that there were three serious problems.

These are a permit for the installation of a transmission line for electricity supply, environmental approval to build the processing plant as a cave had been discovered on the site of the  plant, and access to the land around the plant.

Approval had been obtained for the three issues, but then withdrawn or litigation had been instituted against the project owing to these processes. It has since been difficult to proceed, said Castellari.

* The writer holds shares in Anglo American.

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