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Minas-Rio weighs heavily on Anglo

Chantelle Benjamin

Besides the Brazil project's mounting costs, the company's platinum earnings are sharply down, writes Chantelle Benjamin.

A seemingly endless paper chase has delayed Anglo American's massive project in Brazil by two years. (Anglo American)

Anglo American's Minas-Rio mine in Brazil, referred to in investment circles as the world's most expensive iron ore mine, will be one of the main items on incoming Anglo American chief executive Mark Cutifani's to-do list.

Analysts are concerned that other Anglo American projects may be sidelined while the company focuses on bringing the costly mine into production. It has experienced one delay after another and was expected to begin operating in the second half of this year, but it is now expected to come on line only in 2015. Anglo's investment so far is estimated at $14-billion.

The mine was bought by former chief executive Cynthia Carroll for $6-billion in 2008 from Brazilian billionaire Eike Batista's MMX Mineracao e Metais SA. The initial project capex has been revised several times, increasing from $3.6-billion to the latest estimate by Anglo American of $8-billion, and the project is still in its first phase.

Minas-Rio is considered by many to have been a key factor in the souring of relationships between Carroll and the company's shareholders. Another was the poor performance of the company's platinum arm.

A mining analyst said this week that, even if Anglo American sold off portions of the Minas-Rio mine, it was doubtful that the company would recoup its losses. "It's unlikely they will ever get their money back," he said. "Anglo American has invested so much in capex that they appear to have no choice but to push on with the project and see the second and third phases to the end."

In November, SBG Securities estimated the cost per tonne of iron ore from Minas-Rio at $350, compared with the iron ore price of $120, although the iron ore price has improved slightly since then.

Construction activities
In all fairness, Minas-Rio is ­considered one of the world's largest ­mining projects, including the construction of a port in Acu, the installation of more than 200km of pipeline and infrastructure for the region. But mining experts say that, legal and construction issues aside, the project has been badly managed.

"The project is now two years behind schedule and Anglo expected to cover costs in the second phase, but it would be interesting to see if they break even in the third phase," the analyst said. "It's a massive property and it has potential, but Carroll paid a high price for it." He said the problems at the mine could be "easily fixed" with good leadership.

The development of the mine has been repeatedly delayed while Anglo American fought a seemingly endless paper chase since 2010 when it received its mining licence. In December, Anglo American announced that work "has continued to resolve a number of licensing challenges facing the project". Apart from permit delays, especially those required for work on the project to begin, the mine had three injunctions against it last year "affecting construction activities at the plant and the installation of an electricity transmission line and land access issues facing 525km of pipeline".

Two of the injunctions were removed in September last year, allowing construction to begin on the primary crusher and conveyor system at the mine site. And the third, which was delaying the installation of a 90km electricity transmission line, was removed in December. Efforts over access to land for the pipeline continue.

Anglo American's share price dropped 3.5% in November when it announced that it was undertaking a cost review of the mine. There will be an update on the project on February 15, when Anglo American releases its preliminary results.

The need to recoup some losses appears to have spurred on Anglo Amer­ican's sale of the Amapa iron ore mine, announced in January. It was part of the 2008 acquisition from Batista and was sold to former commodities trader Pramod Agarwai's Zamin Ferrous for an undisclosed sum.

Anglo American platinum's woes are also going to demand Cutifani's attention. On January 14, shares in the world's largest platinum producer dropped by 1.72% to R491.50 on the news that its headline earnings per share in the year ending December 2012 were expected to be between 491c and 628c, reversing a profit of 1365c reported for the year before.

The company also said it expects basic earnings for the period to include a loss of R463-million from the revaluation of some investments and a R6.606-billion write-down in the carrying value of ­projects and other assets not in use and considered not economically viable in the current market.

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