Anglo shows off Minas-Rio, but payoff is remote

Anglo American showcased its most controversial project this week, the $8.4-billion (about R99-billion) iron ore mine Minas-Rio in Brazil, just when its seventh-biggest shareholder, Investec, published a report saying Anglo should exit the iron ore business altogether.

When Cynthia Carroll made the decision to start the Minas-Rio project in 2007, iron ore prices were on the up, as it looked like China could not get enough to build its rapidly swelling cities.

By 2010, with iron ore prices up to $180 a ton, it seemed a savvy move. But today, it is a different story as iron ore prices have slumped to about $50 a ton.

Minas-Rio, Carroll's dream project before she was forced out of Anglo in 2013, has turned into a nightmare for the company: licensing problems, construction challenges and navigating the many political and social challenges in Brazil have pushed the cost to $8.4-billion, more than double the initial $3.6-billion budget.

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Anglo's shareholders also had to stomach two big write-downs on the project, the latest one of $3.5-billion put through by Carroll's replacement, Mark Cutifani, this year. This made it one of the priciest projects to be built in recent years, and at the low iron ore prices it is unclear when shareholders will receive a return.

Rough calculations show it could take Anglo more than 40 years (the life of the mine is 45 years) to pay back the money spent on Minas-Rio at today's iron ore prices.

Minas-Rio was Carroll's baby, and it is not clear that Cutifani shares her sentiment. This means that calls from certain shareholders for Anglo to exit iron ore, including its South African mines held by Kumba, might not fall on deaf ears.

In a report this week, Investec analysts said Anglo could raise as much as $4.66-billion by selling its iron ore assets, allowing it to focus on diamonds and platinum. "A disposal of the entire iron ore portfolio would be a game-changing transaction, strengthening the balance sheet, reducing the risk profile of the group and potentially enabling a substantial rerating," Investec said.

Asked this week if Anglo would consider taking on a partner at Minas-Rio, Anglo iron ore CEO Paulo Castellari said the company would always consider viable partners. "Right now, we need to focus on the ramp-up of Minas-Rio, and get some returns back to shareholders," he said.

This week, Anglo took Business Times and other media to visit Minas-Rio, to provide a sense of how complex and large it is. The project includes three phases: the mine in Minas Gerais state; a 529km pipeline across 33 municipalities; and a designated iron ore port close to Rio de Janeiro.

It is a project that traverses the rural Brazilian landscape, requiring hours of travel on buses and planes, and which involved more than twomillion people. The soil that was moved could fill Wembley Stadium 32 times.

Almost 1000m above sea level is the central Minas-Rio site. Mining has started and 1.2million tons of iron ore has been mined in the past six months. Anglo hopes to mine up to 14million tons this year. The ramp-up will take about 18 to 20 months, at which point about 26.5million tons will be produced from the operation.

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Anglo's James Wyatt-Tilby was instructed to press the "red button" to celebrate the new Minas-Rio mine, which sparked a blast and cloud of dust in the distance.

"This blast is in celebration of the best mine in the world that we are building here," said Anglo's Rodrigo Vilela.

Iron ore is Brazil's largest foreign exchange earner and the country has felt the impact of lower prices. From 2000 to 2012, Brazil was boasting growth rates of about 5%, but lower commodity prices and big corruption scandals such as the Petrobras saga have dampened spirits andaffected growth, which is expected to be as low as 1.8% this year.

There is also a "wait and see" attitude by international investors as political and regulatory uncertainty plagues Brazil.

The Minas-Rio project has been one of the most significant private investments in the economy in recent years and has been welcomed by many. The resource has the highest iron content, at 68%, in the world. Anglo believes this will give it a price premium. "We are giving customers more bang for their buck," said Anglo Brazil iron ore director Pedro Borrego.

The most challenging part of the project, said Borrego, was building the longest slurry pipeline yet built. The most complex was trying to find out who to buy the land from and having to deal with 33 municipalities to get approval.

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From the dedicated iron ore port close to Rio de Janeiro, Anglo has dispatched its first 13 vessels carrying iron ore, mainly to China and Europe.

In the harbour, a 440m-long ship, which had docked two hours earlier, was being loaded. This would be the 14th iron ore shipment from Minas-Rio. As the ore pours into the hold, one wonders how many such ships will have to be filled to give shareholders their return.

The intention is to expand the project to produce 90million tons of ore a year. This is not in Anglo's short-term or even medium-term plans. But the project could be scaled up to produce 29million tons without spending any real money. If Anglo wants to expand beyond that, a second pipeline would have to be built.

"Bringing on a second pipeline will not be a walk in the park, but it won't be as big a mission as the first one, seeing that the social impact part of the project is behind us now," said Borrego, who moved to Brazil from South Africa 10 years ago.

And as commodity cycles move, there is, of course, the hope of an upturn in iron ore prices.

"So is Investec saying to buy, sell or hold?" asked Borrego. It is a hold. "Well, we are holding on to Minas-Rio too," he added with a determined smile.

The writer's trip to Brazil was sponsored by Anglo American