Bloomberg News

Anglo American’s Minas Rio Cost May Rise 15% to $5.8 Billion

December 20, 2011

(Updates with analyst comment from fifth paragraph.)

Dec. 20 (Bloomberg) -- Anglo American Plc raised costs at the Minas Rio iron-ore project in Brazil for at least a fourth time to as much as $5.8 billion, more than double the figure planned when the company agreed to buy its largest development.

The producer, also digging for iron ore in South Africa, is seeking to contain the latest blowout in expenditure to 15 percent of the previous guidance of $5.03 billion, according to a statement released today by London-based Anglo American. The project continues to suffer from delays, the company said.

“Irregular issues, such as the discovery of caves at the beneficiation plant site which require specialized assessment, continue to cause delays to the work scheduling,” it said. Land access and permit holdups are also hindering progress.

Anglo bought the project in the state of Minas Gerais near the peak of the last commodity cycle in 2008, paying about $5.5 billion for the site and smaller assets. The company, which today reiterated the first ore would be shipped in the second half of 2013, originally planned to begin mining last year.

The cost increase “should be taken positively by the market” because it’s limited to an additional $800 million amid mining industry inflation, Charles Cooper, an analyst at Oriel Securities, said by e-mail.

Share Performance

Anglo gained 2.4 percent to 2,329 pence at the 4:30 p.m. close in London, outperforming the FTSE 350 Mining Index which rose 1.8 percent.

Anglo forecast $2.4 billion in capital expenditure in April 2007, an estimate that was pushed up to $2.7 billion and then to $3.8 billion by February 2010. It reported a possible further 20 percent increase by July of that year, followed by the figure of $5.03 billion in February 2011. The project will ship 26.5 million metric tons a year at peak.

“Capital cost inflation is a growing problem in the mining industry,” said Christopher LaFemina, an analyst at Jefferies & Co. “Higher capital costs are likely to lead to lower-than- expected returns on invested capital.”

Vale SA, the world’s biggest iron ore producer, said Nov. 28 it will start the $8.04 billion Carajas Serra Sul mine expansion in Brazil in 2016, two years behind schedule. It cited environmental licensing and cost pressures among reasons.

‘Disastrous’ Investment

Anglo American has made some “disastrous” investment decisions, BlackRock Inc.’s Evy Hambro said in London Dec. 7.

“There’s been wonderful examples of terrible investments by companies,” said Hambro, portfolio manager of BlackRock’s $16 billion World Mining Fund. “Anglo American is a classic case of that. A disastrous spate of investment decisions that they’ve been doing recently has proved disappointing for some.”

The BlackRock World Mining Trust, managed by Hambro, sold shares in Anglo earlier this year, according to an Aug. 1 filing. It trimmed its stake by 7.5 million shares, retaining 400,000, or 0.03 percent of Anglo’s outstanding stock, data compiled by Bloomberg show. BlackRock remains the largest shareholder in Anglo through funds not managed by Hambro.

Anglo today also said it commissioned the South African Kolomela iron ore development, to add 9 million tons of annual production, five months ahead of schedule.

--With assistance from Jesse Riseborough in London. Editors: Tony Barrett, Stephen Cunningham.

To contact the reporter on this story: Carli Lourens in Johannesburg at clourens@bloomberg.net

To contact the editor responsible for this story: Tony Barrett at tbarrett4@bloomberg.net


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