Anglo American Plc (AAL) will write down $4 billion from the value of its Minas-Rio iron-ore project in Brazil and raise spending for a sixth time after prior blowouts forced Chief Executive Officer Cynthia Carroll to quit.
Capital expenditure at Minas-Rio will reach $8.8 billion should Anglo use $600 million it has set aside for possible cost increases, the London-based company said today in a statement. That compares with an original estimate of $2.6 billion in 2008.
The $5.1 billion Minas-Rio acquisition was Carroll’s most expensive bet in the five years before she resigned on Oct. 26.
Anglo rose in London trading as analysts including JPMorgan Securities Plc’s Fraser Jamieson said the cost increase was less than expected and the writedown nearer the low end of estimates. Anglo rose 3 percent to 1,929.5 pence by the close in London.
Costs were “lower than the market feared,” London-based Jamieson wrote in a note to clients. “A $4 billion post-tax writedown is also toward the lower end of expectations.”
Shareholders in mining companies such as Anglo, which lost almost half its value in the past two years, have fallen victim to a rush of acquisitions as commodity prices rallied in 2008 and 2011, and then asset prices slumped. Rio Tinto Group (RIO) CEO Tom Albanese quit Jan. 17 after unveiling $14 billion of writedowns, partly after its $38 billion purchase of Alcan Inc. in 2007.
Anglo today said spending rose because of additional land and license costs, inflation in the construction industry and delays in shipping the first ore until the end of 2014. Its main challenges are access to land to build a pipeline to carry ore, and regulations, Carroll said today on a conference call.
Three licensing injunctions against Anglo have been lifted and the company will begin output at the end of 2014, she said.
“We continue to be confident of the medium and long term attractiveness and strategic positioning of Minas-Rio and we remain committed to the project,” said Carroll, who will be replaced by AngloGold Ashanti Ltd. (AU:US) CEO Mark Cutifani in April.
Jamieson, who said Anglo’s writedown would amount to about $5 billion on a pretax basis compared with JPMorgan’s estimate of about $6 billion, expects the figure to increase further.
“The market will still take a cautious view on the deliverability of the project to the latest schedule,” he said.
Success depends on land access being resolved by the end of March, mine “pre-stripping” starting in April, completion of a tailings dam by the end of May, securing operating licences in 2014, and no further injunctions against the project, he said.
Carroll was criticized for overpaying for Minas-Rio, bought in 2008 as commodities neared their peak, after repeated time and budget overruns. Anglo last raised its expenses estimate for the development in November, to $8 billion from $5.8 billion.
Anglo paid companies controlled by Brazilian billionaire Eike Batista $5.1 billion in two transactions in 2007 and 2008 for the mine. The impairment charge will be recorded as of Dec. 31, 2012, on a post-tax basis, Anglo said in today’s statement.
The mine is forecast to generate $2.5 billion of earnings before interest, tax, depreciation and amortization with 26.5 million metric tons of output, given a price of $120 a ton, or about $3 billion at a price of $150 a ton, Carroll said.
Anglo initially planned to spend $2.6 billion completing the open-pit mine, an ore-processing plant, the terminal and a 330-mile (525-kilometer) pipeline to carry slurry to the coast.
The company has said the project, which spans the eastern Brazilian states of Minas Gerais and Rio de Janeiro, would boost its total iron-ore production by at least 55 percent.
Anglo’s fourth-quarter iron-ore output declined because of strikes in South Africa, it said Jan. 25. Output at its Kumba Iron Ore (KIO) unit dropped by 19 percent to 9 million tons, mainly because of a walkout at the company’s Sishen mine. Platinum output also slid, while coal and copper production expanded.
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