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Truckless $20 Billion Venture Seen Key to Vale Revival: Freight

April 03, 2013

Truckless $20 Billion Venture Seen Key to Vale Revival

Part of the current rail infrastructure servicing Vale SA's Carajas mining complex in northern Brazil. Photographer: Mario Tama/Getty Images

Vale SA (VALE5) is replacing trucks with 23 miles of conveyor belts and building a second railway through the Amazon to cut costs and retake the title of world’s second- largest mining company by value from Rio Tinto Group (RIO).

Vale’s Serra Sul project, part of the Carajas mining complex in northern Brazil, is the industry’s most expensive project ever at almost $20 billion. It will also be the first major iron-ore venture to fully replace in-mine trucks with conveyor belts, according to the miner. The project, which has absorbed $1.8 billion in investment so far, will allow Vale to reduce mine-to-port costs at Carajas to about $15 per ton, half the company’s current operational cost.

Vale, the world’s third-largest miner by value, is seeking to recover ground in the seaborne iron-ore market that it has lost to Australian rivals since 2007. The Serra Sul project will aid Vale shares as it cut costs per ton by tapping richer grades with improved technology, said Jonathan Brandt, an equity analyst at HSBC Holdings Plc.

“It’s quite an impressive project,” Brandt, who visited the venture in September, said in an interview from New York. “It should substantially lower their average cost per ton.”

Brandt, the second-most-accurate Vale analyst on the Bloomberg Absolute Return Rank (VALE), estimates the company will be able to extract, process and deliver ore to the Ponta da Madeira port for export at $20 to $23 per ton once all costs are included. That would be among the cheapest iron-ore operations in the world, he said.

Diversification Failure

Vale needs the boost. Chief Executive Officer Murilo Ferreira is selling assets, freezing projects and focusing on the iron-ore business, which accounts for more than 90 percent of profits, after a bid to diversify into other metals and minerals wound up costing $5.66 billion in writedowns.

Vale stock has lost 25 percent in the past 12 months through yesterday, underperforming the 7 percent and 13 percent drops of Melbourne-based BHP Billiton Ltd. (BHP) and Rio Tinto in London, respectively. Brazil’s benchmark Bovespa index slid 16 percent in the period.

Vale rose 2.9 percent to 32.77 reais at 2:09 p.m. in Sao Paulo trading, the first gain in four days.

Brandt has a neutral recommendation on Vale shares on falling iron-ore prices, down 6.1 percent this year. Vale’s market value dropped below Rio Tinto’s in October for the first time in four years. The company is worth $3.4 billion less than its rival, according to data compiled by Bloomberg.

The Serra Sul project, which includes $8.1 billion in mine investments and $11.4 billion of railway and port spending, is being built in the southern corner of Carajas, the world’s largest iron-ore complex. The project will add 90 million metric tons of capacity, or about 8 percent of global annual exports, helping Vale secure its leadership.

Rain Forest

While Vale has already completed 41 percent of construction, the company said Feb. 27, the logistics associated with the project, including a 560-kilometer (348-mile) railway from the Amazon rain forest to the Ponta da Madeira port in the state of Maranhao, where the company will expand its terminal, still needs to be approved by the board. The company will finance the project with its own resources.

Vale operates about 10,000 kilometers of railroad network in Brazil to serve its mines and ship freight for third parties. Besides iron ore, the existing 892-kilometer Carajas railway also ships manganese, copper and coal and features the world’s largest train, made up of four locomotives and 330 cars, according to the company’s website. The railway transports about 330,000 metric tons of iron ore a day, Vale’s press office said yesterday.

First Time

Iron-ore output at the Brazilian company has grown 5.5 percent since 2007 amid aging mines and environmental licensing constraints, compared with a 37 percent increase for London- based Rio Tinto (RIO) and a 43 percent gain for BHP Billiton, the world’s largest mining company and third-largest iron-ore producer. Production slid 0.8 percent last year, reducing Vale’s lead over Rio Tinto to the narrowest in three years.

Serra Sul will use conveyor belts throughout the mine instead of 100 trucks to link the deposits to a plant that upgrades the ore. That will cut fuel consumption by an estimated 77 percent and reduce emissions by the equivalent of 75,000 small cars, according to Jamil Sebe, a project director at Vale.

“Truckless technology is already used in coal mines, but this is the first time that it’s used in iron-ore mining at this scale,” he said in e-mailed comments sent by the company’s press office.

Vale’s share of global iron-ore exports, which slumped to 23 percent this year from 32 percent in 2007, will probably bounce back to 25 percent to 26 percent once Serra Sul is in full operation, said Colin Hamilton, global head of commodities research at Macquarie Group Ltd. in London.

Proven Reserves

Vale has 7.38 billion metric tons of proven and probable iron-ore reserves at Carajas, enough to supply 10 years of imports to China, the world’s largest consumer of the main raw material used to make steel. The company expects to receive the final “important” permit for Serra Sul this month, Chief Financial Officer Luciano Siani said Jan. 29.

While Vale says Serra Sul, or S11D as it is sometimes called, will start at the end of 2016, it will take a further five or six years to reach full production, said Melinda Moore, a bulk-commodities analyst at Standard Bank Plc in London.

“S11D will most likely still be expanding into the next decade,” she said in e-mailed comments. “Vale’s so-called turnaround is very long-dated.”

The Carajas deposit, located in the Amazon forest of the Para state in northern Brazil, was discovered by geologists working for U.S. Steel Corp. (X) in 1967. After several years of disputes, Vale, then state-owned, took control of the project in 1977 by paying U.S. Steel $50 million in compensation.

HSBC’s Brandt agreed that the low-cost Serra Sul operation will help Vale claw back market share.

“It will help them in the second half of the decade,” he said. “This is what Vale needs to get right.”

To contact the reporter on this story: Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net.

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net.


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