Truckless $20 Billion Venture Seen Key to Vale Revival: Freight – by Juan Pablo Spinetto ( – April 2, 2013)

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, 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.

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.

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