For Vale, Anglo American a Shining Example of Cost Overruns

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Continued from Part One.

Vale already owns the S11 concession, for which it paid some $8 billion, and is planning to spend another $11.4 billion on infrastructure to reach full iron ore production, according to Reuters – an investment beyond the limits of some small states, let alone a single project for a mining company.

current steel prices - MetalMiner IndXThe phrase “putting eggs in one basket” springs to mind, but in Vale’s case the risk is not so much that iron ore demand for steelmaking will not be there to absorb the production, as the project will over-run on costs.

Just Look At Anglo

Anglo American, a highly experienced miner, if not a major iron ore producer, has faced permitting delays and massive cost overruns due to equipment and labor cost increases on its Minas-Rio iron ore project in Brazil.

Although part of the firm’s eye-watering $4 billion write-down of its book value is a reflection of the top of the market timing for the $5.5 billion purchase price of Minas-Rio (in two stages in 2007 and 2008), a large chunk has been down to delays and cost escalation in the industry.

It has taken Anglo years to secure the 300-odd permits required for the mine – a performance Vale will no doubt hope to improve upon with S11D, due to its depth of experience working in the province over the last thirty years. Cost escalation, though, will not go away anytime soon, with the twin draws of soccer’s World Cup next year and the Olympics in 2016 sucking labor and materials into major stadium and infrastructure projects.

Still it is good to see Vale sticking to its knitting and spending money in the mining sector, rather than trying to diversify into downstream operations like Rio’s Alcan purchase.

More often than not, firms that stick to what they know best generally prosper better than those that try to be all things to all men.

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