JOHANNESBURG (miningweekly.com) – In June, Brazilian diversified mining major Vale, the world’s second-biggest mining company by market capitalisation, reaffirmed that it is set to make major investments in Africa by 2016.
“Our current investment proposal in Africa is to expend more than $12-billion over the next five years, subject to board approval,” Vale Zambia exploration manager Ian Hart told the recent first Zambian International Mining and Energy Conference and Exhibition, in Lusaka.
The peak year in this programme will be 2012, which should see the company invest $3.3-billion in the continent. As of April this year, Vale’s investment in the continent totalled $2.5-billion, reported the Financial Times.
Back in October, then Vale CEO Roger Agnelli proclaimed in London: “I am falling in love with Africa.” He added that the continent was second only to Brazil in terms of iron-ore production potential. “Africa will be a completely different continent in five to ten years.”
Not that Vale is interested only in iron-ore. Earlier that same month, it was announced that Vale and its 50:50 joint venture (JV) partner in the Konkola North copper mine, in Zambia, South Africa’s African Rainbow Minerals (ARM), would jointly invest $1-billion in the operation over the following three to five years.
In between these announcements, and in New York, Agnelli told reporters: “[The] discovery of new world-class deposits is increasingly dependent on Africa. Africa will be very big in 10 to 15 years.” Agnelli was in New York for the ‘Vale Day 2010’ briefing at the New York Stock Exchange (NYSE). In his presentation, Agnelli stated that one of the four elements in its strategy of delivering strong and steady growth and value was developing an asset base in Africa. (The other three elements were a focus on organic growth, “massive investment” in developing world-class assets facilitated by the expansion of the company’s own infrastructure and improving its competitiveness in the Asian market.)
Regarding Africa, he affirmed that the continent was the new mining frontier but warned that the days of “easy” discoveries were over. “The discovery of new world-class deposits is increasingly dependent on Africa,” he stated. “Vale is taking steps to build a large African asset base.”
There are both positive and negative stimuli to Vale’s interest in Africa. On the negative side, elsewhere there are declining grades and increasing stripping ratios, environmental licensing restrictions which cause delays, higher taxes and natural resources nationalism which discourage investment. On the positive side, there is the ever-rising demand of the Asian markets.
Agnelli highlighted that China’s urbanisation rate last year was the same as South Korea’s in the early 1970s and Brazil’s in the mid-1950s. In 2005, China had 41 000 km of highways; in 2009, this had risen to 65 000 km and, by 2020, they are expected to total 100 000 km. Likewise, China’s railway track totalled 75 437 km in 2005, 86 000 km in 2009 and should reach 120 000 km in 2020. The country had 140 airports in 2005, 166 in 2009 and is forecast to have 244 in 2020.
Moreover, although the Chinese auto- motive industry is now bigger than that of the US, in 2008, the Asian country had only 36 cars per thousand people. The figure for the US in 2002 was 481 cars per thousand people. (Also in 2002, Western Europe had 464, Japan 428, South Korea 205, Russia 132, Brazil 120 and Mexico 107, while the global average was 95 cars per thousand people.)
And then there is India. “Indian energy and logistics infrastructure is inadequate to meet its growth aspirations,” pointed out Agnelli. “The Indian government intends to double infrastructure investment to $1-trillion in the period 2012 to 2017 from $500-billion in 2007 to 2011.”
CHANGE AND CONTINUITY
Of course, Agnelli is no longer Vale’s CEO. During May, he was replaced by Murilo Pinto de Oliveira Ferreira. There is no doubt that there will be a significant change in leadership style at Vale.
According to the Brazilian business journal Istoé Dinheiro, Agnelli had an “imperial style” and did not like being contradicted, personalised Vale’s results and, as a result of his background in finance, controlled costs in the company and focused on quarterly results.
Ferreira, in contrast, is said to be more discrete and to see no problems in having people disagree with him, to be less egotistical, to share the credit for achievements with his team and to have a focus on long-term results, aligned with the interest of all the shareholders. He told the Brazilian magazine Exame that “we must not be afraid of bad news” when it asked him about a comment he had made, on becoming CEO, that his first task was to “destress the company and free it from the culture of fear”.
Ferreira originally joined Vale in 1998, became head of Vale Inco (now Vale Canada) in 2007 but resigned from the group in 2008, officially, for health reasons, but it has been reported that the real reason was that he had had a row with Agnelli: Ferreira apparently disagreed with Agnelli’s ultimately unsuccess- ful plan to buy Xstrata. (Istoé Dinheiro asked Ferreira if this was the case; his reply was: “I left a little after this episode. I was very tired. I had taken part in various very demanding projects at Vale. It was a period of opening new doors.”)
Canadian United Steel Workers Union president Leo Gerard, speaking to Exame, has described Ferreira as “very accessible and always ready to listen to the concerns of the union”. “We had many constructive conversations.” In contrast, during “25 years in the union, I never encountered an executive as arrogant as Agnelli”. (Of course, it should not be forgotten that it was under Agnelli’s leadership that Vale rose to be the world’s number two mining group.)
That there will be a lot of continuity between the Agnelli and Ferreira eras has been made clear by the fact that the latter has replaced only one of the group’s directors, confirming all the others in their posts. Ferreira has made it clear that there will be no significant changes in the company’s strategy, although refinements are always being made.
He confirmed that the company would maintain its plans to invest $24-billion in Brazil and beyond this year. “We are going to accelerate our investments in the second semester,” he said.
Asked by Exame if the Brazilian government interfered more than other governments, Ferreira asserted: “I guarantee it does not. This [assumption] is a big mistake of Brazilians. The pressure to invest in steel is present in the majority of countries which possess natural resources.” He cited cases of pressure exerted on Inco (before it was bought by Vale) by Canadian authorities and on Alcan by Australian authorities.
That there has been no change in the company’s world view since Agnelli’s October presentation at the NYSE has also been confirmed. “We are living [through] a phenomenon of global urbanisation,” asserted Vale marketing, sales and strategy director José Carlos Martins in mid-June. “It has a focus in China, but it is occurring on a global scale. The cycle is long – more than we can see. They are talking about a supercycle. Sometimes, I begin to think about a ‘forever cycle’. I think we are living [through] a phenomenon similar to the industrial revolution.”
Martins’ comments were bracketed by others by the new Vale CEO. In late May, Ferreira affirmed that the “Chinese market is going to continue to be a strong market, [and] Japan is going to make an enormous effort”, while, in late June, he stated: “Chinese demand will return to growth by the end of the year.”
This continuity is also clearly visible with regard to Africa. “We have a lot of interest in Mozambique, Guinea, Zambia, Malawi, Congo and Liberia,” Ferreira told the Valor Econômico newspaper. And, while the Brazilian government may not interfere in Vale’s decisions, it does no harm that Brasília supports the group’s operations and activities in Africa. In his interview with Valor Econômico, Ferreira noted that Brazilian President Dilma Rousseff “viewed very positively our involvement in iron-ore in Brazil and in Africa”.
The south-east African country is currently the site of Vale’s biggest operation in Africa so far – the roughly $1.66-billion Moatize coal project. This is, in fact, Vale’s biggest coal project in the world, and started mining operations on May 8. The first coal was shipped from the mine in early August. It is expected to produce about 1.5-million tons of coal this year. Moatize will have a nominal annual production capacity of 11-million tons, divided into 8,5-milion tons of metallurgical coal and 2,5-million tons of thermal coal.
Vale expects to make follow-up investments of $4-billion in expanding Moatize and constructing and upgrading railways and port facilities to export its coal. A railway line will be built from Moatize to Nacala and a coal export terminal constructed at the latter (forecast for completion in 2014). (The Nacala railway will complement, and overcome, the constraints on the existing 600 km railway from Moatize to Beira.) Later, Moatize’s production capacity will be expanded by 100% to 22-million tons annually.
In addition to these investments, Vale is planning to set up a coal-to-diesel fuel plant at Moatize. The economic viability study for this project is expected to be finished within a few months. It is hoped that the plant will produce up to 300-million litres of diesel fuel annually, of which no more than half will be consumed by Vale, with the rest to be supplied to the Mozambique market. The technology for this plant is being developed by Vale in cooperation with US and Portuguese partners.
Further, the miner has invested more than $90-million in social projects in the Moatize region. These included the refurbishment of the Tete provincial hospital, the Moatize health centre and the Moatize Intermediate Institute of Geology and Mines, as well as the resettling of 1 300 families.
In early July, Mozambican national director of mines Eduardo Alexandre told reporters in Maputo that Vale was one of a number of companies exploring for coal in the Maniamba basin, which lies under the northern province of Niassa, and which could contain coal resources on the same scale as the Zambeze basin (in which the Moatize coalfield lies).
Vale, he said, was likely to present an application for a new coal project in the Maniamba basin in 2013.
The group is also pursuing a phosphates project in Mozambique, at Evate, some 65 Km from Nacala, in Nampula province. Vale reports that it contains three types of phosphates – 6-million tons of high-grade sands, 54-million tons of low-grade sands and 208-million tons of hard rock. The company points out that the deposit is strategically located to serve the markets of South and South-East Asia.
Alexandre has stated that Vale would probably submit a feasibility study for this project next year. “We have a very interesting phosphates project in Nampula, which will be implemented by the Vale company, whose final product will be fertilisers,” he stated. “In terms of its size, it will be a project as big as the Tete coal [project].”
Vale is also looking for natural gas in Mozambique. In 2009, the group signed a cooperation agreement with Mozambique’s State-owned oil company, Empresa Nacional de Hidro-carbonetas (ENH), to jointly explore for oil and gas, and is now involved in exploration in the Rovuma basin in the north of Mozambique, in cooperation with international partners as well as ENH. Significant dis-coveries have been made – reportedly, more than ten- million cubic feet of natural gas.
ZAMBIA, THE DRC, MALAWI AND SA
As mentioned, Vale’s operations in Zambia and the Democratic Republic of the Congo (DRC) take the form of JV with ARM. This JV, Teal Exploration & Mining, encompasses the Konkola North copper mine and the Kalumines copper project, in the DRC.
Konkola North is currently under development and the two JV partners will jointly invest $400-million into the project over the next two years, rising to $1-billion in five years from now. The mine is scheduled to start production in 2013 and will have an initial output of some 45 000 t of copper, reaching full production capacity of about 100 000 t/y in 2015.
Kalumines is currently subject to a feasibility study.
Regarding Malawi, in September 2010, Vale bought 51% of the equity of the Socie-dade de Desenvolvimento do Corredor do Norte (SDCN). In turn, the SDCN owns 51% of Mozambican company Corredor do Norte (CDN) and of Central East African Railways (CEAR). CEAR operates the entire 797 km Malawi railway system, while CDN has the concession to operate the 872 km of railway from Entrelagos, in Niassa province, to Nacala.
The CEAR and CDN networks are linked and close to Moatize, and CEAR is connected to Zambia Railways, so Vale believes that these lines will serve to export copper from Konkola North, as well as coal from Moatize and phosphates from Evate. Vale, which is a major railway operator in Brazil, is also interested in other freight traffic between Zambia, Malawi and Mozambique.
In South Africa, Vale made a $1.1-billion bid for copper and cobalt miner Metorex, but terminated its offer when Chinese group Jinchuan made a $1.32-billion bid for the South African company. One consequence for Vale is that the group will now find it difficult to meet its target of producing one- million tons of copper in 2015. On the other hand, the company has much bigger fish to fry than Metorex.
GUINEA AND LIBERIA
For Vale, the Simandou iron-ore project, in Guinea, “is a very important initiative”, Ferreira told Valor Econômico. “It is a gigantic project.” The company considers that, with its Siman- dou project and its projects in the Carajás region of Brazil, it now has the “best iron-ore growth platform in the world”.
Vale has concluded a $2.5-billion deal to invest blocks one and two of Simandou as well as in a related, smaller, iron-ore project, Zogota. This deal, once fully implemented, will give Vale control of Simandou 1, 2 and Zogota. Ferreria reported that Vale had so far invested $500- million into Simandou and Zogota. Payment of the remaining $2-billion “depends on a series of events which will take place in the next [few] years”. In other words, the acquisition is being done on a phased basis.
Simandou is composed of four blocks, all of which were originally held by Rio Tinto, but that company was stripped of blocks one and two a few years ago. At the end of 2008, these were secured by a company called BSG Resources. BSG subsequently concluded the deal to sell a reported 51% of the project to Vale.
(Earlier this year, Rio Tinto reached an agreement with the Guinean government, securing its title to Simandou blocks three and four. These it will develop in a JV with the Aluminium Corporation of China – better known as Chalco – and a sub- sidiary of Rio Tinto’s largest single shareholder, Chinalco. The Guinean government will have the right to take a 35% share in this JV.)
“Part of the project, Zogota, is now under way,” highlighted Ferreira. “We have important developments [that are] moving forward, such as earthworks.” Zogota should start production next year with an initial output of one-million tons, ramping up to 15-million tons a year. Simandou blocks one and two should reach an annual pro- duction of 50-million tons. Because Vale and Rio Tinto/Chalco will both be undertaking large-scale iron-ore mining in close proximity and needing to transport their production to port, he says: “We, Vale, is expect- ing meetings with government, a full conversation about the diverse implications [of this situation] – in logistics, in cooper- ation with the community [and with] social responsibility.”
Vale is currently planning to export Simandou iron-ore along a new railway to be built through Liberia to a new iron-ore terminal on the coast (Simandou is closer to the Liberian coast than to the Guinean coast). However, Vale is also upgrading – as part of its deal with the Guinea government – the 660 km Trans-Guinea Railway, which runs from the capital, Conakry, to Kankan, not far from Simandou. This will be used for passenger and light freight transport, and not for iron-ore.
When asked if the Guinea government also wanted a 35% share in Vale’s project, Ferreira responded: “We have never been informed of such a thing. Vale does not have any correspondence which deals with this subject.”
Referring to his group’s African projects, in general, Ferreira told Valor Econômico: “I am very happy to participate in all these projects which support the creation of jobs and opportunities to reduce inequality.”