UPDATE 4-Vale seeks to sell weak mines, plants as profit plunges

Thu Oct 25, 2012 5:13pm EDT

* Brazil's Vale seeks buyers, partners for big projects
    * CFO sets deadline for improvement at nickel mines
    * Metals boom may be over; spending to fall, CFO says
    * Vale shares jump more than 5 pct on asset sales, cuts


    By Jeb Blount
    RIO DE JANEIRO, Oct 25 (Reuters) - Brazilian mining company
Vale SA plans to sell underperforming assets to control costs
and boost profit, executives said on Thursday, a day after
reporting weak earnings and halting work on a giant iron ore
mine in the West African nation of Guinea.
    Vale's  annual investment in new projects
will likely peak this year at $21 billion, Chief Financial
Officer Luciano Siani said on a conference call with analysts.
As the world economy slows, a 10-year boom driven by China's
hunger for raw materials may be over, he said.
    With many metals prices near three-year lows, Vale said a
decade of efforts to cut dependence on iron ore by expanding
into nickel, coal, copper and fertilizers could be ending.
Despite tens of billions of dollars of investment, only coal and
fertilizers have come close to meeting expectations.
    Assets that may be sold in whole or in part include nickel
mines in New Caledonia and Canada, steel mills and oil leases in
Brazil, and fertilizer mines and plants in North and South
America. Even iron ore assets such as the $5 billion Simandou
project in Guinea may be declared "non core."
    "We are not pursuing diversification per se any more, unless
it is a consequence of seeking world-class assets," Siani said.
"We now have more growth options than we need so it doesn't make
sense to keep expanding our growth potential."
    Shares of Vale, the world's No. 2 mining company, rose 5.6
percent to 36.20 reais in Sao Paulo trading, its biggest one-day
gain in more than six months.    
    
    
    With lower metals prices, Vale lacks the former cash bonanza
it used to compete with rivals such as Australia's BHP Billiton
Ltd and Rio Tinto Ltd , Siani said.
    Nor is Vale alone, BHP and Rio Tinto have put projects on
hold and are rethinking a frenzy of basic material takeovers and
new "greenfield" project announcements made in 2005 to 2007. At
the time, prices were soaring and Chinese demand was so strong
that miners couldn't keep up.
    "Most companies should take a large red pen to their project
pipeline," said Wiktor Bielski, global head of commodities
research at VTB Bank in London. "Anything that's a new project
and greenfield is not going to get built for a long time." 
    While Siani warned against expecting "big things" from asset
sales, he said tolerance for losses at several of Vale's nickel
projects is near an end. Vale got most of those assets in 2006
when it paid about $17 billion for Canada's Inco.
    Nickel is used to make steel rust resistant.
    "We have a clear idea of what assets we want to divest and
seek partners for, but this takes time to develop," he said.
    The $4 billion Goro mine on the French Pacific Island of New
Caledonia, expected to be the largest in the world, produced no
nickel in the previous quarter. It was supposed to be ramping up
toward 60,000 tonnes a year in 2009, three years ago.
    If Goro doesn't prove profitable by the first half of 2013,
Vale will not tolerate additional costs from the project, Siani
said. Vale's Japanese partners in Goro, Sumitomo and Mitsui,
reduced their stake in the project earlier today forcing Vale to
up its stake, according to Leonardo Correia and other analysts
at Barclays in Sao Paulo in a report Thursday. 
    
    HUNTING MARKET SHARE
    "With the benefit of hindsight, they wouldn't have invested
in the same projects," said Duncan Hobbs, a base metals analyst
with Macquarie in London. "What's possible on paper and what the
(nickel) corporations have promised have proved to be wildly
optimistic."
    But with metals prices depressed and mines with problems, it
may be hard to find buyers, Siani said.    
    He said one goal of asset sales and a company-wide
cost-control program is to give Vale the strength to claw back
iron ore market share from the Australians. 
    Delays in environmental licensing in Brazil and Australia's 
proximity to China, the largest iron ore market, have cut Vale's
share of the world iron ore market to a little more than a
quarter from more than a third a decade ago. Australia, once the
No. 2 producer iron ore, now has more than a third.
    Iron ore is needed to make the steel used to build
everything from ball-bearings and bridges to washing machines
and skyscrapers.
        
    IRON ORE RESET
    Iron ore , responsible for about 90 percent of
Vale's profit, averaged $112.12 a tonne in the quarter, 36
percent less than a year earlier. The price of iron ore fell to
a three-year low of $86.70 a tonne on Sept. 5.
    Lower prices drove a 66 percent decline in profit to $1.67
billion, Vale's worst performance in nearly three years, the Rio
de Janeiro-based company said late Wednesday.
    While iron ore rebounded on Thursday to $120 a tonne, a
three-month high, Vale expects 2013 average prices to be similar
to those today. The price could swing up to $150 a tonne only to
fall back below $100 a tonne, Jose Carlos Martins, Vale's iron
ore chief said Thursday.
    Investments will be focused on expansion of its Carajas
complex in Brazil's Amazon where the company is in the process
of adding about 100 tonnes a year of new capacity, or about 10
percent of current world iron ore exports.   

    INDUSTRY SHAKEOUT
    By increasing output, Vale will get more sales for each unit
of spending it takes to maintain mines, railways, ports and
other facilities. This reduces the impact of lower prices and
helps keep higher-cost producers out of the market.
    "Shake-outs in basic materials markets are usually long and
protracted," said Michelle Applebaum, founder and chief analyst
with Steel Market Intelligence in Chicago. "If you have high
fixed costs like Vale but you're the lowest cost producer
around, ramping up production makes sense." 
    The Carajas project is expected to deliver some ore to its
ports for as little as $15 a tonne CFO Siani said. That's 12.5
percent of the current spot price. Many Chinese producers have
costs above $100 a tonne.
    Still, times are so tough that at least one iron ore
project, is being put on hold. 
    The $1.3 billion Zogota mine, the first phase of the
Simandou project was to have started output by year end. Vale
said Wednesday that the mine's scope and timetable are under
review and gave no startup date.
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