UPDATE 5-Vale to scale back investment as global economy bites

Mon Dec 3, 2012 6:03pm EST

* Vale plans $16.3 bln 2013 capex, 24 pct less than 2012

* Company may sell Norsk Hydro stake, non-core assets

* Costs jump at Amazon iron ore, Canada nickel mines

* May sell 50-70 pct of VLI SA rail, port firm - CEO

By Jeb Blount

RIO DE JANEIRO, Dec 3 (Reuters) - Brazil's Vale SA , the world's second-largest mining company, cut estimated 2013 capital spending by 24 percent after a global slowdown and a drop in iron ore prices led the company to rethink expansion.

The retrenchment comes after sluggish growth in the United States, China and Europe diminished demand for metals and weighed on the price of iron ore, Vale's main product.

Iron ore , a key ingredient in steel, fell to a three-year low in September, and is currently hovering around $115 a tonne. Vale forecasts a $110-$140 a tonne range in the coming year.

Vale will invest $16.3 billion in 2013, down from the $21.4 billion budgeted this year for new projects, research and development and to maintain existing mines and plants, according to a regulatory filing on Monday.

"The outlook for slower expansion of global demand for minerals and metals in the medium term requires rigid discipline in the allocation of capital and greater focus in maximizing efficiency and reducing costs," the company said in the statement.

Vale's 2013 investment plan is the smallest since 2010. Among cuts, Vale confirmed the removal of its Simandou iron ore mine in Guinea, and the Samarco IV pellet plant with Australia's BHP Billiton Plc in Brazil from the list of active projects.

BHP and Vale each own half of the Samarco mine, slurry pipeline, pellet production and port project.

The Lubambe copper mine in Zambia was removed from the project list after output successfully started, Vale said. The mine is a joint venture with African Rainbow Minerals and Zambia Consolidated Copper Mines Ltd.

Vale is also considering selling its 22 percent stake in Norwegian aluminum group Norsk Hydro, Chief Financial Officer Lucianao Siani said.

Vale obtained the stake when it sold its aluminum business to Norsk in 2010. The agreement requires Vale to hold the stock until February 2013, although the company is eager to divest non-core assets.

"Vale's saying 'we're an iron ore company, this is not iron ore (and) we've got enough trouble in iron ore right now,'" an analyst said. "(The Hydro stake sale) was just a way to get the deal done and monetize it."

Vale, which is Brazil's largest rail and port operator, may also sell 50 percent to 70 percent of its new logistics company VLI SA, far more than the 33 percent originally planned, Chief Executive Murilo Ferreira said. VLI will operate in the non-mining-related general cargo business.

Some analysts said the cuts and planned asset sales failed to go far enough.

BHP 'GOES FURTHER'

"It would be more significant if there were significant changes to capex on core projects, particularly in Brazil," said Wiktor Bielski, head of commodity research at VTB Capital in London.

BHP Billiton has halved capital spending over the next five years, a posture that offers better returns to shareholders, he said.

Vale is still concentrating on too many new mining projects and not looking for enough ways to increase output from existing assets, Bielski added.

"Vale should follow this business model," he said, referring to what he called BHP's more aggressive shedding of new, so-called greenfield projects and focus on older assets.

Vale, though, trumpeted a sharp tightening of financial discipline and a willingness to consider the sale of any and all assets that fail to provide an adequate return.

The era in which the company expanded in all directions is at an end, Ferreira told investors in New York.

"The super-cycle in mining is over," Ferreira said, referring to a decade-long boom led by growing Chinese demand.

"While there is still growth in the iron ore market, it will be slower," iron ore and strategy chief Jose Carlos Martins said at the same event.

IRON ORE FOCUS

Vale's cuts began earlier this year. Final 2012 spending is not expected to surpass $17.5 billion, 18 percent less than originally planned, the company said. Vale spent a record $18 billion in 2011, one-fourth less than the $24 billion initially budgeted for the year.

Since 2008, actual annual capital expenditure has been an average 18 percent below initial investment plans.

Vale plans to focus on iron ore, dedicating 47 percent of 2013 capital spending to the mineral. That is about the same percentage as budgeted in 2012 despite a 22 percent cut in overall spending on iron ore mines, processing and transport facilities and iron ore pellet plants.

Vale, the world's largest producer and exporter of the mineral, accounts for more than a quarter of the world's seaborne iron ore exports.

While the company is also a major producer of nickel, copper and fertilizers, it gets about 90 percent of its profit from iron ore.

The company's outlook for 2013 iron ore sales is down 1.9 percent to 306 million tonnes from the original 2012 estimate of 312 million tonnes.

Spending on coal projects next year is expected to rise to 10.6 percent of the total from 6.9 percent this year. Vale expects to sell 12.4 million tonnes of coal in 2013, a quarter less than its 2012 estimate.

Production is unlikely to pick up until 2014, Vale said.

KEY MINE COSTS RISE

The share of basic metals, where Vale has experienced difficulties with production and efficiency at nickel and copper projects, was raised to 23 percent of spending. The 2013 budget cut base metal spending by 18 percent, to $3.78 billion.

Vale expects to sell 260,000 tonnes of nickel in 2013, or 13 percent less than its estimate for 2012.

Under the 2013 investment plan, Vale expects to spend $10.1 billion, or 62 percent, on new projects; $1.1 billion, or 6.7 percent, on research and development; and $5.1 billion, or 31 percent, to maintain existing mines and facilities.

Vale said it needs less research into new mines and development of projects now that the world economy has slowed. Part of the cutbacks began earlier this year when Vale pulled engineers and other staff from the Simandou project in Guinea.

The need to increase efficiency was underlined by a surge in expected investment in two of the company's largest projects.

The plan to add 40 million tonnes a year of iron ore capacity from mines in the Carajas region of Brazil's Amazon rose to $3.48 billion, 17 percent more than the company estimated in October in its third-quarter earnings report.

Spending on the company's Long Harbor nickel and cobalt mine project on the Labrador coast of Canada's Newfoundland province rose 18 percent to $4.25 billion as a result of rising labor and engineering service costs.

Vale preferred shares, the company's most-traded class of stock, fell 0.87 percent to 36.38 reais on the Sao Paulo BM&FBovespa exchange, their first decline in three days.

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