RIO DE JANEIRO (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 (VALE5.SA) (VALE.N) 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.
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.
"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 skyscrapers and washing machines. China, the United States and Europe have slowed their production of such products.
Iron ore .IO62-CNI=SI, 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 September 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 at least 130 million tonnes a year of new capacity, or more than 10 percent of current world iron ore exports.
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.
Reporting by Jeb Blount, Reese Ewing and Sabrina Lorenzi; Editing by Gerald E. McCormick, Chizu Nomiyama and Sofina Mirza-Reid