The iron ore market could do with some good news – the spot price is down more than 20 percent this year. On the local front producers like Kumba have found themselves so battered by market sentiment, that they’ve fallen outside the Top 40 index. While BHP and Rio Tinto also find themselves under pressure. But unfortunately it’s suggested the pain for iron ore producers will keep on coming as an already oversupplied market will have an injection of further supply. Vale’s biggest project in Brazil is expected to come online ahead of its expected schedule, December next year. The company intends to control the speed at which it hits the market but the project will add 90 million metric tons of annual capacity to global supply. As the saying goes, how low can the price go? – Stuart Lowman
by Danielle Bochove and Juan Pablo Spinetto
(Bloomberg) — The world’s top iron-ore producer has some bad news for the oversupplied market: its biggest project is running ahead of schedule.
S11D, part of the Carajas mining complex in northern Brazil, is on track to beat a targeted December 2016 start date, Vale SA Chief Financial Officer Luciano Siani said in an interview Wednesday.
The project — the industry’s largest and, according to Vale, the most profitable — will add 90 million metric tons of annual capacity to global supply, although Vale intends to control the speed at which it hits the market, Siani, 45, said in Toronto, where he is holding meetings with investors and analysts.
Read also: Iron Ore tests fresh lows below $50, leads global commodities slump
“We will manage the ramp up in order to preserve the premium for this high grade ore,” he said.
While S11D coming on stream sooner than planned would be a boon for Vale’s debt-reduction ambitions, it looms as another strain on an iron-ore market buffeted by a series of expansions by Vale and its main rivals in Australia at a time of slowing Chinese growth.
The big three, including While BHP Billiton Ltd. and Rio Tinto Group, are seeking to navigate the aftermath of an iron-ore price collapse that was exacerbated by their own moves to push through projects and displace a string of new competitors. Rio de Janeiro-based Vale — which has been cutting costs and selling assets under Chief Executive Officer Murilo Ferreira– on Monday said it planned to reduce this year’s dividend to the lowest since 2006 amid slumping metal prices and the need to preserve cash.
Read also: Iron ore price plunge – Mining CEOs didn’t hear obvious message from China
Price Rout
Iron-ore prices are down 21 percent this year, heading for a third straight annual decline. Vale shares have lost 31 percent this year in local currency, in line with a selection of global peers tracked by Bloomberg.
Even if prices continue to fall, Vale is fully funded through 2015, although its 2016 needs will depend on prices, Siani said. He is optimistic that the $16.4 billion S11D mine and logistics project will be brought on stream without adding debt.
Vale is seeking $2 billion to $2.5 billion in financing for its Moatize coal project in Mozambique, in addition to a previously announced equity deal with Mitsui & Co. Talks are complex and an arrangement probably won’t be completed until the first quarter of 2016 rather than the fourth quarter of this year, as previously suggested by Vale’s CEO.
Once S11D is up and running, Vale intends to focus on deleveraging.
Read also: SA coal, iron ore exporters keep export taps open despite glut, price slump
Net debt rose to 3.6 times earnings before interest, taxes, depreciation and amortization in the second quarter from a ratio of 1.1 a year earlier, according to data compiled by Bloomberg. The company will continue to look to sell assets where it makes sense, such as parts of its shipping operations, but has no target for sales, Siani said.
IPO Shelved
One transaction that is “off the table” after prices tumbled is a proposed initial public offering of the company’s base metal assets, Siani said, adding that it would only go back to the IPO proposal if prices recovered.
The company, also the world’s biggest producer of nickel, wouldn’t consider selling its base metals operations outright or merging them with another major, he said: “Vale considers itself to be the natural owner of those assets.”
Glencore Talks
It is continuing to hold talks with Glencore Plc on ways to take advantage of operational synergies at some of their Canadian operations, he said.
One asset that may go on the market is its Carborough Downs coal mine in Queensland, Australia. “The vocation of Vale is to operate large assets,” he said. “We’re not in a hurry but, as usual, it may be worth more to someone else than to us.”
With all industrial commodities under pressure, the key for producers is China.
Read also: Vale, Glencore break off Canadian nickel deal talks
Vale is hopeful that a real-estate pickup in China will fuel demand for steel. But like nickel, iron ore’s outlook won’t be clear until excess inventory is absorbed, Siani said.
On the supply side, the iron-ore price rout will continue to put smaller, higher-cost producers out of business, meaning even a 1 percent to 1.5 percent increase in Chinese steel production would fuel enough demand for a healthy iron-ore market, he said.
The Brazilian miner won’t be participating in the consolidation, even at fire-sale prices, he said.
“Vale is very focused on finishing its investment program and then releasing capital in order to de-leverage the company and pay more dividends,” Siani said. “We don’t have an eye on M&A at this point in time.”
