Vale (
VALE
) saw some significant activity last week. While it had to cut its
output and export target from its Mozambique coal business, it also
received some good news. The federal environment authority in
Brazil granted permission to Vale to expand production at its
Salobo mine.
In August Vale said that it planned to produce 4.6 million
tonnes of coal from its Moatize mine in Mozambique but now the
target has been reduced to 2.6 million tonnes. The company said
that limited capacity on the railway line connecting the mine
with the Beira port was responsible for its decision.
Salobo is the second greenfield project being developed by Vale
in Brazil and has a nominal production capacity of 100,000 tonnes
of copper concentrate a year. Vale has been looking to diversify
away from iron ore for sometime now. The majority of its revenues
come from iron ore whose price has been very volatile in the last
few years. The Salobo project is an important step in that
direction.
See Full Analysis for Vale Here
Infrastructure Issues In Mozambique
Infrastructure bottlenecks are the topmost concern for coal
miners operating in Mozambique. Both the government and the private
sector have been executing various projects to expand and build new
railway lines and ports but infrastructure will take time to reach
satisfactory levels.
The Sena railway line links coal mines located in the central
Tete province to the Beira port from where coal is exported to
other countries. Production of coal has outstripped the carrying
capacity of this line and it needs to be upgraded. The upgrade has
been delayed for years now and is expected to be completed next
year. Once complete, the line will be able to carry 6.5 million
tonnes of coal per year from its present capacity of 2 million
tonnes. Vale will then upgrade its production and export levels to
4.9 million tonnes in 2013. Further capacity addition will
have to take place in future years because Vale plans to invest
heavily to increase the Moatize mine's annual production capacity
to 11 million tonnes. It will expand capacity beyond this only
after the completion of the Nacala railway and port project in
northern Mozambique which will allow it to export greater
quantities of coal.
Vale plans to start large-scale production of premium hard
coking coal by 2015 which is expected to provide higher margins.
However, the company first needs an efficient mine-rail-port system
to make this happen. Right now, revenues from Vale's coal business
are only a fraction of the total. At end of Q3 2012, operating
revenues from coal were $285 million out of a total of $12.76
billion.
Plans For Salobo
Vale plans a total investment of $2.5 billion at Salobo. The
expansion will be complete in the first half of 2014 at an expected
expenditure of $1.7 billion and increase the total production
capacity of copper concentrate to 200,000 tons a
year. Salobo has 1.1 billion tons of proven and probable
reserves, with an average grade of 0.69% of copper and 0.43 grams
of gold per tonne.
Copper revenues in 2012 by end of Q3 were $646 million out of
total base metal revenues of $2.3 billion. We expect this share to
go up in 2014 once additional production begins from Salobo.
We recently revised the
Trefis price estimate for Vale to $19
, which is in-line with its market price.
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