More headaches for Anglo at Minas-Rio

Skyrocketing costs are eating into the pocketbooks of miners across the industry and Anglo American (AAL-L, AAUK-Q) is no exception.

The company notified the markets today that capital expenditure for its 100%-owned Minas-Rio iron ore project in Brazil will likely come in at the upper end of the current range of analysts’ expectations, or no less than US$8 billion. That figure is about 40% higher than its previous estimate of US$5.75 billion.

Tony Robson of BMO Capital Markets in London equates an increase in cap-ex to the US$8-10 billion range with a US$1.76-3.32 per share cut in Anglo’s valuation.

Anglo says it is undertaking a cost review that will assess the impact of project delays “and the other disruptive challenges faced by the project, which include high cost inflation across the construction industry in Brazil.”

The Minas-Rio iron ore project will include open-pit mines and a beneficiation plant in Minas Gerais producing high-grade pellet feed. On completion of Phase 1, ore will be transported through a 525-kilometre slurry pipeline to the port of Açu.

Robson of BMO notes that the project “has been dogged by delays to its licensing arrangements and permits” and that while Anglo is forecasting production will start in the second half of 2014, he believes it will be closer to the first half of 2016. He also expects a further increase in capital costs to US$9 billion for Phase I of the project and estimates the value of Minas Rio has fallen from US$13.5 billion to US$7.1 billion.

Anglo noted that two of three injunctions against the project were successfully removed in September, which enabled the company to commence construction of the primary crusher and conveyor system at the mine site and to resume pre-stripping work. But a third injunction still remains in place. That injunction affects the construction of the electricity transmission line. The licence was awarded in March 2012 and Anglo says it continues to discuss the issue with the regulatory and governmental authorities.

Robson estimates Anglo’s earnings in 2012 will be US$2.16 per share and US$2.96 per share in 2013. “Anglo American has significant exposure to the turbulent South African market and is struggling to deliver some of its key growth opportunities within budget,” he says.

In other news, the company reported production increases across five of its seven commodities during the third quarter ended Sept. 30. Production from Kumba Iron Ore jumped 14% to a record 12.5 million tonnes due to faster than expected ramp up of its Kolomela mine. Kolomela is expected to produce at least 7 million tonnes this year. Its export metallurgical coal production rose 12% to 4.5 million tonnes and its export thermal coal production from South Africa climbed 10% to 4.6 million tonnes. Copper production jumped 12% to 157,300 tonnes due to the full ramp up at its Los Bronces expansion project and nickel product rose 38% to 9,000 tonnes with production from Barro Alto offsetting a lack of production from Loma de Niquel in Venezuela.

On the negative side of the ledger, Anglo reported flat platinum production of 649,000 oz, while equivalent refined platinum production fell 6% to 626,300 oz. Illegal industrial action was to blame for the loss of 42,000 oz. of equivalent refined platinum in the quarter. Diamond production also fell 31% to 6.4 million carats, largely in response to market conditions and a slope failure at Jwaneng.