More headaches for Anglo American

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

The company announced that capital expenditure for its 100%-owned Minas-Rio iron ore project in Brazil will likely come in at the upper end of analyst expectations, or no less than US$8 billion — which is 40% higher than the previous estimate of US$5.75 billion. 

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

Anglo says it is undertaking a cost review that would assess the impact of project delays “and 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. After its first phase, ore will be transported through a 525 km slurry pipeline to the port of Acu. 

Robson notes that the project “has been dogged by delays to its licensing arrangements and permits,” and while Anglo forecasts production will start in the second half of 2014, he expects it closer to the first half of 2016. He also expects an increase in capital costs to US$9 billion for the project’s first phase, and estimates that Minas Rio’s value has fallen from US$13.5 billion to US$7.1 billion.

Anglo notes that two of three injunctions against the project were removed in September, which enabled construction of the primary crusher and conveyor system and resumed pre-stripping. But a third injunction remains in place, which affects the construction of the electricity transmission line. The licence was awarded in March 2012, and Anglo says it’s discussing the issue with the regulatory and governmental authorities. 

Robson estimates that Anglo’s earnings will be US$2.16 per share in 2012 and US$2.96 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 in five of its seven commodities during the third quarter. Production from Kumba Iron Ore jumped 14% to a record 12.5 million tonnes due to a quick ramp-up at 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 was up 12% to 157,300 tonnes owing to the full ramp-up at its Los Bronces expansion project, and nickel production 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. 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.