[miningmx.com] – ANGLO American will impair its Minas Rio iron ore venture by $4bn and set aside a $600m capital cost overrun contingency for the project – enough to send total capital expenditure to $8.8bn.
The write-down was widely expected and follows a number of high profile impairments of assets by most of the world’s diversified mining houses including BHP Billiton, Rio Tinto and Xstrata in the last 12 months.
In the case of Anglo American, however, the write-down is two-thirds the initial $6bn acquisition cost of Minas Rio, a project in Brazil, in 2007. At the time, Anglo attached a capital cost of $3.6bn to the project which was then escalated to $5.8bn in 2012.
At capital expenditure of $8.8bn, it means the Minas Rio project represents a total investment of $14bn by Anglo American which analysts have estimated was equal to a production cost of $350/t.
This would make Minas Rio among the most expensively mined iron ore in the world, athough on a life-of-mine cash cost basis, Anglo American said it would produce iron ore at $30/t. The iron ore price is currently trading at around $120 to $130/t which means Minas Rio will be highly cash generative when it does start production.
Cynthia Carroll, who is due to relinquish her post as CEO of Anglo American in April, declared her disappointment at the project overruns, but set down a fresh timeline for first iron ore production by the end of 2014.
“Despite the difficulties, we continue to be confident of the medium and long term attractiveness and strategic positioning of Minas-Rio and we remain committed to the project,” Carroll said in a statement.
Minas Rio was held up partly by a series of injunctions applied to the project by the Brazilian authorities the last of which – an injunction blocking the building of a large transmission line – was lifted in December.
Carroll said there were still hurdles to overcome, however, including completion of a pipeline that would assume a number of residual land access constraints be resolved by the end of March 2013.
Pre-stripping of the mine site was earmarked to begin by April provided geological setbacks related to nearby caves had been resolved, while at the beneficiation plant, a tailings dam had to be completed by May.
Carroll added that 2014 was a realistic target for first ore – up to a year earlier than some analysts had expected – provided the group “… did not encounter unexpected interventions, such as injunctions relating to licences”.
The write-down and new capital expenditure target factored in the creation of a risk contingency of $600m that Anglo American said would: “… accommodate a number of potential factors to achieve the FOOS [first ore on ship] date of the end of 2014”.
This included the potential for “… additional price escalation, productivity acceleration and finalisation of the extent of earth and civil works required on land that is yet to be accessed,” Anglo American said.
“Minas-Rio is a world class iron ore project of rare magnitude and quality and represents one of the world’s largest undeveloped resources,” said Carroll.
The published resource has increased more than fourfold since acquisition to 5.77 billion tonnes,” she said.
