Anglo ‘paid too much’ for Minas Rio

[] — Iron ore and platinum have enabled Anglo American to double its earnings, but cost increases at Minas Rio indicated that CEO Cynthia Carroll had overpaid for the controversial project.

Anglo declared a final dividend of 40 US cents or R2.8906 per share, bringing the dividend for the year to 65 US cents or R4.7215.

On Friday group chairperson John Parker said that 65c had been accepted by the board as Anglo’s benchmark for future dividends.

Additional cash would also be distributed, but the group’s $70bn growth programme over the next 10 years and $16bn over the next two years would receive preference.

This was Anglo’s first dividend policy statement after it suspended dividend payments in 2009.

Analysts were pleased that the group’s net debt of $11.3bn a year ago had shrunk to $7.4bn.

Anglo increased its operating profit by 98% to $9.8bn, and its underlying earnings were 93% higher than those of the previous year at $5bn, or $4.13 per share.

Anglo Platinum has kept its cash cost increases at 2% for three successive years, despite a 25% rise in electricity tariffs last year and wage hikes of between 8% and 9.5%.

Costs were contained by producing somewhat higher grades of ore, said Angloplat chief executive Neville Nicolau.

But Anglo’s budgeted capital expenditure at Minas Rio had risen to $5bn from $3.8bn a year ago. Together with the initial purchase price this meant that Anglo had paid almost $12b,n or R86bn, for a mine producing 26.5 million tonnes of iron ore a year.

Minas Rio is admittedly a mine with an exceptionally favourable cost structure of $20 per ton for shipped iron ore. But analysts, even those supportive of Carroll, claimed it had been far too expensive.

The cost increases were caused by delays with the project – including the obtaining of licences – which had led to the enforcement of cost clauses in the original purchase contracts.

This had resulted in an additional expense of $180m per quarter.

In December last year further commitments of $525m had been entered into at the port in order to negotiate a favourable tariff.

The delay also postponed Minas Rio’s expected production date from the first quarter of next year to the last quarter of 2013.

There was clearly a problem with negotiating these clauses in the purchase contract, said one analyst.

The only way to get a reasonable return on this capital now would be to develop the second and third phases of this mine. These would be considerably cheaper because the original infrastructure was already in place. Construction of the processing plant will start next month.

Los Bronces, the new copper mine in Chile being built for $2.5bn, will begin to produce later this year.

– Sake24