China pollution war boosts Anglo iron prospect in Rio

[RIO De JANEIRO] Anglo American Plc's Brazilian iron foray was fraught with misfortune from billion-dollar overruns to a global glut. As the S$8.4 billion mine finally ramps up, it's catching a break from China's greener approach to making steel.

The Minas-Rio iron-ore mine, the largest project in Anglo's 98 years, is scheduled to reach output capacity pace by mid-2016. And while the start of operations coincides with a price rout of the steelmaking ingredient, the London-based miner is betting the higher quality of its product will help shield the venture from the malaise affecting the industry.

Minas-Rio produces pellet feed, an ultra fine type of ore containing about 68 per cent iron. That allows Anglo to sell at a premium over the benchmark because steelmakers - including those in China, the biggest buyer - find it more productive and less polluting.

"China is more and more focused on the environmental impact of consuming the iron ore at the steel mills," Andreas Bokkenheuser, an equity analyst at UBS Group AG, said by telephone from New York.

"The lower silica content means they will consume more of it in the future," he said, referring to the most common impurity.

Mr Bokkenheuser said pellet feed with 68 per cent iron can get a premium of as much as US$10 a metric ton over the 62 per cent benchmark price. Anglo, which expects to ship as much as 14 million tons this year and reach full-year capacity of 26.5 million tons in 2017, declined to say how much it prices its product over the reference.

The benchmark rose 2.6 per cent to $62.78 a dry ton on Tuesday, according to an index compiled by Metal Bulletin. Prices are down 67 per cent since a 2011 peak amid supply expansions in Australia and Brazil, the top exporters.

Shares of Anglo lost 2.5 per cent on Tuesday to close at 1,036.50 pence in London, extending their decline in the past 12 months to 34 per cent.

"For this type of iron ore, we don't have oversupply," Rodrigo Vilela, the chief operating officer of Anglo's project, said during a visit to the mine this month. "We don't have any problem in placing this material around the world thanks to its high quality." Minas-Rio includes a mine and processing plant in Conceicao do Mato Dentro, in the heartland of Minas Gerais, connected to a dedicated iron-ore terminal at the Acu port in Rio state through a 529-kilometre pipeline. The rolling hills of this Brazilian state, once a major gold-producing region, contain deposits with higher levels of iron on average than in the vast deserts of Western Australia.

Higher content product also means economies of scale in shipping to China, said Philip Kirchlechner, director of Iron Ore Research, a consulting firm in Perth, Australia.

"If you transport over long distances like that, the freight you pay for a ship is the same for whatever you ship," he said by telephone. "A higher iron grade improves the transportation economics to China."

Vale SA, the world's top producer, is also boosting production of its high quality products and replacing lower grade material to improve margins. The Brazilian powerhouse founded 73 years ago at a mine close to Minas-Rio plans to increase its average content fee to 64.6 per cent by 2018 from 63.7 per cent last year, Chief Executive Officer Murilo Ferreira said May 12.

"Our differentiated and further improved product quality will drive price realization up," he said in Barcelona at a Bank of America Corp. event, according to a presentation on Vale's website.

Getting Minas-Rio in place was a titanic task for Anglo, starting with the ill-timed acquisition of the project in 2008 close to the peak of the commodities super-cycle. Shipments started in October, about four years later than initially scheduled, and development costs ballooned from an original estimate of US$2.6 billion after permit delays and design changes.

Higher quality ore is one of the key selling points of Minas-Rio's product, Paulo Castellari, chief executive officer of Anglo's iron-ore unit in Brazil, said.

"This is very different from stuff that other people have in other parts of the world," he told reporters May 11. "We are producing a very, very high quality product."

BLOOMBERG