By: Henry Lazenby
13th June 2012
JOHANNESBURG (miningweekly.com) – As iron-ore miners continue to expand production in Brazil, Standard and Poor’s (S&P) recently warned of project delays, citing difficulties in obtaining environmental permission, labour constraints and delays in obtaining funding.
Brazil had in recent years significantly increased its role as an iron-ore producer, stepping-up production from about 150 000 t in 2001, to just below 350 000 t in 2011, with a number of new projects slated to enter production from 2014.
Some of the new developments include global mining companies, such as Anglo American expanding its operations in Brazil, and domestic steel producers CSN and Usiminas seeking to integrate existing steel production and export the commodity.
S&P said CSN already has a considerable iron-ore operation that produces a total of 28-million tons a year and it plans to increase production to 70-million tons a year at the Casa de Pedra mine and to 33-million tons a year at the Namisa mine by 2015.
This also includes the construction of a port facility and expansion of its railroad operation, MRS Logística. Among the newcomers is MMX of the EBX Group, which is currently operating a small mine with eight-million-tons-a-year capacity, and has already received the installation licence to begin construction of an additional 21-million tons a year.
However, S&P primary credit analyst Rafaela Vitoria said companies tend to underestimate the execution time of projects in Brazil.
For example, at the end of 2010, Vale's Serra Sul project had a start-up estimate for the second half of 2014. However, in April Vale announced it would now only be by the second half of 2016. Vale said it expected the government to grant its initial licence by the end of June, but did not expect to receive the final installation licence for the actual construction of the mine until a year later.
“Even expansion projects, such as Carajás 40, which are presumably easier to implement than new projects, have experienced delays. For instance, Vale had to delay the Carajas expansion's start-up date one year and now projects it to open at the end of 2013,” Vitoria said.
LICENSING SNAG
S&P observed that the environmental licensing process in Brazil was one of the significant constraints.
The rating agency said companies generally expected it would take six months, to a year to obtain the licences, but that it was actually taking one to two years, given the government agencies' constraints in processing the licensing.
Local authorities have begun requesting compensation investments, such as the conservation of larger areas, infrastructure developments, and even social programmes, which may result in construction delays and cost overruns.
Further, most iron-ore projects in Brazil involve not only the actual mine sites, which are in the middle of the country, but often the infrastructure to transport the ore to the ports on the country’s coast.
“These railroad- or pipeline-transport systems average 400 km to 500 km in length and typically pass through different states and jurisdictions, thereby increasing the complexity of state approvals,” S&P said.
Despite the regulatory hiccups companies experience in developing the country’s resources, S&P said it expected investment in new projects and expansions to continue “as long as there are natural resources available”.
The agency explained that delays in the initial planning were less of a credit concern, since cash disbursements were low at that stage and had little impact in the controlling company’s cash flow.
“However, after construction begins, the impact of budget increases on cash flow and the potential for higher-than-expected debt burdens can become a credit concern for these companies,” S&P said.
The company added that Brazil holds some of the most significant high-grade iron-ore deposits in the world that can be extracted and exported at relatively low cost. This would help Brazilian iron-ore producers to stay afloat, even if the price of iron-ore falls below $100/t in the long term.
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