Vale to scale back investment as global economy bites

RIO DE JANEIRO Mon Dec 3, 2012 3:50pm GMT

The sign for Vale's Copper Cliff mine near Sudbury, Ontario is pictured October 16, 2012. REUTERS/Julie Gordon

The sign for Vale's Copper Cliff mine near Sudbury, Ontario is pictured October 16, 2012.

Credit: Reuters/Julie Gordon

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RIO DE JANEIRO (Reuters) - Brazil's Vale SA (VALE5.SA), the world's second-largest mining company, cut estimated 2013 capital spending by 24 percent after a global slowdown and a drop in iron ore prices led the company to rethink its outlook for expansion.

The retrenchment comes after sluggish growth in the United States, China and Europe has diminished demand for metals and weighed on the price of iron ore, Vale's main product. The price of iron ore .IO62-CNI=SI, a key ingredient in steel, fell to a three-year low in September.

Vale will invest $16.3 billion (10.1 billion pounds) in 2013, down from the $21.4 billion (13.3 billion pounds) budgeted this year for new projects, research and development and to maintain existing mines and plants, according to a regulatory filing on Monday.

"The outlook for slower expansion of global demand for minerals and metals in the medium term requires rigid discipline in the allocation of capital and greater focus in maximizing efficiency and reducing costs," the company said in the statement.

Vale's 2013 investment plan is the smallest since 2010 and removes the Lubambe copper project in Zambia, formally known as Konkola North, from its board-approved investment program.

The plan also confirms the removal of its Simandou iron ore mine in Guinea and the Samarco IV pellet plant with Australia's BHP Billiton Plc (BHP.AX) in Brazil. BHP and Vale each own 50 percent of the Samarco mine, slurry pipeline, pellet-production and port project.

Vale's cuts began earlier this year. Final 2012 spending is not expected to surpass $17.5 billion (10.8 billion pounds), 18 percent less than originally planned, the company said. Vale spent a record $18 billion in 2011, a quarter less than the $24 billion initially budgeted for the year.

Vale releases a spending plan every year in late November or early December. It usually misses its targets. Since 2008 actual annual capital expenditure has been an average 18 percent below initial expectations.

IRON ORE FOCUS

Vale plans to maintain its focus on iron ore, dedicating 47 percent of 2013 capital spending to the mineral. That is about the same percentage as budgeted in 2012 despite a 22 percent cut in overall spending on iron ore mines, processing and transport facilities and iron ore pellet plants.

Vale is the world's largest producer and exporter of the mineral and accounts for more than a quarter of the world's sea-borne iron ore exports.

While the company is also a major producer of nickel, copper and fertilizers, it gets about 90 percent of its profit from iron ore.

The company's outlook for 2013 iron ore sales is down 1.9 percent to 306 million tonnes from the original 2012 estimate of 312 million tonnes. The outlook for the sale of pellets, an amalgamated form of ore that can be fed directly into steel blast furnaces, is expected to fall 16 percent to 43,000 tonnes compared with the year-earlier estimate.

Spending on coal projects next year is expected to rise to 10.6 percent of the total from 6.9 percent this year. Vale expects to sell 12,400 tonnes of coal in 2013, a quarter less than its 2012 estimate.

NICKEL PROJECT PROBLEMS

The share of basic metals, where Vale has experienced difficulties with production and efficiency at nickel and copper projects, was raised to 23 percent of spending. The 2013 budget cut base metal spending by 18 percent, to $3.78 billion.

Vale expects to sell 260,000 tonnes of nickel in 2013, The outlook for nickel sales is 13 percent less than its estimate for 2012.

Other problems with its nickel business in Brazil and the French Pacific Island of New Caledonia have raised expectations about asset sales.

As revenue becomes tighter, Vale is reorganizing its railway and port operations in a way that would allow it to sell a stake in the unit. Spending on ports, railways and other general logistics projects is expected to rise 3.5 percent in 2013 to $532 million.

CUTS R&D SPENDING

Planned energy spending on hydroelectric dams and biodiesel systems for its railroads and mine equipment is down 65 percent to $271 million.

Under the 2013 investment plan, Vale expects to spend $10.1 billion, or 62 percent, on new projects; $1.1 billion, or 6.7 percent, on research and development; and $5.1 billion, or 31 percent, to maintain existing mines and facilities.

Vale said it needs less research into new mines and development of projects now that the world economy has slowed. Part of the cutbacks began earlier this year when Vale pulled engineers and other staff from the Simandou project in Guinea.

The need to increase efficiency was underlined by a surge in expected investment in two of the company's largest projects.

The plan to add 40 million tonnes a year of iron ore capacity from mines in the Carajas region of Brazil's Amazon rose to $3.48 billion, 17 percent more than the company estimated in October in its third-quarter earnings report.

Spending on the company's Long Harbour nickel and cobalt mine project on the Labrador coast of Canada's Newfoundland province rose 18 percent to $4.25 billion as a result of rising labour and engineering service costs.

Newfoundland is seeing costs rise because it is the fastest-growing province in Canada, Vale said.

Vale preferred shares, the company's most-traded class of stock, fell 0.82 percent to 36.40 reais on the Sao Paulo BM&FBovespa exchange. The Bovespa index of the most-traded stocks on the BM&FBovespa was up 1.01 percent.

(Reporting by Jeb Blount and Sabrina Lorenzi; Editing by Gerald E. McCormick, Jeffrey Benkoe, Nick Zieminski and John Wallace)

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