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Vale to slash spending as slowdown takes bite out of iron ore prices

The need to increase efficiency was underlined by a surge in expected investment in two of Vale’s largest projects, including mines in Brazil’s Carajas region.


Brazil's Vale SA , the world's second-largest mining company, cut estimated 2013 capital spending by 24 per cent 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 diminished demand for metals and weighed on the price of iron ore, Vale's main product. Iron ore, a key ingredient in steel, fell to a three-year low in September.

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

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"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. Among cuts, Vale confirmed the removal of its Simandou iron ore mine in Guinea, and the Samarco IV pellet plant with Australia's BHP Billiton PLC in Brazil from the list of active projects.

BHP and Vale each own half of the Samarco mine, slurry pipeline, pellet production and port project.

The Lubambe copper mine in Zambia was removed from the project list after output successfully started, Vale said. The mine is a joint venture with African Rainbow Minerals and Zambia Consolidated Copper Mines Ltd.

Vale is also considering selling its 22-per-cent stake in Norwegian aluminum group Norsk Hydro, said Vale chief financial officer Lucianao Siani. Vale obtained the stake when it sold its aluminum business to Norsk in 2010. The agreement requires Vale to hold the stock until February, 2013.

Vale, which is Brazil's largest rail and port operator, may also sell 50 to 70 per cent of its new logistics company VLI SA, far more than the 33 per cent originally planned, said chief executive officer Murilo Ferreira. VLI will operate in the non-mining-related general cargo business.

Some analysts said the cuts and planned asset sales failed to go far enough.

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"It would be more significant if there were significant changes to capex [capital expenditures] on core projects, particularly in Brazil," said Wiktor Bielski, head of commodity research at VTB Capital in London.

BHP Billiton has halved capital spending over the next five years, a posture that offers better returns to shareholders, he said.

Vale is still concentrating on too many new mining projects and not looking for enough ways to increase output from existing assets, Mr. Bielski added.

"Vale should follow this business model," he said, referring to what he called BHP's more aggressive shedding of new, so-called greenfield projects, and its focus on older assets.

Vale, though, trumpeted a sharp tightening of financial discipline and a willingness to consider the sale of any and all assets that fail to provide an adequate return.

The era in which the company expanded in all directions is at an end, Mr. Ferreira told investors in New York.

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"The supercycle in mining is over," Mr. Ferreira said, referring to a decade-long boom led by growing Chinese demand.

"While there is still growth in the iron ore market, it will be slower," iron ore and strategy chief Jose Carlos Martins said at the same event.

Vale's cuts began earlier this year. Final 2012 spending is not expected to surpass $17.5-billion, 18-per-cent 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.

Since 2008, actual annual capital expenditure has been an average 18-per-cent below initial investment plans.

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

Vale, the world's largest producer and exporter of the mineral, accounts for more than a quarter of the world's seaborne iron ore exports.

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

The company's outlook for 2013 iron ore sales is down 1.9 per cent to 306 million tonnes from the original 2012 estimate of 312 million tonnes.

Spending on coal projects next year is expected to rise to 10.6 per cent of the total from 6.9 per cent this year. Vale expects to sell 12.4 million tonnes of coal in 2013, a quarter less than its 2012 estimate.

Production is unlikely to pick up until 2014, Vale said.


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

Vale expects to sell 260,000 tonnes of nickel in 2013, 13-per-cent less than its estimate for 2012.

Under the 2013 investment plan, Vale expects to spend $10.1-billion, or 62 per cent, on new projects; $1.1-billion, or 6.7 per cent, on research and development; and $5.1-billion, or 31 per cent, 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-per-cent more than the company estimated in October in its third-quarter earnings report.

Spending on the company's Long Harbor nickel and cobalt mine project on the Labrador coast of Newfoundland rose 18 per cent to $4.25-billion as a result of rising labour and engineering service costs.

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