Minas Rio albatross will weigh on Anglo’s profit
No further production is expected from the Brazilian iron-ore operation for the rest of the year, thanks to a leaky pipeline
The Minas Rio mine in Brazil, which has cost Anglo American at least $13bn to buy and build, could cost the company up to $400m in earnings and is unlikely to deliver much beyond the 3-million tonnes it produced before being shut down to manage repeated leakages in a 530km pipeline.
The mine, which is the most controversial in the Anglo stable, has been more expensive and delayed than the company would have liked, earning the opprobrium of analysts and investors who have long regarded it as a bad investment.
There have been two leaks at the Minas Rio pipeline in March. It is arguably the most risky part of the operation that relies on the single mechanism to get its high-grade iron ore to the coast. There is no economically viable alternative to the pipeline to move highly abrasive iron ore from the rugged inland environs where the mine is situated.
Minas Rio would restart production only in the fourth quarter of 2018 and reduce Anglo’s full-year earnings before interest, tax, depreciation and amortisation – essentially an operating profit number – by between $300m and $400m, said CEO Mark Cutifani at the release of the company’s first-quarter production data.
Looking at the company’s entire production as a copper equivalent, Anglo said its output in the first three months of 2018 was 4% higher than that of the matching period in 2017.
“Our operations have made a solid start to 2018, delivering a 4% increase in total production. This reflects our consistent focus on driving efficiency across our portfolio and continuing our strong performance of the fourth quarter of 2017 despite the suspension of operations at Minas Rio,” said Cutifani.
First-quarter production at Minas Rio fell 30% to 3-million tonnes because of the suspension of the operations since March 12 because of the leaks.
“Operations remain suspended and no material production is expected for the remainder of the year, as inspection, remediation and restart activities are progressed,” Anglo said, pointing out it kept its full-year production forecast for the mine at the 3-million tonnes it had generated so far in 2018, down from the expected 13-million to 15-million tonnes.
“Anglo American generated an ebitda [earnings before interest, tax, depreciation and amortisation] of $8.8bn in 2017 so the likely impact of the suspension of Minas Rio is meaningful, but in an improving operating environment for the major resources companies not disastrous,” said SP Angel analyst John Meyer.
Anglo is undertaking an intensive 90-day investigation of the pipeline and will need approval from regulatory authorities to restart operations.
“We are currently working with our unions to agree the appropriate terms for the approximately 35% of our employees at Minas-Rio who will be on an extended period of leave, including providing training during that time, in addition to a pay and benefits package,” said Cutifani.
“The majority of our Minas Rio employees continue to be deployed across our operations in Brazil, including on the construction required to secure our Step 3 operating licence in the first half of 2019 to enable the full ramp-up of Minas Rio to 26.5-million tonnes per annum.”
RBC Europe analyst Tyler Broda said he had already cut the estimated ebitda contribution from Minas Rio in 2018 to $30m from 2017’s $435m.
“Minas Rio accounts for 7% of our net asset value for Anglo American and with expectations around a fix likely, the impact to the shares should be moderate,” said Broda.