BMI View: In a bid to boost production of iron ore, bauxite and other key minerals, mining companies will spend an estimated US$24bn between 2012 and 2016 on investment in the Amazon Rainforest. Whilst miners operating in the region will continue to encounter their fair share of problems, the abundance of untapped mineral resources on offer will nevertheless, encouraged more companies to step up investment in Brazil.
We believe an increasing number of mining companies will continue to venture abroad in the search for investment opportunities beyond their traditional operating countries. In line with our expectations, mining giants such as Vale and Anglo American have heightened their efforts to extract minerals from the resource-rich region of Brazil's Amazon Rainforest, which remains one of the country's greatest untapped areas. According to Brazil's mining association, IBRAM, mining companies will spend an estimated US$24bn between 2012 and 2016 to boost production of iron ore, bauxite and other key minerals found in the Amazon Basin. The majority of this spending, at 75% of total investment, will be targeted on the state of Pará for the exploration of minerals including bauxite, copper, nickel and gold. We believe Brazil's mining sector, which already attracted a fifth of all mining investment globally, is poised to experience further growth in the years ahead as more miners step up investment in the Amazon Rainforest.
|Pará To Dominate Amazon Investment|
|Brazil - Amazon Investment By State (2012-2016)|
We note that the push by Vale and Anglo American into the Amazon reflects the multitude of challenges that miners are facing in their current operating environment. These include problems associated with cost inflation, declining ore grades, greater resource nationalism and falling commodity prices. Whilst mining investment in Brazil will continue to encounter its share of problems, we believe the rewards that come with investing in the abundance of untapped mineral resources on offer will nevertheless encourage more miners to enter the country. It is reported that an iron ore mine situated in the Amazonian state of Amapa has attracted as many as four potential bidders including commodities trader Glencore International PLC and Russian steel maker OAO Severstal. Furthermore, we highlight that Brazil will be on the radar of foreign investors going forward as the government undertakes efforts to drive economic growth by tapping into the Amazon's riches while increasing spending on the infrastructure sector.
|Brazil - Iron Ore Production & Growth|
Iron Ore To Remain Foundation Of Brazilian Mining
We believe iron ore will remain the most important mineral commodity in Brazil, capturing the largest portion of mining investment over the coming years. The country is the second-largest iron ore producer in the world, with output at 390mnt (mn tonnes) or 14% of global production in 2011. We expect Vale to continue dominating Brazil's iron ore production given its economies of scale and available capital. The company's US$8.1bn expansion of its Carajas iron-ore mine is the biggest Amazon mine project underway and has an expected production capacity of 90mntpa (mn tonnes per annum) upon its scheduled commencement in 2016.
|Source: BMI, Brazilian Mining Association (IBRAM)|
|Companhia Siderurgica Nacional||Casa de Padre||50mntpa||2014|
|Companhia Siderurgica Nacional||Namisa||Increase from 14.5 to 39mntpa||2014|
|Mineracao Minas Bahia||Pedra de Ferro||20mntpa||2014|
|Anglo American||Minas Rio||26.5mntpa||H2 2014|
|Vale||Carajás Serra Sul||90mntpa||2016|
Indeed, Brazil's high grade iron resources, combined with a favourable business environment, have continued to attract investment from several other major mining and steel players. These include the likes of Anglo American and Companhia Siderúrgica Nacional (CSN) which are currently working on the Minas Rio project and Namisa mine expansion programme, respectively. Overall, we forecast iron ore output to reach 494mnt by 2017, growing at an annual average rate of 3.8% from 2011 levels.
|Vale To Maintain Dominance|
|Brazil - Iron Ore Output By Company, 2011 (mnt)|
Miners To Continue Digging At Their Own Risks
Nevertheless, we caution that companies operating in Brazil should be prepared to tolerate a certain level of risks and shortcomings in the mining space. For one, the persistence of infrastructure bottlenecks will remain a major roadblock to mining investment in Brazil. We expect the majority of mining projects will continue to be dominated by the larger players who are blessed with the balance sheets and organisational capability to solely fund and develop large scale logistics assets pertinent to the growth of mining operations. Indeed, Vale's key to success has been the immense infrastructure the company owns, with more than 10,000km of railway lines, 216 locomotives, nines ports and a huge fleet of ships. The company was recently granted an environmental license to construct approximately 500 miles of Amazon railway, including duplicate and new rails, as part of its expansion programme. At the same time, works for a 90km electricity transmission line for Anglo American's Minas Rio project is expected to begin immediately after a permit to start construction was obtained lately. In addition, other recent proposed legislation, if enacted without revision, would increase royalties for ore production, set time limits for mining concessions, and create a new mining regulator that would auction off mine sites. Though such legislation is unlikely to advance until early 2013, it could present significant changes to Brazil's current mining regulatory regime.