Allan Seccombe
30 July 2010
Johannesburg — ANGLO American is expected to announce a R3,7bn increase in the cost of its biggest project, the Minas Rio iron-ore venture in Brazil, and a long delay in launching the project because of difficulty in securing land rights for a pipeline.
American financial research firm Sanford C Bernstein says it expects Anglo to announce the delay of up to a year and a cost overrun of up to 500m at its interim results today.
Business Day reported earlier this month the Minas Rio project could be set back by a year, with a launch date of 2013 because of difficulties negotiating with 1500 landowners to build a 500km long ore slurry pipe to the coast.
However, the news may be tempered by the resumption of dividend payments.
"We remain concerned that even after tomorrow's revised schedule is announced, further delays to this project are possible," analyst Paul Galloway said.
The news will certainly detract from what is expected to be a strong set of results. Analysts have based their expectations on the sound earnings posted by companies in which Anglo holds large stakes, namely Anglo Platinum, Kumba Iron Ore and diamond group De Beers, which make up about 40% of its earnings.
"We feel Anglo's results are being significantly de-risked. To our mind the market's reception to the results now hinges on whether a strong performance in copper and coal - 53% of our forecast earnings at a combined 1,4bn - and an expected dividend reinstatement will outweigh further disappointment surrounding Minas Rio," said Michael Rawlinson of Liberum Capital.
The fears over delays and increased costs at Minas Rio have already been priced into the Anglo share price, which has underperformed its peers over the last month, he said.
Citi Metals forecast Anglo would pay an interim dividend of 0,30 a share, based on strong operating cash flow, $2,3bn in asset sales and an improved outlook for the commodities market. Anglo CEO Cynthia Carroll said in February Anglo may resume dividend payments this year and that the Minas Rio project would start producing ore in 2012, increasing to 26,5-million tons a year.
Minas Rio has a high quality of ore, averaging 68% iron content, and has the potential to be an 80-million tons a year mine.
Ms Carroll told the market in February at the release of full-year results that Anglo's share in the cost of the first phase of the project had jumped $1,1bn to $3,8bn because of exchange rate movements, scoping changes and time delays, as well as a 35% increase in contingency funds. Also in February, Anglo announced a $1,5bn impairment of its Amapa iron-ore mine and plant which was included in the $5,5bn purchase of Minas Rio, for which some analysts are concerned Anglo may have overpaid.
Amapa produced 2,7-million tons against a design capacity of 6,5-million tons a year, because of operational and logistics problems. "Anglo has to husband its balance sheet given large capex requirements in 2010 and 2011," said RBC Capital Markets analyst Des Kilalea.
"We think the risks remain focused on the project delivery, in particular Minas Rio where delays could mean impairments," he said.
Anglo is a different company to a year ago. It has brought in a hard-nosed businessman, Sir John Parker, as chairman, fought off an unsolicited merger offer from Xstrata, shed noncore assets, cut 2700 managers and set up seven focused business units.
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