Mining Leaders: Peru 2012 by Miguel Camacho

Mining Leaders

2012

PARTNERS:

politics & Economy 6 lead article: The Future is Now 11 Q&A: C. Scliar, Ministry of Mines & Energy 12 feature interview:

R. Mancin, IBRAM 14 LEAD ISSUE: Mining Code 16 leader Insight: R. Papaleo, BCCC 17 Q&A:

Publisher: Freestone Publishing Editor-In-Chief: Mat Youkee

18 A. Hodge, ICMM article: South by South East

iron ore

Country Coordinator: Gabriella Von Ille Country Editor: Felipe Gaitán Sub-Editor: Emma Tracey

21 lead article: To Be Ore Not To Be? 24 Q&A: M. Ferreira, Vale 26 feature interview:

Project Assistants: Urjel Morais, Uolli Briotto, Mâite Gothe Art Director: Miguel Alejandro Camacho Administrative Manager: Silvia González Printing: Lowe Martin Group Email: info@mining-leaders.com www.mining-leaders.com

28 29 30 32 33 34 36

P. Castellari, Anglo American Iron project focus: Ponte Verde, SAFM

Brazilian Metals Group 38 q&a: J. de Menezes, WMR 39 box: Play it Bahia

gold 40 lead article: Rush Hour 43 box: Go Where Garimpeiros Go 45 company focus:

Serabi Gold 46 feature interview:

C. Mancuso, Colossus Minerals 48 project focus: Volta Grande, BeloSun 49 jurisdiction overview 50 project round·up 52 Q&A:

jurisdiction overview lead issue: Infrastructure project focus: Planalto Piauí, Bemisa box: It’s a Steel project round·up Q&A:

Executive Director: Charlotte de Casabianca 2012

37 company focus:

P. Freund, Centaurus Metals

53 54 55 56 58 59

B.Doyle, Amarillo Gold company Focus: Tristar Gold company Focus: Rio Novo Gold market focus: The Bottom Line project round·up: Tapajós District project focus: Traira, Cosigo box: Taking the Indigenous Initiative

Mining Leaders

ch_toronto2012_ad_A4_OTL.indd 1

12-04-24 2:06 PM

base metals 60 lead article: Back to Basics 64 company focus:

Anglo American Nickel 65 project focus: Maracás, Largo Resources 66 lead issue: Mineral Plan 2030 67 Q&A:

85 86 87 88

89 90 91 92 93 94

J. Martin, Horizonte Minerals 69 market focus: Seeing Red

fertilizers 70 lead article: A Market To Harvest 74 Q&A:

Q&A: P. Almeida, Atlas Copco leader Insight: P. Libãnio, Ausenco box: Power Up Q&A:

S. de Brito, BVP Engenharia market focus: Destination Automation company Focus: CEMI box: Bank-Rolling Brazil company Focus: Pimenta de Ávila market focus: Taxing Times Q&A: G. Bastos, Devex

mining equipment, technology & services 96 lead article: At Your Service 99 company Focus:

Aerzen do Brazil A. Silva, MBAC 75 project focus: Cerrado Verde, Verde Potash 76 lead issue: Reaching Sufficiency 78 Q&A: S. Keith, Rio Verde 79 box: Things Could Be Sweeter

100 101 102 104 105 106

company Focus: Geosol box: The Next Big Drill company Focus: Esteio company Focus: SGS box: Passing the Test Q&A:

engineering, construction

& automation 80 lead article: From Start to Finish 84 company Focus:

Brazilian Rockhounds

111 company Focus: Vacon 112 Q&A:

J. Ribeiro, Gaustec 108 mets round·up 110 Q&A:

F. Barros, Polysius

W. Ladeira, ERM 113 market focus: The Cutting Edge 114 leader Insight: B. Nader, BNA Micromine 115 company Focus: Gemü 116 Q&A: D. Rossetti, Rossetti

financial & legal services 118 lead article: Building Brics 120 Q&A:

R. Sands, Casimir Capital market focus: Not At Ease Q&A: U. Chadda, TSX company Focus: West LB company Focus: Integratio market focus: Taking Interaction leader Insight: B. Soares, Allen & Overy 129 market focus: Talent Show 130 leader Insight: N. Watson, Sandstorm 131 Q&A: R. Ellison & C. Kassis, Shearman & Sterling 122 124 125 126 127 128

ml recommends

132 article 133 hotel listing 134 directory and advertisers index WWW.MINING-LEADERS.COM

Mining Leaders is a trade mark of Freestone Publishing Inc. Copyright Freestone Publishing Inc. 2011. No part of this publication can be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopied, recorded or otherwise without the prior permission of Freestone Publishing Inc. Freestone Publishing has made every effort to ensure that the conent of this publication is accurate at the time of printing. However, Freestone Publishing makes no warranty, representation or undertaking, whether expressed or implied, nor does it assume any legal liability, direct or indirect, or responsibility for the accuracy, completeness or usefulness of any information contained in this publication.

Mining Leaders

politics & economy

2012

lead article

the future is now I

t was a Frenchman who provided the epigram for Brazil’s many years of frustrated development. Returning from a state visit to the country in the 1960s, Charles de Gaulle reportedly said, “Brazil is the country of the future…and always will be.” But in recent years the country’s economic and social achievements and its growing status on the world stage have left this quip looking outdated. Economic growth, which held strong and steady in the mid-2000s at over 5%, hit 7.2% in 2010 and although growth fell in 2011 it was still enough to see Brazil surpass the UK as the world’s sixth largest economy. By 2030 it is likely to be the fourth. Under a center-left government, inequality has also fallen. Since 2003 over 40 million Brazilians have escaped poverty and joined the middle classes. Meanwhile the country has risen as a power on the diplomatic front and is pushing hard for a permanent seat on the UN Security Council. The 2014 FIFA World Cup and 2016 Rio Olympics look perfectly timed to announce Brazil’s arrival on the world stage. But amid the excitement, it is worth remembering Brazil has experienced similar economic booms in the past. The Brazilian Miracle, under the military government of the 1970s, saw similar levels of economic growth before the system collapsed under spiraling foreign debt and rampant inflation. But the current boom feels different. Brazil has changed dramatically in the last 30 years and the Mining Leaders

lead article

$33

Billion

Low interest loans made available to stimulate local industry in 2012

most important changes have been political. Military rule ended in 1985 and although Brazilian politics were often chaotic in the years immediately following the return to democracy, the presidencies of Fernando Henrique Cardoso (1995-2003) and Luís Ignácio Lula da Silva (2003-2010) established a strong degree of political and economic stability. It was Cardoso who laid the foundations for the current good times, taming inflation through the Real Plan and privatizing key industries. He also federalized key social programs, such as Bolsa Familia an anti-poverty scheme that makes cash payouts to poor families on the condition that children attend school and receive vaccinations. The scheme was expanded under Lula to reach 12 million families and has since been heralded as a model for other developing countries. As leader of the Brazilian Workers’ Party, Lula’s victory in the 2002 presidential elections spooked investors who feared he would bring about a partial default on foreign debt. But the new president stuck by the free-market reforms of his predecessor, paying off the country’s IMF debt in full before the end of 2005, two years ahead of schedule. Under Lula, Brazil experienced years of strong and steady economic growth. The country, which had successfully diversified its trade relationships and developed a vibrant domestic market, was one of the least affected by the financial crisis of 2008. Indeed, Brazil turned creditor for the world’s bailout fund, buying up $10

2012

billion in IMF bonds in April 2009, leading Lula to cheekily ask reporters, “Don’t you think its chic for Brazil to lend to the IMF?” Lula left office as the most popular president in Brazilian history and it was no surprise that his chosen successor, Dilma Rousseff, comfortably won the 2010 presidential elections, becoming the country’s first female head of state. But while her elevation to power may have been straightforward, the challenges confronting the new president are multiple. Corruption scandals have dominated the front pages of the press since Rousseff set up office and she was forced to remove seven ministers from their posts in the first year of her term. The economy has also stalled.

The April stimulus is just the latest measure in a country with a history of maintaining a strong industrial policy. While some investors – and also The Economist – fret that rising “statecapitalism” is providing challenges to private investment, Brazilians have long

Brazilian gdP

Sources: OECD; IMF

Dilma Rousseff has big shoes to fill, following on from Luis Ignacio Lula de Silva, one of the country´s most popular presidents

Following GDP growth of 7.5% in 2010, the Brazilian economy grew just 2.7% in 2011. High inflows of capital during the years of strong economic growth and high interest rates have lead to a steady appreciation of the Brazilian real in recent years, hitting local industry hard as high import tariffs have proved insufficient to prevent cheap Asian imports entering the market. The government has approached the issue on two fronts. First, it bought up US dollars on the spot market, causing the currency to weaken to below $0.50 in May 2012, the first time it hit these levels since 2009. Second, in April the government introduced a raft of tax cuts and $33 billion of low-cost loans to stimulate local industry.

lead article

The Maracana stadium in Rio de Janeiro is one of the stadia being upgraded for the 2014 World Cup

seen state involvement as crucial to the long-term development of the country and there is no prospect of that changing soon. Brazil’s economy remains heavily dependent on producing and exporting raw materials including oil, iron ore, and agricultural produce. And while the government is unlikely to introduce legislation that undermines its most fundamental economic base, its policy efforts are focused on developing more value-added products. In order to compete with the Tiger economies of Asia, Brazil needs to create more high-end industries and foster an atmosphere of innovation. Brazil already has a handful of worldclass firms, Embraer, the former state owned aircraft manufacturer, being a salient example. But the experience of South Korea demonstrates that in order to develop world-beating manufacturing and technology firms, education is key. If reforming the pension system is the most important step in maintaining the country’s long-term fiscal health, then overhauling education is crucial to maintaining long-term economic growth. At present the country spends more on education as a proportion of GDP than most developing countries. However, the mayority of these funds flow to public universities, providing free tertiary education to the many students whose families could afford to pay for private primary and secondary education. But the government also

needs to promote the formation of the professionals that the country so badly needs. Ask mining executives about the biggest constraints on the growth of their companies and the answer is invariably human resources. With less than 40,000 engineers of all stripes graduating yearly, supply is well below the amount of jobs opening up in the natural resources and infrastructure sectors. In addition to reforming education, the government needs to bolster domestic investment, which stands at just 20% of GDP, if it is to finance the major

7.5% gdp growth 2010

infrastructural projects required for the development of the industrial and natural resources sectors and for the World Cup and the Olympics. Given that the country already has the highest taxation rate in Latin America, spending cuts, particularly from the bloated public pension schemes, have become a necessity. Doing so will not be easy, as the disparate nature of the National Congress can make reform a slow process.

At the same time, the government is reevaluating how rents from the natural resources sector are redistributed. Attempts to spread a greater proportion of royalties from the country’s offshore oil fields amongst the country as a whole have met strong resistance from the states where the finds are located. The protracted nature of congressional discussions has also impacted on the Brazilian mining sector. Proposals to reform the country’s Mining Code have been on the table for several years, but no fixed deadline for their implementation has been decided. Proposed reforms include changes to the way titles are granted, the introduction of limited exploration and production time frames, and the increase in royalty rates across a number of minerals. President Rousseff has inherited a country in better shape than at any time in history. In addition to consolidating democracy and improving the lot of the country’s population of nearly 200 million people, her most crucial challenge is to find a healthy balance of the role of the state in the economy. At present the country’s hydrocarbon, mining, and agricultural industries form the backbone of the economy. These industries could provide the base for a wider economic growth, but this will be achieved only through an efficient and clearly defined industrial policy and not through bloated government. Mining Leaders

Destinations 2012-13

June 19 – 21, 20 China W 12 orld Su Beijing, mmit Wing, China

London • Hong Kong • Beijing • Australia

Decembe r 2 – 5, 20 12 The Busine ss Design London Centre,

2013 – 22, ntion h 18 Marc ng Conve tre, n o e K C Hong xhibition ng & E ong Ko H

Brought to you by the events team at

ralia 12 Aust , 20

Bringing together some of the most influential decision-makers within mining companies and the investment community, the hugely successful Mines and Money shows provide a platform where the best of mining and exploration can be showcased to investors from around the world.

– 17 r 15 y, obe , Sydne C SCE ustralia A

Oct

Recognised as the best international forum for networking in London, Hong Kong, Beijing, and Sydney, the events are fixtures in the diaries of industry leaders. Whether you are a mining or exploration company seeking investors, or an investor seeking the next hot mining growth opportunity, Mines and Money has something for you.

Brought to you by the events team at

To book your sponsorship or exhibition booth for 2012/2013, please contact Pablo Martin • By phone on: +44 (0)7957 164107 / +44 (0)20 7216 6063 • By e-mail at: pablo.martin@aspermontuk.com

10 M&M2012_A4_Alt.indd 1

2012

www.minesandmoney.com www.hkgoldinvestmentforum.com • www.mongoliainvestmentsummit.com 01/06/2012 11:13

q&a

the state

Claudio Scliar Secretary for Mines Ministry of Mines and Energy

of play

What are the political motives behind the reforms to the Brazilian mining code proposed by the Ministry of Mines & Energy? The changes the ministry is proposing aim to create a new model for Brazilian mining. The current model is based on the mining code of 1967 and reflects a difficult political and economic period in Brazil’s history. In the last 35 years the country has undergone profound political, social and economic changes which were seen most clearly in a new federal constitution, signed in 1988. It established procedures for the relation between public goods and private interests. We deemed it necessary to develop a new legislative framework for the access, exploitation, supervision and regulation of mineral extraction activities which reflects the current times. What will be the roles of the National Council for Mining Policy and the National Minerals Agency? The National Council of Mining Policy will be an institution presided over by the Ministry of Mines & Energy. Its fundamental role is to subsidize the presidency with regards to the mineral policies necessary for the proper development of this important segment of Brazilian industry. The National Mineral Agency will replace the DNPM and will be the entity responsible for the regulation, supervision and mediation of conflicts in the mineral sector. Does the government believe we are experiencing a super-cycle of commodity prices? Firstly it’s important to clarify that iron ore prices are mainly defined by contracts signed between miners and consumers and not by the stock market, as is the case with many other metals. As such the high price of minerals reflects as much the global economic situation as it does the existence of national demands which require large quantities of raw materials, as is the case in China and many other developing countries, including Brazil. The proposed increase in royalties is a cause of concern. What is your message to these firms with respect to the changes? Royalties cover mining companies which are producing minerals. As such the royalties do not touch those firms which have mineral

POLITICS & ECONOMY

Brazil’s Ministry of Mines and Energy was founded in 1960 with the mandate of providing support through research and policy to the country’s mining industry. As the sector develops, the need to introduce new regulations has become a priority. Claudio Scliar, the current Secretary for Mines, will be part of the team leading reforms of the current mining code, which dates back to 1967. exploration as their principle aim. Brazil needs to improve its legislation in order to overcome delays brought about by different laws governing the CFEM. The government has undertaken studies examining various mining jurisdictions in order to help modernize Brazilian legislature. There will be increases for some minerals and reductions for others - such as minerals for agriculture in order to achieve self-sufficiency in fertilizers. A World Bank study found that acquiring environmental permits in Brazil takes far longer than in most other Latin American countries. Does the government believe this is an issue that needs to be addressed? The global trend is for an increase in environmental restrictions and in this context the Brazilian environmental legislation is one of the most modern, reflecting the concern for sustainable development by taking into account an analysis of the environmental, social and economic impact of the activities that are to be licensed. Many gold exploration juniors operating in Brazil are working in areas with large numbers of garimpeiros. What is the government doing to ensure cordial relations between these groups? In Brazil we have a specific regime designed to improve the activities of “garimpeiros,” We have made efforts to regulate these activities through the Small Scale Mineral Prospectos permit. We have had innumerable cases of success whereby “garimpeiros” and companies have worked side by side, such as in the case of Colossus Minerals with the garimpeiro group COOMIGASP. The Folha de São Paulo newspaper reported that a state-owned company is undertaking mineral exploration activities in the Brazilian offshore region. What are your expectations for these projects? The Ministry of Mines & Energy is responsible for the geological survey of the country, which includes the continental platform in Brazilian and international waters. The CPRM, a body linked to the Ministry has the responsibility to execute these works which are set out in the Accelerated Growth Plan. Mining Leaders

feature interview

in your corner Brazil has one of the lowest dollars per square meter exploration ratios in the world. Rinaldo César Mancin of the Brazilian Mining Association (Ibram), extols the exploration possibilities of the country but also laments the lack of geological information. As the Brazilian mining industry’s main advocacy group, the organization is constantly promoting safety, a fairer mining code and more sustainable practices. A sleek residential building in Brasilia’s quiet embassy district of Lago Sul might seem distant from the mega-projects of the iron ore quadrilateral or the enery sapping work of Amazonian gold exploration, but it is here that Ibram, Brazil’s premier mining association is fighting the industry’s toughest battle. Since 1976 the organization has promoted the Brazilian mining industry, provided vital statistics and organized technical training events. In the last two years, however, its role as protecter of the interests of the country’s miners has been put to the test. As the government looks to push through a raft of reforms to restructure the industry, it has fallen to Ibram to act as the voice of the private sector at this vital time. Rinaldo César Mancin, Ibram’s Director for Environment Affairs, agrees that the country’s 1967 mining code is in need of a revamp but his vision for a new

2012

framework differs from those proposals under discussion. “What we want to see from the new code is more investment but the current government appears to want to intensify the state’s control of the mining sector” he said, “when you have the state so

“Brazil ranks tenth in the world in terms of annual mineral exploration expenditure, but when adjusted for area, the country is 150th. While Canada invests $2 billion a year in mineral exploration, here we spend around $320 million.” closely involved, it could makes investors wary.” While he welcomes stronger regulation through the creation of the high level council for mining affairs linked to the president and the creation of

the National Minerals Agency, Mancin is concerned that these bodies won’t remain truly independent and will be linked to ruling political parties rather than the state. One of Mancin’s principle concerns is that too much of the current thinking on the reform is being borrowed directly from the hydrocarbons industry, which he maintains needs to be treated distinctly. “There is no comparison between mining and petroleum projects. The index of success in the mining sector is very low. The government has suggested the possibility of being partners with companies under a new exploration model in certain kinds of projects, but it is not prepared to assume much of the risks.” While mineral exploration projects are high risk anywhere in the world, the Brazilian situation is compounded by a lack of geological data. “Brazil ranks tenth in the world in terms of annual mineral exploration expenditure, but when adjusted for area, the country is 150th. While Canada invests $2 billion a year in mineral exploration, here we spend around $320 million. To put it another way”, he explains, “we invest just $0.01

RINALDo CÉSAR MANCIN

$320 MILLION

spent annually on brazilian mineral exploration

per square meter of territory whereas the Canadians spend $0.20.” He insists that in such a situation, and with the Brazilian Geological Survey under-funded, the private sector is the only option for exploring the country’s mineral resources.

The statistics Mancin quotes are courtesy of IBRAM’s independent studies on the mining sector. Each year the organization produces a detailed analysis of the key minerals in the Brazilian mining sector. But despite attempts to raise the profile of the industry, Mancin recognizes that it still suffers from a negative image in Brazil. “Upon founding IBRAM, our first president declared that it was its mission to rebuild the image of the sector in Brazil. Now, 35 years later IBRAM’s first priority is still to change the image. The mining industry provides employment and develops infrastructure across the nation, but we still suffer from a negative image. Brazilians are not proud in the same way that Australians or Chileans are proud of their mining industry.” He points to the good corporate social responsibility projects being run by majors such as Vale, AngloAmerican and AnglogoldAshanti as examples of how the industry can improve relations with communities and reduce the environmental impact of projects but believes that these are too frequently under reported in a media that choses to focus on the artisanal gold mining that has led to large scale mercury pollution in sensitive areas such as the Amazon. “Brazilians are becoming more conscious of sustainability and environmental issues,” continues Mancin, “obviously the protection of the environment is an important priority for the government but at the moment the situation related to environmental license permits is very bureaucratic and onerous. If your project is in one state then the state secretariat of environment deals with that. If it is in more than one state then Ibama, the federal environmental agency,

Photo: VALE Brazil’s mega-projects are often hampered by onerous permitting processes

is in charge. We are subject to two types of governmental oversight process –DNPM, who oversee mineral law concessions and exploration, plus the environmental framework. It is impossible to have a clear picture of the time and costs involved to have the complete approval.” Another area in which the organization has taken a leading role is the issue of mining safety. The industry has a worse record for accidents than the transportation and construction sectors. Ibram’s Mineração program aims to develop specific training tools, based on health and safety which will cater to every level of the industry. “The idea is to have a collective movement to have better benchmarks. We have the National Confederation of Industry and São Paulo University as partners. Health and safety indicators are an important decisive factor when investors are looking at countries.” Ibram maintains a strong presence at some of the world’s largest mining events, such as

PDAC. In addition the organization has its own events, including the EXPOSIBRAM conference which takes place every year with the venue alternating between Belo Horizonte and Belém. The latter event is particularly important for its role in opening up the mining industry to the Amazon region. Mancin accepts, however, that with such huge mineral endowment Brazil sells itself and promotion isn’t hugely necessary. The organization expects to see $68.5 billion in private investment in the Brazilian mining industry in the coming five years with a focus on the states of Minas Gerais and Pará, which are forecast to receive $25 billion each. Despite the importance of China as an export market for Brazilian iron ore, the Asian giant has been slow to enter into mining projects in Brazil. “Not many Chinese are entering Brazil in comparison to Africa or India. We only have seen small investment, of about $10 million. They purchase more than they invest.” Mining Leaders

Mining Code The reform of Brazil’s 1967 mining code has been under discussion for several years. Much speculation still abounds but the main changes proposed can be divided into three areas. Firstly, the process of granting mining concessions will be altered to tackle the trend of land-banking. Exploration licenses will likely be shortened and mining permits may be limited to 20 years, with extensions granted by the government on a case by case basis. There is also the suggestion that bidding rounds will be introduced for permits of particular size or importance. While many firms working in the industry would be in favor of under-exploited titles being re-sold, the use of bidding rounds, while appropriate for oil and gas ventures, is generally considered to be unsuitable for mining activities. The second area likely to change concerns the work requirements for each mining title. Minimum levels of investment look set to be introduced with a possibility that mining firms will face the same local content requirements that oil and gas firms currently contend with. In accordance with the goal of boosting local metal processing set out in the National Mining Plan 2030, firms could see incentives offered to develop local processing facilities. The final question concerns the royalty regime. Brazil has some of the lowest rates in the world, just 3% on iron ore and 1% on gold. The government is looking to double royalties on a number of minerals. A possible flexible royalty rate, designed to decrease as prices wane has also been proposed. While some firms judge the increases as fair compared to those elsewhere, others point to the high overall tax burden in Brazil. Most of all companies are worried about uncertainty and until the government produces a clear vision for reform, investors have a right to be circumspect.

2012

comParátive tax rates (2010)

Country

Corporate Tax

Brazil

15% + 10% social contribution of 9% based on net profit (worldwide income regime)

Canada

Federal Tax: 18% in 2010 decreasing to 15% by 2012 Provincial Tax: between 10%–16%

Australia

Colombia

Peru

Remittance Tax 0% on dividends 15% on royalties and technical service 25% on others 25% on services with no transfer of technology

Specific Mining Tax

The rate varies according to the type of mineral, from 0.2% to 3%

Each province imposes its own mining tax under systems that vary significantly 25% on dividends, Applicable tax interest paid to rates vary between related parties, 10% to 16% rent, royalties, Mining tax base is management typically revenue fees rendered in less most expenses Canada unless except financing reduced by tax and property treaties in force acquisition costs No withholding tax on loans from unrelated parties

30% (worldwide income regime)

0% on franked dividends 30% on unfranked dividends 10% on interest 30% for royalties

Bulk material: 7.5% Concentrate material: 5.0% Metal: 2.5%

33% (worldwide income regime only Colombian source for branches of non-resident companies)

No tax on dividends paid out of taxable earnings Otherwise a 33% withholding tax applies (treaty relief available) No branch profits or remittance tax

Certain specific taxes such as royalties from 4% to 6%

30% (worldwide income regime)

4.1% on dividends upon distribution in benefit of domiciled individuals or non-domiciled beneficiaries (either individuals or legal entities), 15% on technical assistance and 4.99%–30% on others

1-3%

Source: PwC Global Mining Group

POLITICS & ECONOMY

lead issue

lead ISSUE investor sentiment towards ComParAtive Taxation regimes (2011)

Mild deterrent to investment Strong deterrent to investment

Source: Fraser Institute

Would not invest due to this factor

Source: Xstrata (Global Insight)

Mining countries by growth in mining value added to GDP 2001-2008

Source: PriceWaterhouseCoopers Total Tax Contribution study for the mining sector

Composition of taxes and contribution borne by the mining industry (2010)

David Mendelawitz Managing Director Cleveland Mining “Increases to Brazil’s royalty rates will only bring them to the level that Australia is leaving now. The cost advantage of Brazil will remain. Australia is Brazil’s competition in the iron ore industry and the government there is proposing changes that will be an impediment to mining. Brazil at 6% iron ore will look attractive in comparison. If you can’t pay 6% you shouldn’t be in this game.” Luciano de Freitas Borges President Ardent Mines “Royalty increases will certainly have a negative impact in both the project’s feasibility assessment parameters as well as in the long term economic return of the mining activity for the country. As soon as you increase the cost, a company must start to high-grade and the more you high-grade the more you reduce the lifetime of a mine - it’s a principle that goes directly against sustainability.” Bruno Soares Partner Allen & Overy LLP “Investors are concerned about the potential that royalties will be calculated from gross revenue instead of net revenue, or the potentiality of paying a fee for not processing your mineral in the same state as extraction. A clear and constant set of rules needs to be implemented, one that will not change with every new government. This gives investors the chance to build a clear business plan and to calculate their internal rate of return.” Pedro A. García Partner Veirano Advogados “Rumors on changes to Brazilian regulations have unsettled some investors. Authorities need to understand that one of the main reasons for the massive foreign investment received between 2007 and 2011 was legal stability. The uncertainty of regulatory changes probably hasn’t reduced the number of investments yet but the government must be careful, otherwise Brazil could lose investment to its neighbors.” Mining Leaders

leader insight Raul Felipe Papaleo President Brazil-Canada Chamber of Commerce

As President of BCCC, Raul Felipe Papaleo is leveraging his 40 years’ experience of Brazilian and international business, to promote trade and investment between Brazilian and Canadian enterprises. Serving as an active Member of the Brazilian Institute For Corporate Governance, Papaleo is familiar with the issues facing investors coming to Brazil, but is confident that state and federal government are offering the necessary incentives to encourage trade. BCCC is headquartered in Toronto, has an office in Montreal and in 2012 will expand to Calgary and Vancouver. POLITICS & ECONOMY

polar ties

Mining is one of the most important sectors in bilateral trade between Brazil and Canada. The economic base of both countries is founded on natural resources and mining is the most profitable area. This means that trade between the two countries is established in a climate of mutual understanding. Prime Minister Harper arrived in Brazil in August 2011 to announce record trade of $6 billion in 2010 between the two states. But really, looking at the size of the two countries’ economies, that figure is just a drop in the ocean. There is huge potential for trade, investment and sharing of skills. During his time here Prime Minister Harper, in conjunction with President Rousseff signed four important agreements, which included a social services agreement and the establishment of a Canada-Brazil CEO Forum. The Brazil Canada Chamber of Commerce operates under four mandates, all of which work together in the pursuit of improving and increasing trade and investment between the two countries. The four mandates are networking, advocacy, service and information provision. Networking involves joining Brazilian and Canadian enterprise and institutions – commercial, industrial and service providers. Advocacy means providing support for companies and sectors facing difficulties, as well as building good relationships with government. Our third mandate, service, signifies aiding companies in a complete evaluation of market conditions allowing them to better plan and execute investment. Perhaps our most interesting mandate, and certainly the one in which we have been investing most heavily, is information provision. Our website was

2012

“Mining is one of the most important sectors in the bilateral trade between Brazil and Canada. The economic base of both countries is founded on natural resources and mining is the most profitable area.”

recently overhauled and we send out a bi-weekly newsletter. We have branched out into a private social media site for members which allows for more fluid exchange of ideas and investment. Our commercial committee is establishing a database of markets, products and companies in Brazil and Canada. Also, we bring a variety of speakers to talk to our members, including Henrique Meirelles, former President of Brazil’s Central Bank and the current President of the Brazilian Olympic Public Authority, state governors and experts who explain trends, opportunities and barriers.

We have close to 150 corporate members, most of them being Canadian – due largely to the geographic location of our offices. The challenges that our members most often face center on issues of taxation and sustainability. However, we emphasize that behind every big tax there is always an incentive. We keep our members updated on the development programs that both federal and state governments are providing. Likewise, business has to be approached in a sustainable manner; this is particularly relevant for mining companies. Looking historically at the relationship between Brazil and Canada, we can see that there is an established pattern of successful investment. Vale acquired Canada’s second largest mining company, Inco, for $18.9 billion in October 2006. A huge number of Canadian juniors have entered Brazil in recent years. The amount of people travelling for business between the two countries is growing and Canada is the number one destination for high school and language students. The return on investment has been proven, the cultural exchange has been established all that’s left is Brazilian and Canadian companies to take full advantage of the opportunities so clearly laid out.

q&a

Dr. Anthony Hodge

President International Council on Mining and Metals

LEADERS NEEDED

During the last two years, what is the biggest change you have seen in the industry’s perception on social and environmental responsibility? PDAC, in March 2012, was a signal event. I remember a time when there was huge resistance to putting corporate social responsibility issues on the agendas of mining executives. One of the biggest changes we are noting is the new interest coming from the financial services industry. This has been one of the sparks of change. Before putting money into companies, investors do their due diligence and in the last two years have begun to closely examine how companies are dealing with social issues – what are their principals, what action are they taking and really, most importantly, what is the depth of the understanding. How important is it to implement CSR practices in the exploration stage? The nature of the industry is that only 1 in every 1,000 targets makes it to a mine. Regardless, if you develop bad relations at this early stage of the game, the chances of a major coming along and acquiring your project are reduced dramatically. If you don’t deal with these issues effectively it will have direct implications for the success of the company. Companies in the past have been slow to communicate with local communities regarding the benefits of mining. How important is communication and what’s the best way of approaching it? Companies can’t just think in terms of taxes and royalties because the social implications of mining are profound. I think the industry has shot itself in the foot by propagating taxes and royalties as the main benefit mining brings to communities. This is the industry’s message. Yet, when governments around the world come for a bigger piece of the pie - more taxes and royalties – companies feel isolated and insecure. The reality is that mining can affect five to seven generations of the same family – it affects the very social fabric of a community. When you ask people what they want, the response is the same across the world and that is stability for their children. This is an

POLITICS & ECONOMY

Established in 2001, the International Council on Mining and Metals (ICMM), is governed by a council of top CEOs from companies such as AngloAmerican, AngloGold, BHP, Newmont and Xstrata. ICMM president, Dr. Anthony Hodge believes the industry has the power to become a leading innovator in sustainable socioeconomic and environmental development, which his body aims to promote. important lesson – communication has to be two way. It’s not a matter of the industry telling a story; rather it should be a process in which we listen and then reflect the interests of the host community in the structure and design of future plans. You have to make the communities feel what you are doing. That is a curve in front of the mining industry. Our greatest challenge is the fractured nature of the sector. But it is like any industry, at the top you have leaders and at the bottom you have a group of truly hostile avoiders. When I first started working a colleague asked me “are we working for the dark side?” But we need to stop thinking about ourselves as producers of metals and start imagining ourselves as an agent of positive social change. What defines these leaders and how can we learn from them? The CEO of Xstrata said the greatest insurance policy he has was good community relations. That reflects a concept of mining with a different framing, which is remarkable. All of the guys who sit on the 22 man ICMM council display an aspect of that. They are not just talking about making a few more pounds or a few more ounces; they are accepting an identity which is saying “our role in society is profound.” I think that the mining industry has found itself as a leader in some of these CSR issues because it operates on the edge. I lived in the Yukon for a decade and now I live in London. But I experienced some of the most innovative solutions there, on the periphery. Mining operates on the periphery, in extreme terrain and weather, amongst indigenous communities and with some of the largest financial risk of any sector. This placement demands innovation that only some CEOs are able to embrace. What is the relationship between Rio+20 and ICMM? We are extremely anxious that the industry will have a profound impact on the goals of Rio+20. We are participating in the development of it. We have been contributing and we are looking at it in terms of how we can understand the agenda of concerns arising. Then we can look at how the mining industry can contribute. Mining Leaders

POLITICS & ECONOMY

article

South By South East As President Luiz Lula da Silva approached his American counterpart at the G-20 Summit in London in April 2009 the cameras were there to catch Barack Obama’s effusive greeting, “That’s my man right here… He’s the most popular politician on earth.” Possessing little foreign experience prior to his election and with a propensity for grammatical gaffes, many in the Brazilian elite, a group highly sensitive to the opinions of the outside world, feared that Lula would be a source of embarrassment on the international stage. But the president’s charisma and common touch made him a hit with world leaders and allowed Brazil to embark on a far more ambitious foreign policy than at any time in its history, without stepping on too many toes. The country has diversified its trade relations, taken a leading role in the financing of international attempts to resolve the global economic crisis and is pushing for a permanent place on the UN’s security council. But not all of the country’s diplomatic efforts have been successful and attempts to increase Brazil’s profile on the international stage have often been haphazard. Under Dilma Rousseff, another leader with little experience of international diplomacy, Brazil needs to focus on its foreign policy and develop a defining strategy. Brazil has been a formative force in the growth of south-south trade, embracing political ties and the numerous acronyms

2012

the phenomenon has spawned. Lula has advocated greater regional integration through the creation of the Union of South American Nations. The grouping together of Brazil, India, Russia and China, countries with little in common other than high growth rates and large populations, into the BRIC group was essentially a marketing ploy by Goldman Sachs. Yet the countries concerned have taken it seriously and each spring they meet together at the BRIC summit. Since 2002 Brazil’s trade with China has increased by a multiple of 17, reaching exports of $256 billion in 2011, leading to the displacement of the US as Brazil’s leading trade partner. Despite the 2003 creation of the India-Brazil-South Africa Dialogue Forum (IBSA), trade with India and South Africa remains modest. Although a 20% growth was registered in 2011, Brazilian-Indian trade remained under $10 billion. But IBSA, with its focus on three growing democracies, is often heralded as an example for future similar south-south trade agreements and since the demise of the non-aligned movement is one of the leading voices for the developed world. The alliance with India is also a key plank in the Brazilian government’s attempts to gain a permanent seat on the UN Security Council. While the UK and France support Brazil’s inclusion in an expanded council, the US and China have vetoed the proposals. Following

the reconciliation with its traditional adversary, Argentina, Brazil’s military has struggled to find a purpose in a continent largely absent of national conflicts. Instead it has focused on protecting the integrity of its Amazonian border, helping the Colombian government rescue hostages held by guerilla forces. The country has also become the second biggest contributor of troops to UN peacekeeping missions, heading up the UN’s Haiti operations since 2004 and sending forces to 23 countries in recent years. Just what Brazil expects to achieve with its Security Council application and peacekeeping efforts, aside from increased prominence in global affairs, is unclear. Many Brazilians criticize the policy as a diplomatic vanity project, pointing out that the money and energy could be better spent on resolving the country’s domestic problems. The country’s failed nuclear and space programs are often cited in tandem as further examples of where Brazil’s ambitions of becoming a ‘global player’ have proved misguided. Under Lula and now Dilma, however, Brazil has emerged in an unlikely role of an international creditor. The country is the fourth largest holder of US Treasury bonds and purchased $10 billion of IMF bonds in 2009. As the Euro crisis deepens, Brazil finds itself in a strong position vis-à-vis the fund, offering support in return for increased voting rights. Dilma has also said that the government was studying options to throw Portugal an economic lifeline, either through the purchase of a portion of its sovereign debt or the early buy-back of Brazilian bonds held by the Portuguese. In a reversal of the traditional ‘emerging market’ role, Brazil is investing heavily in Portugal. FDI from the South American power to its former colonial master topped $300 million in 2010 and there are expectations that Petrobras will buy a stake in Portuguese national oil firm Galp. The global economic crisis has afforded Brazil the opportunity to prove itself as a both a stable economy and a responsible global citizen. This quieter approach to achieving diplomatic influence is more suited to Dilma’s leadership style and is likely to yield greater benefits than the Security Council bid will.

LatAm Mine Water Conference 2012 -Understanding water value and overcoming challenges29 â&#x20AC;&#x201C; 30 August 2012, Rio de Janeiro, Brazil

Join our dedicated efforts to resolve issues related to Acid Mine Drainage

Watershed Management

Water Scarcity

Climate Change

Mine Water for Hydro-Electric Power Generation

CSR Practices in Mining

www.fleminggulf.com/register-online

For further information contact sonika.mendjoge@fleminggulf.com ASSOCIATE SPONSOR

TABLE TOP SPONSOR

SUPPORTING PARTNER

WATER PARTNER ASSOCIATE

SUPPORTING ASSOCIATION

IPWA

MEDIA PARTNERS:

Global Water Intelligence MEDIA

INTERNATIONAL PRIVATE WATER ASSOCIATION

IRON ORE

2012

lead article

TO BE ORE NOT TO BE?

n a sweltering hot day in July 1967, an aerial survey plane from Companhia Meridional de Minerações (CMM), a subsidiary of the U.S Steel Company, was forced to make an emergency stop on a barren hill top in the middle of South East Amazonia. The fortuitous landing resulted in the largest iron ore discovery in history. Covering 160,000 ha with an estimated resource of 18Bt and an iron content as high as 66%, the Carajás deposit galvanized Brazil’s position as one of the most prospective iron ore jurisdictions in the world and helped consolidate Vale as a major global player.

Photo: VALE

Today iron ore is one of Brazil’s most important commodities, accounting for over 80% of mineral exports in 2010 at a value of $29 billion. In 2011 the country produced 467Mt of the mineral, a 25% Mining Leaders

lead article

$45

billION expected investment in iron ore from 2011 - 2015 Photo: Vale Dilma Rousseff ’s “Bigger Brazil” economic policy will see the construction of new ports and other infrastructure, which will open up opportunities for new players

There are other major deposits within Minas Gerais, including Rio de Peixe Bravo - with an estimated resource of 10Bt at 35% Fe - and Guanhães and Morro do Pilar which both have nearly 500Mt of reserves, just north of Belo. Elsewhere in the country there are further major deposits at Corumba in Mato Grosso do

2012

Sul on the border with Bolivia. In March 2012, IMS Mineração, the company developing the Juína project in the region, released a total resource of 5.29Bt grading 40.5%. Given the grades of over 60% in much of the country, grades of 40% had previously been considered uneconomical, but higher iron ore prices have changed that. In Bahia state too, major iron ore deposits in the 40% grade range have been known for some time, but it is only recently that a number of firms have begun developing projects in the region. When Bahia Mineração’s Pedra de Ferro project comes on-line in 2014 with an expected production of 200Mt/y Bahia will become the third placed state in Brazil in terms of iron ore production. The development of the mining industry in Bahia is considered

to be one of the major areas of future opportunity by many experts. Around four fifths of Brazil’s iron ore is produced by former stateowned firm Vale, the second largest mining group in the world. Following years of state monopoly between the firm’s establishment in 1942 and its privatization in the mid-1990s, Vale not only owns the country’s largest deposits but also controls a vast private infrastructure network of railroads and ports. The firm is undertaking a myriad of projects across the country, with total investments of close to $19 billion. Salient amongst its current portfolio is the $3.5 billion expansion of the Carajás Serra Sul project, which will add a further 90Mt/y of production when it comes

Brazil’s iron ore production (mt)

Source: Sinferbase/USGS/DNPM

increase on the previous year’s figure and placing the country firmly in the top three producers globally, alongside China and Australia. According to the Brazilian mining association, Ibram, iron ore projects will attract a massive $45 billion worth of investment between 2011 and 2015, out of a total $68.5 billion across the wider mining industry. With nearly 30Bt of measured and indicated reserves, the country has the fourth largest endowment in the world, but with huge tracts of the country still unexplored this figure has potential to grow significantly. Currently over 95% of iron ore is produced in the states of Pará, where Carajás is located, and in Minas Gerais, home to the Iron Ore Quadrilateral. This 7,200 square kilometer area, just south of state capital Belo Horizonte, is the most developed mining region in the country. In addition to access to the mining services and personnel in Belo Horizonte, the Iron Ore Quadrilateral is served by excellent infrastructure, including 100 pig iron smelters and nine major steel mills.

lead article

Photo: Samarco

online in 2014. Despite the famously high quality iron ore at Carajás, Vale is also looking to address the problem of falling grades, establishing research centers to develop extraction and concentration technologies to mine deeper. Working in a market dominated by a firm of Vale’s stature is a challenge. Not only does the local giant control the primary iron ore infrastructure, but it is also a magnet for local talent and the preferred client for the local construction and mining services firms. But private companies have proved that it is possible to gain a foothold in the Brazilian iron ore industry and have followed a number of different routes. Back in 1977 BHP Billiton teamed up with Vale in a 50:50 partnership to form Samarco Mineração to develop the Alegria mine in the Iron Ore Quadrilateral. Today the firm accounts for over 6% of Brazilian production. Brazilian billionaire Eike Batista established MMX in 2005 to develop three greenfield projects, before selling controlling stakes in two of them to AngloAmerican. MMX is now developing new mines in Minas Gerais and its own $1 billion port on the coast of Rio de Janeiro. Other local firms, including Companhia Siderurgica Nacional, Namisa and Usiminas have billion dollar projects underway, while Arcelor Mittal, Ferrous Resources and China’s Honbridge group lead a contingent of major international firms in the country.

Vale, the former state-owned firm, is the second largest mining group in the world

For juniors entering Brazil, such grand schemes are out of the question. Nevertheless a number of Canadian and Australian firms have acquired projects in the country. Some have headed straight for the Iron Ore Quadrilateral and picked up high grade projects. South American Ferro Metals acquired the Ponto Verde project in 2008 after its former owner had failed to meet environmental requirements. Another Australian firm, Centaurus Metals, aims to bypass Vale owned infrastructure to sell its product to the domestic steel industry, before looking

80% of brazil’s mineral exports were iron ore in 2010 to move into export-focused business in the long term. Hilltown Resources, a Canadian junior, has entered into a joint venture with local firm Socoimex, to sell product from its Capanema project at a fixed price. Cleveland Mining has chosen to focus its iron ore exploration in the northern state of Amapá, an area removed from Vale’s control of infrastructure.

Profitable iron ore projects depend heavily on access to infrastructure and the development of new ports and key rail links such as the NorteSul and Transnordestina railroads will be crucial to opening up new avenues for exports. But other challenges still remain. As of April 2012, Anglo American’s $6 billion Minas-Rio iron ore operation in Minas Gerais had been halted seven times by the state relating to different environmental licensing and permitting processes. Likewise, in Pará state, the March 2012 introduction of a new mining tax of R$6.9 per ton of product demonstrates the intent and capacity of individual states to increase their revenues from natural resources. Finally, while it is true that the price of iron ore remains high, despite falling from its 2011 peak, there are concerns that Brazilian exports have become over-dependent on China, given the anticipated slowdown in that country. The opening up of the Brazilian mining industry and the resiliently high commodity prices have nevertheless created a buzz around the iron ore sector. Although its production remains behind that of China and Australia, the excellent grades found in the country and the potential for new world class discoveries provide the firm fundamentals that the world’s mining majors and junior explorers require. Mining Leaders

q&a

valuing Murilo Ferreira CEO Vale

Vale

IRON ORE

Present in 38 countries, Vale today has a portfolio of world-class projects, operations and mineral exploration initiatives. A major part of its growth has been organic, realised through heavy investment to meet growing demand for iron ore as well as nickel, coal, copper and fertilizers. Murilo Ferreira, CEO of Vale, has put transparency at the top of the company’s agenda for 2012. As the new CEO of the company, you have signaled a desire for greater transparency from Vale. What do you see as the key tasks and goals to be achieved during your tenure? Transparency and discipline are key to achieving our goals. To know how to listen to and talk with our employees, analysts and investors in a very clear and straightforward manner is essential. Discipline in capital allocation is a priority. Since I took over as CEO of Vale, I have highlighted that our main goals are to ensure that the company provides the best return to shareholders, values its sustainable practices and offers a great workplace, with the highest health and safety standards. The Boston Consulting Group estimates that Vale has produced more value than any other firm in the last 10 years. What strategy has enabled this accumulation of value? Vale has a record of growth and diversification. While its core business remains iron ore, of which it has been the world’s biggest producer, Vale has become a global mining company reflecting its expansion into other areas such as nickel, coal, copper and fertilizers in Brazil and abroad. A remarkable step towards becoming a global mining power was taken in 2006, when Vale acquired Canadian nickel miner Inco, allowing it to position itself as the world’s second largest nickel producer. And we believe that, as early as 2013, we will become the number one in nickel too. Profits reached $18,800 billion in 2011, the highest amount ever reported by a publicly traded company in Brazil. What key projects will fund this growth? No matter how we grow in other minerals, such as nickel, coal and copper, iron ore will remain our major source of revenue and growth. And all of our iron ore today is produced in Brazil. Vale is investing heavily to expand its iron ore operations. Carajás Serra Sul S11D, Carajás expansion project and Serra Leste are key projects. Serra Sul S11D is our most ambitious iron ore project. It is located in the southern range of Carajás,

2012

in Pará state, and is expected to add 90Mt/y to our production capacity. We are talking about estimated investments of $19 billion in the development of a mine, processing plant and rail and port facilities. Start-up is expected for the second half of 2016. The Carajás Expansion will add 40Mt/y. Both that and Serra Leste are expected to come on stream in 2013. Aside from iron ore, it’s also important to mention our fertilizer projects, for example, Rio Colorado in Argentina, with a estimated nominal capacity of 4.3Mt/y of potash, will be our first greenfield potash project. In a logistics intensive industry, what key challenges in the infrastructure sector need to be overcome for Vale and the iron ore sector in general to reach maximum potential production? As you mentioned, logistics is a key element of the mining business. Vale develops its logistics business based on the transportation needs of its mining operations. An important project under development in Brazil is the CLN 150Mt/y project, designed to increase the northern system railway and port capacity, including the construction of a fourth pier at the Ponta da Madeira maritime terminal, in the state of Maranhão. This project involves an estimated investment of $3.47 billion. It’s also worth noting that Vale, in addition to investing in expanding capacity, focuses on developing training programs to guarantee greater security and operational efficiency. To give you an example, Vale created the Vale Engineering Center, which brings together the infrastructure necessary to implement technical training for railway, port and navigation. The center has been operating in Vitória, in the state of Espírito Santo since 2009 and has the most modern train simulator in the world, developed by Vale in partnership with the Polytechnic School at the University of São Paulo. The equipment faithfully reproduces the company’s railroad network using 3D technology, and is used to train drivers. Another initiative is the artificial

q&a

$21.4 Billion

2012 investment in project execution, R&D and Sustaining existing operations intelligence system developed by Vale in Ponta da Madeira. It allows remote operation of stackers and reclaimers used to transfer ore from the dockyard to the ships. Maranhão is the first state in Brazil to have a port terminal with all dockyard machines operated by remote control.

Brazilian ore departs on the long journey to Asia

To what extent was the decision to trim Vale’s 2012 investment plan by 11% based on uncertainty over iron ore prices? What scenarios regarding prices are the firm With mining in Brazil suffering from a negative public anticipating in 2013? perception, what projects does Vale engage in that could There was no reduction in the capex budget. Vale invested be seen as examples of responsible corporate practice? $17.9 billion in 2011, a significant increase of 42% over the Leaving a social, economic and environmental legacy, working $12.7 billion invested in the previous year. in an integrated manner with governments For 2012, Vale aims to invest $21.4 billion, and society, and acting as a catalyst for local “Serra Sul S11D in Carajás is our of which $12.9 billion in project execution, development in the medium and long$2.4 billion in research and development most ambitious iron ore projects and term are Vale’s commitments to sustainable is expected to add 90 Mtpy to our and $6.1 billion in sustaining existing development in the areas where it operates. production capacity. We are talking Vale has a number of programs designed to operations. As for iron ore prices, Vale about estimated investments of $19 makes no projections but we expect prices mitigate risks and leverage opportunities billion in the development of a mine, in the regions where it is present. These to recover as demand picks up in the second processing plant and rail and port quarter of 2012, following the end of the include programs for impact management, facilities.” Chinese winter. vocational training, supplier training, local and traditional community relations, culture, In January 2012, The Economist featured Brazil as one of mine closure and other social programs. These programs take the leading ‘state capitalist’ economies. Is government place from the implementation phase up to the end of activities, influence over the affairs of ‘national champions’ such as in line with conditions at each site. In 2012, Vale aims to invest Vale overstated? $1.65 billion in social and environmental actions. We understand that the company’s performance affects our various stakeholders and the government is one of them. In which regions of the world and in what minerals will we As I said before, we are here to bring the best return to our see the most dramatic developments in Vale’s business in shareholders, to promote sustainable practices and make sure the next 12-18 months? that we offer a healthy work environment. And that’s what In addition to Brazil, Africa is home to our biggest projects. we have been working on. Concerning the mining code, we In Mozambique, we operate the Moatize coal mine, with a don’t know the content yet but we hope it will not hinder the total capacity of 11Mt of coal, and we are investing to double its capacity by 2014. mining industry’s competitiveness. Mining Leaders

feature interview

IRON ORE

a giant finds its feet Having developed its ambitious Minas-Rio project from greenfield stage, Anglo American has encountered various issues regarding licensing which have slowed operational works. However, CEO Paulo Castellari, is convinced that by Q2 2013 the projects low cost iron ore will finally enter production, allowing Anglo American to become a major player in Brazilian iron ore. “A project that covers 600km across 32 municipalities and two states is bound to face some challenges” says Paulo Castellari, CEO of Anglo American’s Brazilian iron business unit. With a capex of over $5 billion, the MinasRio project is the company’s biggest investment to date and one of the most ambitious integrated iron ore projects ever undertaken in Brazil. Minas-Rio is located in Minas Gerais, the traditional hub of iron ore production in Brazil, and will include an open pit mine, a beneficiation plant and a slurry pipeline to the Port of Açu in Rio de Janeiro. The firm has had to deal with delays relating to the installation of an electricity transmission line, but Castellari remains undeterred by the challenges ahead given the huge mineral resource that could be at Anglo American’s disposal.

2012

First arriving in Brazil in the 1970s as a coal producer and then diversifying its operations into base metals and iron ore, Anglo American has built up a strong familiarity with the Brazilian market. Constantly working to secure high value low cost assets, the company took a minority stake in the Minas-

“If there is no way to transport iron ore from Minas Gerais to the coast, it’s not a problem we’ll find a way; if there’s no port to export, its ok - we’ll build it.”

Rio project in 2007 and later in 2008 acquired the remaining 51%. At that time the resource base was 1.2Bt. Following additional drilling,

mineral classification and geochemical studies, that figure increased to 5.8Bt, justifying a mine life of 20 to 25 years. Minas-Rio has been conceived in three phases, with the first stage allowing for a 26.5Mt production capability, with eventual ramp-up to 90Mt/y. But despite the nearly five-fold increase in the resource in recent years, Castellari insists that there is still potential waiting to be unlocked on the site. “We feel confident that our resource can grow” he says “our firm has almost 100 years’ experience in developing these projects and we know what it takes to be successful in Brazil. So if there is no way to transport iron ore from Minas Gerais to the coast, it’s not a problem we’ll find a way; if there’s no port to export, its ok - we’ll build it.” Logistics are key to iron ore projects and Brazil’s infrastructure consistently emerges as one of the greatest obstacles facing new investment in the country. Slurry pipelines have developed as an alternative to both impractical road transport and costly rail alternatives. As of 2009, Brazil had 7,000km of oil

Paulo Castellari

90mtpa and gas pipelines and only 1,500km of slurry pipelines. Vale controls the large majority of current pipelines running through the country but, once completed, Minas-Rio’s planned pipeline will be the most extensive in the Brazil. Running for a total of 525km, the pipeline has been challenging in terms of social permitting and licensing. However, following internal procedures garnered from years of large scale infrastructural planning, Anglo American has successfully secured 90% of the land and a total of 220km of pipeline has been installed. The project will be hiring 1,500 direct employees and 3,500 indirect employees. During the construction of the pipeline, 15,000 people will work on the site. Anglo American is no stranger to delivering large scale integrated projects and dealing with the social licensing challenges that they often entail. In 2011 alone, production began at the $1.9 billion Barro Alto nickel project in Brazil, the 200ktpd brownfield expansion of Los Bronces copper mine in Chile was completed, and in Australia a copper expansion project was completed and thermal coal and platinum projects began production. Nevertheless, the company has come across various obstacles. By May 2012, 86% of the earthworks at the beneficiation plant had been completed but an ongoing dispute over a transmission line which would connect the site with the national grid caused worry amongst investors who were eager to see production start within the 15% capex increase previously announced. The disputed licensing process means the company is presenting its case to the ministry. However, Castellari remains optimistic, “Everything else in the project is going as planned – we continue to work at the pipeline and at

final iron ore production of minas-rio

Up to 15,000 workers will be employed by Anglo American Iron in the construction of the Minas-Rio mine

the port. It’s just a portion of the works at the plant that has been suspended. I have no reason to believe that what we are planning will have any other issues in the area.” To date, iron ore projects make up only a small proportion of Anglo American’s Brazilian project portfolio which is dominated by its major nickel projects. However, when Minas-Rio enters production, which is estimated to be in the first half of 2013, it will be a game changer for the company. With iron ore prices falling 20% from their peak in 2012 and production costs increasing as a result of currency inflation, Anglo American remains acutely aware of the changing economics of the Brazilian iron ore industry. However, the Minas-Rio project was chosen on the basis of its low production costs. The firm estimates that the annual output of 26.5Mt wet base pellet feed can be delivered to China at a cost of about $50 per ton, with costs split equally between production and transport.

China is the largest steel producer and consumer in the world and accounts for more than two-thirds of global seaborne iron ore imports. Anglo American has been operating in Brazil for close to 40 years and Castellari notes that in that time the country has seen massive development but the mining code has remained unchanged. However, he is positive about Ibram’s ability to represent the sector and believes that the most important thing is that the industry stays unified as a whole. “Change is healthy and normal. I think it is clear from the investments we are making that we want to stay here in the country. The message that we always work with is making sure that Brazil remains a competitive location for mining.” The size of the Minas-Rio project, plus the new technologies and infrastructure being introduced means that the market is closely watching the company’s progress. The project will likely be used in the future as a blueprint for large scale infrastructural projects. Mining Leaders

project focus

South American Ferro Metals Limited (ASX:SFZ) Iron Ore Quadrilateral 6,000m Phase 1 drill program 2,000-2,500m Phase II drill program

Since the early 1700’s, Minas Gerais has been at the heart of Brazil’s iron ore industry. But while the state’s great source of commodities has been the main catalyst of wealth in the region, in recent years many projects have been bottlenecked by strict laws. As a result many projects have been out on hold, waiting for environmental permits. Now international firms, with high operating standards, are bringing these projects back into production.

Ponto Verde was an example of a 230Mt iron ore mine with 44.5% Fe content (JORC Mineral Resources Estimation – December 2011) that was surprisingly shut down by the government due to its insufficient environmental practices. Having acquired the project in 2008, it took SAFM two years of negotiations with the Brazilian government to finally acquire the necessary licenses to re-open the mine and commence operations in October 2010. Following a year without operational accidents, the mine returned to production. “It surprised investors when they learned that the timeframe from May to December 2011 was profitable after everything the mine had gone through” says Eduardo Freitas, Commercial Director of SAFM. SAFM’s present-day license allows production up to 1.5Mt/y and it is currently producing at this capacity with both small lump and sinter feed products. SAFM is developing another

2012

concentrating plant which will increase its production by 20% by June, 2012. A a $3 million magnetic separator is being installed at the plant, which will result for an increase in cash flow and a superior quality iron ore grading at 62-64%.

“SAFM is a young, healthy company staffed by professional experts. We are not only focused on production or profit but also on maintaining a great bond with the local population.” Eduardo Freitas

The future looks promising for SAFM. In 2011 the firm achieved JORC compliance, meaning the firm is now abiding by both Brazilian and Australian mining laws and in 2012 it expects to start processing the necessary government environmental licenses to increase Ponto Verde’s ROM to 8Mt per year. In addition, a second phase drilling program is scheduled for February 2012 that will add an extra 3,000m to the existing 6,000m already drilled. With ambitious plans in the Minas Gerais area and an eye in the Pará and Bahia regions, SAFM is well placed to become a significant player in the Brazilian iron ore industry.

Commercial Director & COO SAFM

belém

belo horizonte

PONTE VERDE Exploration Target (Initial exploration target of 140 – 150 million* tonnes of Hematite-rich Itabirite) VOLUME (Mm3)

TONS (Mt)

MEASURED

9,81

INDICATED

CLASS

GRADE Al203 (%)

Mn (%)

P (%)

PPC (%)

(-11/2”+ 1/4 ”) (%)

(-1/4”+ 1,00 mm) (%)

(-1,00mm (-100 + 100 mesh) mesh) (%) (%)

Fe (%)

Si02 (%)

28,15

40,04

36,05

1,64

1,194

0,062

2,97

17,12

8,25

10,15

62,27

21,29

59,57

41,16

33,94

2,18

1,258

0,054

3,06

19,84

9,34

8,99

58,99

MEASURED + INDICATED

31,10

87,72

40,80

34,62

2,01

1,24

0,06

3,03

18,97

8,99

9,36

60,04

INFERRED

21,15

61,41

36,87

38,35

1,77

0,826

0,052

2,87

17,96

9,84

9,62

59,41

TOTAL

52,26

149,13

39,18

36,15

1,91

1,068

0,055

2,96

18,55

9,34

9,47

59,78

TOTAL RESOURCES

*Resource is presently not JORC compliant

Source: Coffey Report November 2009

IRON ORE

ponte verde

(IABr)

(2010, Ibram)

jurisdiction overview

(SAFM)

of Brazilâ&#x20AC;&#x2122;s iron ore goes to China

brazil iron ore consuption (mt)

RANK COMPANY NAME

COUNTRY

PROD AREA Mt

METAL

Vale

Brazil

255

Brazil

Div.

Rio Tinto

172

Australia, Canada

Div.

BHP Billiton

Australia

137

Australia, Brazil

Div.

SAIL / NMDC (State of India) India

India

Iron Ore

Anglo American

South Africa, Brazil

Div.

43.8

Mining Leaders

Source: Raw Materials Group, Stockholm 2011

top iron ore companies 2009

lead issue

infrastructure IRON ORE

Haroldo Fleischfresser Executive Director Sul Americana de Metais

Brazil has experienced rapid growth over the last ten years with limited supporting infrastructure. According to Morgan Stanley, the percentage of GDP spent on infrastructure has been declining since the 1970s when it measured 5.4%. In the 1980s it fell to 3.6%, it dropped to 2.3% in the 1990s and finally reached an all-time low of just 2% in the 2000s. The high volume low margin ratio of iron ore mining means that infrastructure is the most common obstacle for new investments in the mineral. A case in point for the difficulties facing new iron ore operations coming online is IMS Mineração 5.29Bt Juína project in Mato Grosso. Existing infrastructure is insufficient. The idea, instead, would be to extend the Centro Oeste railroad to Juína in order to transport the material to the ports of Santar’em, Ilhéus in Bahia or Santos in São Paulo. A new project in the region will see Latin America’s largest rail operator take a 50.38% stake in a new company to be called Vetria Mineração SA. An investment of $2.3 billion will be made in modernizing the existing railway to bring the ore to the port of Santos, over 1,750km away, saving the operators from using the current transportation method of transporting the iron through Argentina via 2,700km of waterways. These huge capex investments are not available to juniors entering the market who are dependent on established infrastructure, which very often is controlled by Vale. In order to keep pace with other BRIC countries, Brazil needs to double its infrastructure spending. However, hope is in sight. Approximately 40% of loans coming from the BNDES are currently spent on infrastructure projects and with the “Bigger Brazil” economic stimulus, more investment will be made in new projects. Multipurpose ports such as Puerto Central in Espírito Santo and Porto Sul in IIheus, Bahía will ease bottlenecks in Brazil’s infrastructure system.

2012

“We are third in line as far as developing new pipelines is concerned - Minas Rio, Ferrous and then us, so we are trying to learn from them, particularly for securing the right of way. There is no cookie-cutter approach – you have to try to learn from others’ mistakes. We go through 500 properties across the Cerrado. Something that will likely help is the fact that we expect to have a public utility decree.”

Paulo Castellari CEO Anglo American Iron

“We are building the longest mineral pipeline in Brazil. From start to finish it is 525km long. Any project with a footprint of that size is bound to have challenges – you have to consider land access, licensing, land owners and then the mobilization of thousands of people in safe working conditions. The pipeline crosses 32 municipalities, so we are working closely with communities and local government.”

Ronaldo Matos Valiño Advisory PWC

“Big players have a lot of opportunities to raise money to build big infrastructural projects. They are designing the whole project from the mine pit to the port. An option for smaller players is joint ventures in order to reduce costs and risks. I receive queries every day from juniors asking about infrastructural projects. Bureaucracy for licenses is a challenge. Despite that, the new president is focused on increasing efficiency.”

lead ISSUE Brazilian Iron Ore Infrastructure ports 1. Belém (Talon Metals) 2. Marabá (Talon Metals) 3. Ponta da Madeira (Vale) 4. Pecém (Bemisa) 5. Suapé (Bemisa) 6. Salvador (Vale) 7. Aratu (Vale) 8. porto central (state owned) 9. Porto de Açu (Anglo American Iron) 10. Sudeste (MMX) 11. Complexo Portuário Sul (Vale)

RAilways East-West transnordestina carajás Ferrovia Centro-Atlantica S.A. Norte-Sul (project)

R$ billion

% of total

% of GDP per year

Electricity

33.6

0.7%

Telecommunication

24.5

0.5%

Sanitation

14.2

0.3%

Railways

10.6

0.2%

Highways

12.0

0.3%

Ports

5.1

0.1%

Electricity

274

100

2.2%

Sectors

infrastructure competitiveness index 1

21 28 23 66 81 83 102

Source: World Economic Forum

Infrastructure investment plans (2010-2013)

Source: GT Investimento, APE/BNDES, Morgan Stanley LatAm Economics

Norte-Sul

*Railroad: 87th · Air transport: 93th · Road: 105th · Ports: 123th

Mining Leaders

project focus

Brasil Exploração Mineral S.A. (Bemisa) Piauí State, Northeast Brazil 65,000m drilling since 2008 15 Mt/y Pellet Feed Fines @ 71% Fe

Photo: BEMISA

Even though the most traditional iron ore mines are located in the iron ore quadrilateral in Minas Gerais, exploration outside this zone has become more common. In recent years, Piauí state has become one of the newest frontiers for exploration. Bemisa, arriving in 2008, was one of the first mining companies to enter, with its flagship project, Planalto Piauí.

Since September 2008, continuous successful drilling campaigns, totaling 65,000m, have been completed. Planalto Piauí proved to be a world-class iron ore asset. It holds measured, indicated and inferred resources in the order of 1Bt of magnetite iron ore averaging 27% Fe, certified by SRK Consulting. A certified technical report concerning proved and probable reserves should be available in the second half of 2012. Planalto Piauí is suitable to produce a premium quality Pellet Feed Fine. Pilot plant tests delivered a 71.4% Fe with negligible contaminants product obtained through magnetic separation. Pelletizing tests pointed out a real possibility to produce Direct Reduction (DR) pellets. With conceptual engineering carried out, once basic and detailed engineering is completed, building should start in early 2013. The mine will be operational by 2015 rampingup to 15Mt/y by 2017. Infrastructural and logistical aspects surrounding Bemisa’s project have feasible solutions. Water and power

2012

supplies have been granted by authorities. The Transnordestina Railway is under construction and is passing just 8 km from Planalto Piauí. This railway connects the project to two main ports in Brazil, Suape Port in Pernambuco State and Pecém Port in Ceará State, both capable of operating capesize vessels.

“Our main aim is that in five years, Planalto Piauí will have reached full capacity, adding value for our shareholders and fostering the development of Brazil’s northeast.”

Additionally, Bemisa has been granted a pre-approval letter of R$1.06 billion funding from SUDENE, the federal agency supporting economic development in northeastern Brazil. The environmental impact analysis has been approved and in May 2012 the preliminary environmental license for the mine and process plant was issued.

Augusto Lopes CEO Bemisa

piauÍ planalto piauÍ

Planalto Piauí will be a driver of change. A huge impact on local GDP and infrastructure is expected. Bringing both social and economic benefits, the project will breathe new life into one of the most underdeveloped regions in Brazil.

mineral resources of the planalto PIauÍ project Sectors

Volume (km3)

Density (t/m3)

Tonnage (kt)

Fe (%)

Measured

2,543

3.45

8,785

28.37

Indicated

182,675

3.45

630,726

27.07

Inferred

69,474

3.45

239,532

26.88

Total

254,692

3.45

879,043

27.03

Source: SRK Consulting, December 2011

IRON ORE

PLANALTo pIauí

IT’s a steel

Steel Demand Drivers in Brazil (2009 - 2016)

In 2011, Brazil was the top exporter of iron ore and niobium, and number two in manganese and bauxite. This level of production has been largely successful in bringing Brazil to the world’s attention as a growing powerhouse, but some critics warn that the dependence on resources will bring about the infamous ‘Dutch Disease,’ where demand from abroad for commodities boosts the local currency to a point where the local manufacturing base deteriorates as prices become uncompetitive. For the moment demand is strong enough in China that despite being the top producer of iron ore it must import record quantities from nations like Brazil. In 2011, iron ore exports grew to $41,817 billion from $28,912 billion in 2010, a change of 40.58%. Analysts still see plenty of room for Brazil’s economy to grow via the minerals sector; by 2015, iron ore production in Brazil is expected to reach 399.5Mt compared to 372Mt in 2011. Only 30% of Brazil’s territory has been put under geological survey, and geologists expect many more deposits to be uncovered as exploration progresses. Brazil’s mineral potential is vast, and in the coming years the sector will continue to see sustained growth. With all the attention focused on shipping iron ore across the Pacific Ocean, domestic steel producers are closing their doors because now, with the strong real, Brazilians are choosing to import steel from abroad instead of buying local production. Local steelmakers have seen a sharp fall in profitability. Profit margins that were once as high as 40% have now thinned to 10% following the surge in price of their inputs: iron ore and metallurgical coal.

Steel Demand Main (K tonnes) Segment

Time Horizon

Minha Casa, Minha Vida I

450

Long

2009-11

Minha Casa, Minha Vida II

900

Long

2011-14

World Cup

2,000

Long / Flat

2010-14

Olympic Games

2,000

Long / Flat

2010-16

Oil & Gas (mainly Pre-Salt)

2,700

Flat

2010-16

Total

8,050

Steel Demand (2010-16)

197,326

Increase in Demand

4.1%

Lacking metallurgical coal production in Brazil, domestic steel producers now must look abroad and import the important mineral. Despite the real’s strong purchasing power abroad, metallurgical coal prices are flirting with historic highs around $330 per ton. As Jean Marc Dreyer, Managing Director of Citibank Brazil, comments, “For many years, the steel industry in Brazil has been protected - there has been little investment and the cost of production is higher than in other countries. Brazilian steel companies will have to invest more to become competitive - vertical integration is a good way to improve their competitiveness. I think that building new plants in Brazil will remain a key challenge.” Critics would call the struggling domestic steel industry a textbook example of ‘Dutch Disease.’ For the moment the country is expected to continue growing in step with demand. The decline of the manufacturing sector could become a real threat if the economy remains dependent on natural resources in the future instead of diversifying into a consumer economy. The strong real and Brazil’s dependence on commodity exports could very likely lead to government intervention as Brazil continues to grow through either devaluations or subsidies. At least, Brazil will have plenty of resources to sustain the boom, for now.

Developing mineral opportunities in brazil

Since 2007, BEMISA Group has been prospecting and developing a diversity of mineral deposits. BEMISA Group covers thirteen mi neral projects encompassing a wide range of minerals: iron ore, phosphate, nickel, copper, gold, limestone and rare earth elements. With two projects on a implementation phase and four in an advanced exploration stage, BEMISA Group is present in 8 Brazilian states. Served by a hi gh qualified technical team, with several levels of specializations in Brazil and abroad, exploratory works are still in progress with 45,000 meters of drilling programmed to be done in 2012, totaling more than 100,000 meters in BEMISA’s lifetime. Investors: +55 21 3550-1260 www.bemisa.com.br

project round-up

porto grande CLEVELAND MINING (ASX:CDG) RES: Greenfield 2012: Exploration

“Iron ore is not that hard to find, but logistically it can be challenging to exploit. Our Porto Grande Project is surrounded by companies like Anglo American and Cliffs Natural Resources, so we benefit from existing infrastructure. The first phase results on this 1,200km2 greenfield project are encouraging and our management team has the necessary experience in iron ore exploration and production to bring the project to fruition.”

Trairão

1 David Mendelawitz Managing Director

RIO PARDO BRAZILIAN METALS GROUP (ASX: BMG) RES: Target 2Bt to 3Bt over 13km strike length. 2012: Resource estimation

“The Rio Pardo project currently has an exploration target of 2Bt to 3Bt of iron ore grading between 16-20% Fe which is typical of the Northern Minas Gerais region. As part of our low-cost strategy, we plan on producing a final pellet feed of 67% Fe at a rate of 25Mt per annum. An infrastructure plan is in place, which includes building a railroad link to meet the East-West railroad.”

2012

2 Luis Azevedo COO

TALON METALS (TSX:TLO) RES:1.4Bt In. at 34% Fe & 1.2 Bt If. at 29% Fe. 2012: Mineralogical and metallurgical test work

“The project is on an 18km main ridge strike. By April 2011, we raised $29 million in financing and by December 2011, 13,535m of drilling was completed in Areas 1-6 & 8. In March 2012, we received positive preliminary metallurgical studies. The company aims to become a large scale provider of pellet feed and also wishes to establish a small scale production to supply the local market and generate near-term cash flow.”

VALE DO RIO PARDO

3 Bruce McCracken CEO

SUL AMERICANA METAIS RES: Block 8: 2.6Bt M&I 2012: Engineering phase

Haroldo Fleischfresser “We have an integrated mine, plant, pipeline Executive Director and port. We have a number of mineralized

blocks in one region, but block 8 is our focus as it has a large resource base to be mined for at least 25 years. We have completed all pre-feasibility studies. We are finalizing our process route – we have low grade, friable ore, which needs to be processed to reach commercial grade levels at a competitive cost. We plan to produce 25Mt of pellet feed a year.”

Serra Norte Serra Leste Serra Sul

Iron Ore Quadrilaterel

Baratinha

MINAS-RIO ANGLO AMERICAN IRON (LSE: AAL, JSE: ANGLO) RES: 5.8Bt 2012: Pre-feasibility phase two

“Minas-Rio was conceived in three phases. The first phase will produce 26.5Mt with full ramp up going to 90Mt. We will be producing high-quality, low cost iron ore to be sold in Brazil and China. The current plan is to start operations for Minas-Rio in the second half of 2013. It involves a huge capex investment in infrastructure but the good news is that we have been very successful in delivering large-scale projects.”

Paulo Castellari CEO

6 Augusto Lopes CEO

BEMISA RES: 28Mt of hematite at 58.7% Fe 2012: Engineering & Environmental Licensing

“The project is favorably located to supply raw material to the Brazilian steel market. Two drilling campaigns, totaling more than 5,500 meters have been completed. The project will produce 2Mtpy of high quality sinter feed (up to 66% Fe). Seeking to start production in 2013, we have two main goals - to complete engineering studies and obtain the operational environmental license. By the end of 2012 both objectives should be achieved.” Mining Leaders

q&a

GOOD THINGS IN

Peter Freund Director & COO Centaurus Metals

SMALL PACKAGES

IRON ORE

Centaurus, an ASX-listed iron ore company, is using its experience of the Australian junior mining sector to create a new business model for the Brazilian market. Focusing on small to medium sized projects, the experienced management team hopes to provide swift returns for shareholders. The firm plans annual production of 2Mt Fe by the end of 2013 for the domestic market, which will be followed by expansion into export markets. What can an Australian company bring to the Brazil market? I think the major difference between Australia and Brazil is that in Australia we have a much stronger listed junior mining sector. There are small mines here, but they tend to be family owned or individuals holding tenements. The investors in Brazil are less acquainted with the same opportunities as investors in the Australian or Canadian markets. They have not had the same exposure to equity raising for this sector or to the risks associated with investing in exploration and juniors. We are mid-way between an explorer and an operator but heading very much to being an operator. The clear message is that if we present credible projects we have access to equity markets which understand the junior mining risk. Also, importantly, junior miners in Australia have found innovative ways to access export infrastructure. We are applying this here in Brazil. The ministry has projected iron ore production to grow by 60% between 2008 and 2015. Do you think that target is realistic? I will be surprised if it is reached in the timeframe. The people predicting the markets are suggesting there is still a 1Bt shortfall in projected seaborne traded iron ore. That shortfall has to come from somewhere and the countries most likely to produce it are Australia and Brazil. The predictions to supply such a market are often correct in absolute tonnage, but wrong in timing. To reach full production, we need to see improvements in infrastructure and efficiency of current assets, as well as challenge traditional infrastructure and logistics norms. Also, there needs to be more data available for iron ore production and for domestic steel consumption. There is such a myriad of small suppliers, producing a range of product qualities that it is difficult to find a market index which gives an appropriate or transparent price for domestic iron ore. Inflation is also affecting costs in Brazil, meaning that the competition from imported steel might limit Brazil’s steel production and hence stifle domestic iron ore growth. What are the challenges of doing business in Brazil? Access to the land. There are a lot of people in the business of trading rather than developing tenements and their expectations are still rooted in the pre-2008 economic climate, which saw inflated prices

2012

for undeveloped tenements. Now the challenge is getting people to free up those tenements and be rational about their actual worth especially given the frequent lack of any drilling. How do you intend to develop Jambreiro, your flagship project? Jambreiro contains 116.5Mt at an average grade of 26.8% Fe. The wonderful thing about this particular ore is that you can change the beneficiation parameters to manage the silica levels. So depending on the customer’s needs, we can produce between 63%-67% metal content. The land around Jambreiro is already being used industrially, producing eucalyptus for the manufacturing of paper pulp, so we believe we should experience relatively fewer problems with the statutory approval process. Our only challenge is time – we need to get our environmental impact study approved, which should take about nine months. Any additional finance for the development is likely to be debt. Do you intend to target the export market with this project? We plan to target the domestic market through our Jambreiro project. It is not impossible for it to become an export project but the economics dictate that it should go to a domestic market. We will also become one of the closest suppliers to some of the biggest producers of steel as we are located even closer to them than some of their current sources. Serra de Lontra, which is in the exploration stage, is being developed as our first project in our export strategy. Subject to confirming an economic resource, this project will eventually require new funding to complete resource definition, environmental studies, and the development of port access – all of the things we have already finished at Jambreiro. Of course by then we anticipate to be in a positive cash flow position with Jambreiro. What are the benefits of Centaurus’ focus on small projects? This is more of an Australian model. Small projects are an area where juniors excel, creating profit for shareholders with fewer overheads. In the next two years, our primary focus is to get projects developed, get our products to domestic market, accelerate our export strategy and achieve a positive cash flow.

company focus

Brazilian Metals Group Minais Gerias, Iron Quadrilateral Carrrapato deposit: Exploration Target 62Mt Gema Verde Deposit: Maiden Mineral Resource of 458.5Mt Rio Pardo Deposit: Exploration Target 2-3Bt

McCracken explains, “It’s part of our twophased strategy; first, to secure new, lowcost production opportunities that we can develop quickly and generate cash flow. Second to develop long-term, larger scale opportunities in north Minas Gerais.” In March 2012, as part of the first stage of this strategy, BMG acquired the Carrapato project, which is located in the Iron Quadrilateral adjoining both East China Mineral’s $1.2billion Sarzedo project and Vale’s Corrego do Feijao mine. Continuity between the Carrapato deposit and those two mega-projects and a sizeable resource means that the company plans

“We’re early in our progression from explorer and developer to producer but we believe that Brazil presents a great opportunity for investment and growth in the iron ore sector. ”

Bruce Mc Cracken CEO BMG

rio pardo

minas gerais

to apply for a special mining permit to facilitate early production. The ultimate aim, following the establishment of 2Mt/y production at Carrapato, will be to develop a separate 25Mt/y operation at the company’s other key projects in northern Minas Gerais. Currently, the Rio Pardo project is the most prospective target in the company’s land package in the region, boasting a 2Bt to 3Bt target across an area of 887km. Drill results to date have shown grades between 16-20%, but McCracken looks to grades between 16-30% typical of the region which makes the resource upgradable. From an infrastructure stand point, the ultimate plan is to build a rail connection which will link the project to the east-west railroad to a port in Bahía. Currently there are no formal agreements in place, however the Minas Gerais government is supportive as the link would be beneficial to local agricultural production.

Comparison of Australian and Brazilian iron ore Pilbara Deposits, Western Australia Lower Proterozoic Age Banded Iron Formation Grain Lump and fines product Size and of rock fragments – Products 0.1mm rejected Moderate Bond Work index Upgrade Crush and Grind Deslime Character to remove <0.1mm Poor upgrade potential Small pods to Very Deposit Large, >1bt, Moderate Size to High Strip Ratio Operating ~A$35 - 45/t product FOB Cost

Magnetite Deposits, Rapitan Deposits Western Australia Minas Gerais, Brazil Lower Proterozoic NeoProterozoic Banded Iron Formation Glaciomarine Sediments Very fine grained 0.2 – 0.5mm average, (colloidal), intergrown, Pellet Feed and Sinter Pellet Feed -Concentrates Feed -Concentrates Hard - High Bond Work Friable - Low Bond Work Index Crush and Grind Index. Crush and moderate to 28-38 μm, Mag Sep Grind, Mag -Sep, Flotation. Moderate upgrade potential Very good upgrade potential 0.1 to >1.0 bt High Strip ratio

Very Large, 3 – 4bt Low Strip Ratio

~A$55 – 65/t product FOB

~US$30 to 35/t product FOB

Mining Leaders

Source: BMG

In terms of iron ore production, many similarities can be made between Australia and Brazil, but certain analysts argue that prevailing geological and legislative factors give the latter jurisdiction a slight edge. Confident that Brazil had good geological opportunities as well as a competitive cost structure, Australian company Brazilian Metals Group entered the market just over two years ago. “Australia obviously has very good resource projects, but it is a mature market. The costs are higher and the opportunities to enter are far more limited,” explains Bruce McCracken, BMG’s CEO. According to McCracken, Brazilian ore, compared with its Australian counterpart, has more available potential in both deposit size and the upgrade character. Most importantly, operating costs in Australia range between $35–$65 per ton product FOB compared to just $30-$35 per ton product FOB in Brazil.

IRON ORE

brazilian metals group

q&a

Prospecting

Jorge de Menezes Process & Development Director World Mineral Resources

Paramirim

IRON ORE

Brazilian company World Mineral Resources Participacões S.A. is developing a number of projects in the State of Bahia in north-eastern Brazil. Production on its flagship property in the Paramirim Valley is set to begin in 2015. WMR was founded by João Carlos Cavalcanti, a geologist with more than 40 years’ experience who was directly responsible for the discovery and development of some of the most renowned recent iron ore mines in Brazil. What is the exploration program for your Bahia iron ore project? Our drilling program is set to start very soon in the Paramirim valley mineral district. We have two regional projects that have estimated geological resources of 4.1Bt of iron ore. With such a large resource in our hands we have initially estimated our target ore reserves at 1.2Bt (50% measured and 50% indicated and inferred according JORC and 43-101) and the deposit should ensure at least 20 years of production at 20Mt/y of high-quality pellet feed. Both our iron ore projects and the rare earths project are in close proximity to a railwayline currently under construction by the federal government which is due to be completed by the beginning of 2014. Encouragingly, this railway-line is funded by government, which allows for significant CAPEX savings on investors part. Additionally the privately owned power company is willing to provide all investment in power lines required to supply projects demands. The water needed for these projects will probably be pumped from the São Francisco river, about 120 kilometers from the sites. Bahia has a reputation for having lower-grade iron ore deposits than those found in Minas Gerais or Pará. How does this affect your operations? Actually the quality of iron ore in Bahia is not low. In fact it is a higher grade than other iron ore deposits that have recently been found outside of Bahia, in states such Minas Gerais. Many of these lower grade projects are either under construction or in engineering stage. We now know that we’re taking in 38-40% Fe grade levels in itabirite type ore, this rock consists of a banded sandstone mainly formed by silica and iron minerals. How is your company funded and how can firms such as yours access the capital they need during periods of financial crisis? After initially forming the company, a group of investors decided to take part in our future development as minority shareholders. As of now they hold roughly 13% of WMR. The company is currently negotiating with new investors and some are already visiting our sites in order to buy shares in the company. The aim is to raise around $50 million for complementary geology, drilling, beneficiation testing,

2012

process engineering and other necessary work. That amount should finance our operations up until the feasibility study stage. What measures does the company put in place to ensure that its projects are environmentally and socially sustainable? Our iron ore project is located in a very dry region so water will be the best social benefit that we can bring to the community there. For this project we are planning to invest in a pipeline from the São Francisco river to the site, and we will probably have to build a large dam with enough water to serve the surrounding population. The second benefit is employment which should increase money circulation and community development. What steps is Bahia state taking to encourage the growth of its mining industry? Besides providing good geological information, Bahia has been instrumental in the construction of infrastructure schemes to facilitate the development of various mining projects. The state is encouraging numerous new mining projects. Alongside our plans for Paramirim Valley, development recently began on another large iron ore project operated by Eurasian Natural Resources Corporation, as well as Canadian company Largo Resource’s vanadium mine and pentoxide plant and Brazilian company Magnesita’s magnesite and dolomite projects. Which are the scenarios for bringing the Paramirim mines into production? Do you plan to export or serve the domestic steel market? The idea is that by 2015 exportation will be under way. Considering the railway will be ready by 2014 it is expected to be just the right time to start production. We have set a target for ourselves to begin the drilling program and to have our feasibility study completed by the end of 2013. We also have 25 other projects around Brazil that will be started soon, with evaluation studies including copper, nickel and fertilizer projects. Given our future growth potential and the wide variety of prospects the company has in its portfolio, WMR should be in a strong position in the near future.

It’s a state best known for its white sand beaches and raucous carnival, but Bahia is fast emerging as one of the most dynamic places to invest in Brazil. Over the last years the north-east region, a group of eight states in which Bahia is the largest and most populated, has grown at an average of 4.2% per year compared to 3.6% elsewhere. While it remains the poorest area of the country, major new investments in the petrochemicals, agricultural and industrial sectors are bringing new opportunities to the region and slowing to a trickle the historically high migration from the north to the metropolises of the southeast. At present the mining and metals industry accounts for around 10% of Bahia’s economy, with a 2009 mineral production of $620 million. The state is home to some key base metals projects including Mineração Caraíba’s Jaguari copper mine and Mirabela Nickel’s Santa Rita project. Yamana’s Jacobina gold mine is also located in the state. Until recently, however, Bahia’s iron ore industry has remained relatively modest. The state’s ore reserves have been known about for some time but the grades, often around 40%, were deemed uneconomical, especially when compared to the 60% grades that abound in its southern neighbor, Minas Gerais. But as iron ore prices have marched inexorably higher over the last decade and with most of the country’s higher grade projects already developed or under title, investors have taken a second look at Bahia. Bahia Mineração’s Pedra do Ferro project is set to come on line in 2014 with a production of 20Mt/year and in 2008 ArcelorMittal Brazil, a steel company, won a bid for three key

Source: SEI & IBGE

PlAY It BAHIA

ECONOMIC ACTIVITIES (% OF GDP)

projects with estimated reserves of over 1.5Bt. While the lower grade ores require a greater level of beneficiation, the increased costs of production are mitigated by attractiveness of Bahia as a mining jurisdiction. As a member state of the Sudene development agency, investors in Bahia receive a number of tax incentives, including the 75% reduction of corporate tax over the first ten years. Compared to most other regions of the country, there is readily available and good quality geological information available which has led to around a quarter of the state’s area being requested for titles. Combined with this, the local government has shown itself to be pro-mining, seeing the growth of the industry as key driver of employment. The government is funding the construction of the FIOL railroad, which runs through one of the main iron ore production areas, and is developing an open access deepwater port north of the town of Ilheus. With infrastructure in place and recorded reserves of over 8bt, Bahia has firmly established itself as the up and coming iron ore region for mining firms looking for a new discoveries.

Mining Leaders

GOLD

2012

lead article

rush hour B

Photo: Yamana Gold

lack gold. Today the phrase is used to describe oil, but in the seventeenth century it was the discovery of large gold nuggets, coated in black iron oxide, that gave the town of Ouro Preto its name. Discovered by a hardy group of slave-hunters and mineral prospectors known as bandeirantes during their forages into the interior of the country, the ensuing gold rush briefly made Ouro Preto the richest city in the Americas, with a population greater than that of New York. Following further discoveries in Mato Grosso and Goias, the eighteenth century saw Brazil export 800 tons of gold, making it the largest producer in the world. In a country defined by periods of commodity booms and busts, the gold rush soon went the way that the sugar boom had before it and that the coffee and rubber booms would follow later. Nevertheless, the elaborate gold gilded interiors of Ouro Pretoâ&#x20AC;&#x2122;s baroque churches stand testament to the townâ&#x20AC;&#x2122;s past riches. Today a Mining Leaders

lead article

billion BRAZILIAN GOLD EXPORTS IN 2010 new generation of explorers is taking advantage of record gold prices to bring new deposits into production. Even for its vast size, Brazil has a wealth of opportunities, with over 2,500 gold occurrences. In 2011 the country’s gold production jumped 13% on the previous year to reach 66 tons, and although this leaves it outside the top ten countries by production, it has the seventh largest reserve base globally, according to the US Geological Survey. With 46 tons of gold exported in 2010, the metal accounted for nearly $2 billion of exports, second only to iron ore in the minerals sector. While production levels had been relatively stable until the jump in 2011, in the recent years a wave of exploration activity by junior companies has allowed the reserve base to increase significantly. Data from the DNPM showed that reserves of over 510 tons of gold were added in 2010 alone. There are expectations that gold production could reach 70 tons in 2012 and then double over the next ten years. An estimated $2.4 billion in gold exploration investments is expected between 2012 and 2016. Minas Gerais, the state in which Ouro Preto is located, remains at the heart of Brazilian gold production.

2012

Modern mining techniques are breathing new life into former artisanal mines

In 2010 the state accounted for 64% of the country’s total production. It is here that gold majors Kinross and AngloGold Ashanti have their flagship projects. Kinross’ Parácatu mine produced over 450,000oz in 2011 and will consolidate its position as the largest producing mine in the country following an expansion plan budgeted at over $300 million. The project remains a main focus for the company and in May 2012 the firm sold its 50% stake in its other major Brazilian property, the Crixas mine in Goias state, to its partner and operator of the project AngloGold Ashanti for $220 million. The South African company, which produced over 330,000oz in Brazil in 2010, also has its main focus on Minas Gerais where its Nova Lima Sul, Step Change, Lamego and Corrego do Sitio projects are located. The focus of most recent exploration, however, has been in the state of Pará. The state, home to the massive highgrade iron ore deposit of Carajás,

contains over 40% of the country’s gold reserves. Following the discovery in the late 1970s of alluvial gold in the Tapajós region in the west of the state, Pará was host to the largest gold rush in history. Over a million informal miners are estimated to have decamped to the region and an estimated 25-30Moz of gold was extracted from the Tapajós between 1978 and 1995. But as the numbers of alluvial miners have dropped in the 21st century, exploration firms have moved in in an attempt to locate the hard rock sources of the alluvial gold. Following discoveries by Rio Tinto and TSX-V listed junior Brazil Gold Corp, the region has attracted a number of junior exploration firms along its north-west to south-east strike length, with the companies focusing on the old garimpeiro sites. The Tapajós region is one part of a much larger geological formation from the Proterozoic-Archaean age known as the Amazonian Guiana Shield, which split from the African Guiana Shield during the Jurassic period. The shield covers a total of over 100 millon acres across

CM10471 Spring’12 MiningLeaders JuniorPage_FA

GO where the garimpeiros GO

As the 1980 discovery of vast gold deposits in the state of Pará suggests, a high number of garimpeiros or independent prospectors in a region usually means an equally high mining potential. The state instantly attracted droves of garimpeiros after a geologist called it one of the largest gold reserves in the world. Over 5,000 garimpeiros migrated to the region within the first month. That number escalated to 25,000 within the year, and by 1984 there was somewhere between 50,000 and 100,000 miners extracting gold from the region. Today, Colossus Minerals owns the site, referred to as the Serra Pelada and other explorers still consider garimpeiros a promising sign of gold potential for future developments. Mark Eaton, President and CEO of Belo Sun Mining Corp., says the potential of its Volta Grande Project is reinforced by the presence of independent miners. “In the 1970s, the Volta Grande property had 30,000 garimpeiros, which is always a good sign of gold mineralization,” he says. Garimpeiros mostly work in gold extraction, though they also mine cassiterite and semi-precious stones. Yet their past is mired with violent outbreaks and environmental disasters. Garimpeiros clashed with the Yanomani tribe in the early 1970s when the miners entered their homeland in northwestern Brazil and neighboring Venezuela. They brought with them numerous diseases and infections that are estimated to have killed roughly 10,000 Yanomani over 30 years. The miners also used mercury in their mining process, which began leaking into nearby streams and poisoning water sources. This is a pattern which has, unfortunately, been repeated across the country. However, in recent years, the Brazilian government has begun attempts to regulate the garimpeiros. Co-operatives groups, such as COOMIGASP, are beginning to get more organized and the recent partnership with Colossus Minerals on its Serra Pelada project shows hope for future formalization of these artisanal miners. Mining Leaders

lead article the northern states of Brazil, and is responsible for major gold deposits in Venezuela and Guyana. The Gurupi gold province, which straddles the states of Pará and Maranhão is home to three projects with over a million ounces of measured resources, Luna Gold’s Aurizona project, Kinross’ Jiboia project and Jaguar Mining’s Gurupi project. In Amapa state on the border of French Guyana, Australian firm Beadell Resources 2.9Moz Tucano project is scheduled to enter production before the end of 2012. But despite the country’s untapped potential a number of factors are pushing up costs for gold companies, a development exacerbated by the gold price dropping below the psychological barrier of $1,600/oz in May 2012. Some of these factors are macroeconomic. Yearon-year inflation peaked at over 7% in September 2011 and while it dropped to 5.25% by April 2012, it remains above the government’s targeted rate of 4.5%. This, combined with the rapid appreciation of the currency means that operational costs in dollar terms have increased significantly. Other costs are a result of Brazilian policy options. The country’s historically high tariffs and lengthy import processes means that bringing in parts and equipment can be problematic. Signals from the government that they intend to introduce similar local-content rules to those that

Brazilian gold miners are looking forward to a bright future

govern the oil and gas sector have also been a cause for concern. Although the country’s iron ore service sector is awash with top quality providers, exploration firms told Mining Leaders that often local drilling providers lacked the technology and personnel to undertake advanced projects, pushing up costs and exploration times compared to jurisdictions such as Canada. While traditionally the main social challenge affecting explorers has been dealing with the local artisanal miners, garimpeiros, the current gold exploration boom has led to issues with surface rights, with farmers requesting exorbitant rates for land access. All this is happening at a time in which risk capital for gold projects is increasingly hard to come by. While juniors across the world saw their stock prices take a hit in late 2011 and early 2012 it was noticeable that firms with late stage exploration projects and high-grade deposits such as Belo Sun and Colossus were least affected. Mergers and acquisitions activity was limited and the expected consolidation of the Tapajós region has not yet begun, although El Dorado has taken stakes in two firms. Speculation surrounding the purchase of Jaguar Mining by Chinese state owned firm Shandong Gold Group turned out to be just that. But the lack of activity means that there is still all to play for and the Brazilian gold sector remains a dynamic place to invest.

2012

company focus

Serabi Gold (LSE: SRB, TSX: SBI) Development Tapajós region 144,000 ha land package

In 2008, Hodgson suggested a complete overhaul, which involved stopping production, liquidating Serabi Mining and cutting down the workforce. This was a painful process in the middle of the global financial crisis when raising working capital was near impossible. However, the company survived, was renamed Serabi Gold and began to focus on its core assets in order to add value to what was left of the firm, “What had to be done was to go back several steps and focus on resource growth and definition.” The newly focused Serabi Gold soon began to stir interest within the investment community and in April 2011, El Dorado Gold invested $6 million, gaining 27% ownership.

“Serabi Gold has quite a tightly held stock. The positive message about this is that with a few phone calls, over 70% of the company’s shareholder’s decisions are known.”

Michael Hodgson President Serabi Gold

With cash in the bank, Hodgson got his team organized, commissioning an airborne survey for the mine site. These surveys help mining companies to understand the geology lying beneath the dense forestation typical in the Amazon Tapajós region. Following the airborne survey, 18 initial drilling sites were narrowed down to nine feasible targets on which geophysics and geochemistry were to be completed. During 2011, 12,000m was drilled leading to two discoveries. These two discoveries give Serabi a clear resource growth route plus an immediate exploration program. Serabi is looking into reviving production at Palito. The Palito mining operation produced over 100,000oz. gold equivalent between 2005 and 2008. With advanced exploration targets plus potential for further resource expansion at the Jardim do Ouro site, a developed knowledge base and a modest gold production, 2012 looks set to be a golden year for Serabi.

pará belém itaituba

Palito Project Resources Tonnes

Gold Grade (g/t)

Copper Grade (%)

Contained Au (oz)

Contained AuEq (oz)

Measured Resources

97,448

9.51

0.26

29,793

32,045

Indicated Resources

753,745

7.29

0.23

176,673

192,228

Total Measured and Indicated

851,193

7.54

0.23

206,466

224,272

Inferred Resources

2,087,741

5.85

0.27

392,817

443,956

Mineral Resource

Mining Leaders

Source: Serabi Gold

Mike Hodgson, CEO of Serabi Gold joined the company in early 2008, as the technical director. At that time the company, then called Serabi Mining, was facing difficult times. Hodgson realized the company had a good asset but the lack of a formal foundation plus the absence of a properly evaluated resource base meant many production decisions were made in error. Serabi had entered the Tápajos region, in north Brazil, nine years prior to Hodgson’s arrival. Beginning informally with small scale production, the company soon had some 500,000 hectares of land in their portfolio. In 2005, the company took the decision to become more formal, entering an IPO in London, which Hodgson admits, looking back, was not the right decision.

gold

serabi gold

feature interview

MAKING THE GRADE

An emerging high grade, low cost gold producer, Colossus Minerals’ Serra Pelada project is one of the country’s most promising underground projects. The firm has developed a new model for working in collaboration with the country’s artisanal miners which looks set to be repeated elsewhere At a time when record gold prices have led to a surge in bulk tonnage projects with less than a gram per ton of gold coming to market, Colossus Minerals’ Serra Pelada project in the state of Pará stands out for its high grades. But the project is also a shining example of how former artisanal mines can be given a new lease of life through modern techniques and productive partnerships between mining companies and garimpeiros. The mineral rich Carajás region near the towns of Curionopolis and Paráuapebas, has a prolific history of artisanal gold production. From 1979 until 1986 up to 80,000 garimpeiros managed to extract two million ounces of gold from a hand dug open pit mine over a strike length of 350 meters.

2012

In early 2000 the Brazilian government decided to give the full title to the artisanal miners. It was then that the opportunity opened up for Colossus Minerals, according to Claudio Mancuso, the firm’s President and CEO.

“The artisanal miners get funding for the project, a company capable of building the mine and 25% of the profits. They are fully engaged and have assisted in gaining social acceptance.”

“One of the government stipulations was that the project had to increase its efficiency through mechanization,” explains Mancuso, “so COOMIGASP, the

body representing the garimpeiros, decided to look for a partner.” The project went out to tender at a fortuitous time for Vic Wall, a renowned geologist and Augusto Kishida, who had served in Vale’s gold division. Together with financier Ari Sussman, the three formed Colossus Minerals in 2006, taking control of the project. The garimpeiros retain an interest in the project through an innovative ownership structure. “COOMIGASP required both monetary and technical assistance to develop the project” explains Mancuso, “under our ownership structure they get funding for the project, a company capable of building the underground mine and 25% of the profits moving forward. They are fully engaged in the project and have helped us move the permitting process along, assisting Colossus in gaining social acceptance.” Despite the many years of artisanal mining, Mancuso explains that the work previously done has only

$175 million scratched the surface of the area’s total potential. The down plunge extension of the ore body has been traced 600 meters further to the south west of where the artisenal miners stopped working, so there is still a lot of gold in the system. There are also some parallel zones, as well as very good geological potential to find other deposits elsewhere on the property. “It’s a complicated task,” explains Mancuso, “a high grade deposit such as ours requires tight space drilling and drilling from underground. We will drill horizontal holes into the deposit, figure out the width of the ore body and use the information to produce an initial one-year resource and reserve estimate.” Going forward, the company expects to release a rolling two to three year resource and reserve estimate. Additionally, the technicalities of the project make it clear why modern mining practices are so important. The project will use an underhand cut and fill method, the mining method of choice when extracting high grade gold deposits in challenging ground conditions. This method controls ground conditions while reducing dilution. The mine will be a 1,000 ton per day underground operation equating to 365,000tpa. Some of the drill grades thus far have been impressive - 7.5 meters of 1,500g/t gold, 500g/t platinum and 500g/t palladium. “It was necessary to develop a decline in order to drill from underground. Consequently, we believe that the grades are high enough to warrant the incremental investment in a processing facility and surface infrastructure to get the mine operational.” Mancuso is confident that the project will go into

claudio mancuso

Cost to Bring Serra Pelada to Production

Serra Pelada has had some impressive drill results,including 7.5 meters of 1,500g/t gold, 500g/t platinum and 500g/t palladium

production in 2013, “We will figure out the annual production when we take a bulk sample and complete the underground drilling program.” Mancuso adds that the high grade of the Serra Pelada project will become an increasingly attractive prospect for investors. Many industry leaders believe that, given the low grades of many of the upand-coming bulk tonnage projects, gold prices will need to remain above $1,400 for the industry to remain sustainable. “There are a lot of companies creating value from bulk tonnage, low grade projects, but investors are starting to make a distinction and are beginning to recognize the value of deposits like Serra Pelada,” explains Mancuso. Mancuso remains unworried about proposed changes to the Brazilian mining code and actually expects reforms to give the industry more

dynamism. Changes in royalty rates would likely impact bulk tonnage, low grade projects more so than high grade, low tonnage ones. Nevertheless, Mancuso believes that Brazil is one of the most important mining jurisdictions in the world today for all types of projects, boasting stable economic and monetary policies and a culture which understands mining. Mancuso’s belief in the country is not surprising – he has taken some of the most traditional mining groups in Brazil and woven them into the fabric of his company. In the region surrounding Serra Pelada, all the mining titles are held by Vale or by a myriad of garimpeiros associations, some of whom have begun to contact Colossus following the success with COOMIGASP. The Colossus model is one that could be repeated across Brazil. Mining Leaders

project focus

Belo Sun (TSX: BSX) Volta Grande Project Altamira, Pará State 130,541ha 2.85Moz (M&I) and 1.97Moz (Inferred) gold

volta grande While most resource stocks took a hammering in late 2011 and early 2012, Belo Sun’s share price remained remarkably solid. It was rich reward for the progress the firm has made on one of the most promising gold projects in the country. But it also reflects the company’s solid management team - which includes VP for Exploration Helio Diniz, a former Director of Brazilian Exploration at Xstrata - and an understanding and focused shareholder base. According to CEO Mark Eaton, “If you look at our shareholders they are all top gold funds – Blackrock, Vanguard, Sprott, American Century, AGF and Dundee.” This shareholding means that the company circumvents the problems associated with more generalist funds that moved away from juniors as the market went through a de-risking phase in the second half of 2011. At the center of this stability has been the firm’s 100% owned Volta Grande Project. Current management took over the asset in 2010, at which time the resource stood at 2Moz, mostly in the inferred category with average grades of 1g/t. Since that time, the company has drilled over 100,000m, releasing three resources updates in April 2011, January 2012 and April 2012, which have seen an increase not just in size but also in grade of the resource – with the measured and indicated moving up to 1.69g/t and the inferred averaging at 1.70g/t. With the expanded resource achieved at an average cost of just $12

2012

an ounce and seeing more potential to increase the resource along both the strike and to depth, the project looks set to be the second largest gold mine in Brazil. “We believe we have the best project in Brazil, maybe even in South America when you look at everything combined. We are not interested in diluting our efforts or our shareholders with other projects.”

“We are aiming for gold production by 2015. We have one of the best teams and deposits in Brazil. Our biggest challenge is going to be keeping the larger companies away.”

Mark Eaton CEO Belo Sun

The project lies on the north edge of the Carajás gold belt. The deposit is on the northern part of the Três Palmeiras greenstone belt, which also has some copper showings and some banded iron formations. The preliminary feasibility study is expected in Q3 2012.

belém

The company also has the Patrocinio Project, in Tapajós. Eaton expects to see consolidation of the region and is willing to work the project as a joint venture. The priority, however, is to remain focused on the Volta Grande Project.

sÃo paulo

2011 Q1

2012 Q4

Volta Grande Project General Timeline 2013

2014

2015

DNPM Licensing (RFP+PAE) Prelliminary License - LP (6 months - 1 year) Installation License - LI (6 months) Pre-Feasibility Study Definitive Feasibility Study Detailed Engineering

Order Long Lead Time Items Construction

Operation License - LO (5 months)

Project Commissioning

jurisdiction overview

Main producing gold states

Comparative Gold Exploration Investment and Production

Minas Gerais 64%

ParĂĄ 3% goias 11%

Bahia 11%

CANADA

AUSTRALIA

BRAZIL

Archean shield area (km2)

2.200

1.200

2.600

Production through 1990 (tonnes)

7.600

6.800

2.400

Exploration investment (1970-1990) ($M)

$4.968

$2.963

$685

Exploration investment per km ($/km2)

$2.26

$2.47

$0.26

Production per $ invested in exploration

$1.53

$2.29

$3.50

Mining Leaders

Source: Mineral Economic Group 2005

Despite itâ&#x20AC;&#x2122;s enormous potential, Brazil produces only 2.5% (61Mt) of the total world gold output.

project round-up

JURUENA

Montes Aureos

LAGO DOURADO (TSX-V:LDM) RES: Drill Highlights 4m at 32.5g/t & 216m at 0.55g/t 2012: Drilling

“Juruena is one of the biggest gold in soil anomalies globally – artisanal miners have already mined approximately 0.5Moz gold at surface. It has the potential to host both epithermal and porphyry style deposits. We completed 15,000m of diamond drilling in 2011. Phase two targets will incorporate recent work completed by Prof. David Groves, a world leading geologist, and will be focused on two very large porphyry targets.”

Forbes Gemmell President & CEO

Borborema CRUSADER RESOURCES (ASX:CAS) RES: 2.31Moz (Indicated & Inferred) 2012: Bankable feasibility study

“We expect that in 2014, once licenses are granted and the project is financed, production will begin and Borborema will become a very significant gold mine in Brazil. Our published grade results are only a small part of the ongoing drilling program on this site since September 2010. Up to 2012, 50,000m have been drilled on site and Crusader Resources has no intentions of reducing its exploration in the area.”

2012

BRAZIL RESOURCES (TSX-V:BRI) Exploration License: 2,000 ha 2012: 3,000m drill program

Amir Adnani, “Montes Aureos is our flagship project. Our Chairman & Director technical team has a track record of over 10Moz of gold discoveries in Brazil. Luna Gold Corp, Kinross and Jaguar Mining are our neighbors. This is an area where real development is taking place in gold projects, so as a junior we have managed to elbow our way in and have developed a good land package. There is a history of about 120 years of artisanal mining on the site.”

Serra do Ouro

3 Rob Smakman Managing Director

ARDENT MINES (ADNT:US) RES: Estimated 1.4Moz 2012: Drilling

Luciano de Freitas “Serra de Ouro is our flagship project. It Borges, CEO is brownfield; it was discovered by the Brazilian geological survey and has the potential to be a world class, high grade project. It’s a quartz-vein deposit with good infrastructure and without many environmental issues. We are expecting between 50,000 to 80,000oz a year production minimum but our target is 150,000oz – it all depends on engineering.”

belém

sÃo luis

natal

cuiaba

4 5

6 salvador

belo horizonte

sÃo paulo

Goldfish-Almas

seRROTE de Laje AURA MINERALS (TSX: ORA) RES: 6.08Moz Inferred 2012: Financing

“Serrote de Laje is a copper-gold-iron project. We have road, rail, labor, power and we are relatively close to the Caraiba Metais copper smelter. By producing copper concentrate in Brazil, we can potentially generate quite a bit of value through import substitution and save on transportation costs. A bankable feasibility study will be published in the third quarter 2012. Following that we will contract and finance the project.”

rio de janeiro

5 Jim Bannantine President & CEO

6 Miloud Hassene CEO

GOLDEN GATE MINING RES: Potential 1Moz 2012: 2,000m drilling

“From our preliminary drilling campaign, we have intersected 2m of 9g/t Au between 46m and 48m and we have collected many high grades samples, 30g/t Au. We are finishing a geochemical campaign and defining new promising sub-targets. The ongoing magnetometry will be followed by an IP ground geophysics study that will better define our drilling trend which encompasses 2,000m in 2012 and 10,000 m for 2013.” Mining Leaders

q&a

yellow

METAL

Buddy Doyle President and CEO Amarillo Gold

fever

gold

Located in a low-risk jurisdiction and surrounded by a number of major operations belonging to the likes of AngloGold, Kinross and Yamana, Amarillo Gold’s flagship Brazilian project, Mara Rosa, looks set to become a producing mine by 2014. From there, the company will begin to develop Lavras do Sul, a major gold prospect located in the south of the country with the aim of establishing a resources base of over 2Moz. of gold.

Pre-feasibility on the Mara Rosa gold project was completed in May 2012. What is the development strategy to move from junior to mid-tier producer? We see infrastructure playing a major role in the rapid development of this project. The state of Goias is mining friendly. We are 35km from the 4Moz Chapada mine, owned by Yamana Gold and there are several other mines within 200km. The main time constraint to our project is permitting, but its not a big issue. Yamana is developing the Pilar gold project, which is about 12 months ahead of us. We are following the same permitting route. In May 2012, we submitted the preliminary environmental license application (LP). The legal time frame to receive the initial license to build (LI) is six months. Once this is in hand the company can order the long lead items such as mills and trucks and begin construction. Our greatest challenge is financing the project with maximum advantage to our current shareholders. How does operational licensing in Brazil differ from other countries in which you have worked? In Canada, I lead the team that discovered the Diavik diamond mine which took nine years to permit. We had to get social licenses before we could complete the federal permitting. I expect Brazil to be easier – not that there are any shortcuts, I just think that Goias state and its citizens recognize the benefits of mining. The LI is a two-way processes between the state and the firm and tends to promote best practices from around the world. There are public hearings to make sure the community is on board. The last stage is the operating license, a formality that allows you to start production as long as you have followed the criteria of the LI. The average timeline of the permitting process in Goias is 18 months. What are the challenges of having your projects neighbor Yamana’s? One challenge may be labor. We will peak at about 1,000 people on site during construction and then fall off to about 300 people when operational. Chapada send buses to near-by communities. They look south so we will have to look north, but there will be an intersect where we will be going to the same villages. Overall, the proximity brings benefits - infrastructure and local familiarity to the benefits of mining.

2012

Lavras do Sul is the company’s second project. What are the particularities of the site? We are looking to become a producer at Mara Rosa by 2014. At the moment our pre-feasibility for Mara Rosa gives us a seven year mine life – and seven years goes by very quickly. Once we are a medium-sized producer – we are expecting 120,000oz/y - we’ll be looking to keep the company sustainable - Lavras do Sul is part of that. It’s an advanced exploration project with a resource of 520,000oz of combined indicated and inferred gold. We expect this to grow; there is 12km by 8km of old gold workings that have little modern exploration. By May 2012 we had drilled over 30,000m on site. We expect an updated resource in Q3. Are there any geological similarities between Lavras do Sul and Mara Rosa that allow the company to create synergies? Other than both being open pittable bulk tonnage gold prospects and of the same geological age - neoproterozoic - there are few similarities. Geographically they are over 1,500km apart, Mara Rosa is a shearhosted orogenic gold deposit, with a greenstone footwall, gneiss hanging wall. Lavras do Sul, on the other hand, is an epithermal style deposit. The other main synergy will be the team that works on them. What is your process for selecting projects? When we look at projects, we look for good infrastructure. Early on in the company’s history we consciously decided to stay out of the jungle. Both Mara Rosa and Lavras do Sul have tarmac highways, communications and a power grid. Both are in mining friendly jurisdictions. Even at Lavras do Sul which is in the state of Rio Grande do Sul, there are a number of coal mines in the vicinity which means infrastructure and supporting services can be adapted. This is unlike many of the other opportunities in Brazil where the junior mining companies followed the wave of garimpeiros as they moved north into the jungle. We also chose Brazil because it is relatively under-explored. This we think explains why there is far less gold production from Brazil, compared to other mining nations. On top of this Brazil has good mining legislation, exploration titles are relatively inexpensive. 100% foreign ownership of mineral titles has been allowed since 1996.

company focus

TriStar Gold (TSX V: TSG) Tapajós region Castelo de Sonhos: 72,067ha, 11 exploration licenses Bom Jardim: 8,829 ha, 1 exploration license

Pereira has experience in the Tapajós, seeing the area improve greatly since first arriving 20 years ago. Roads are being paved and electricity is arriving to the province. In Novo Progresso, 100km north of the Castelo de Sonhos project, power comes from the national grid. Eldorado is developing the Tocantinzinho mine nearby which will mean the construction of an extra 200km of transmission lines bringing power to the heart of the Tapajós district. Likewise, the government is constructing power plants at various points on the Tapajós and Jamanxim rivers. However, with a thick jungle canopy, limited visibility and very basic geological knowledge, exploration

“As a spin out company of successful Brazauro Resources, TriStar Gold boasts the same former Brazauro board, management and team.”

Elton Pereira VP of Exploration TriStar Gold

pará belém

bom jardim

castelo de sonhos

remains challenging.

TriStar is involved with both the communities and artisanal miners in the area, “Nowadays, garimpeiros have more education and more access to information. They know that companies could be a good source of profit, so they have decided to enter into various agreements,” explains Elton Pereira. After working for two years with the local community, TriStar has been rewarded through increased worker loyalty and good stakeholder relationships. In the short term, drilling will continue at Castelo de Sonhos throughout 2012 and 2013. Bom Jardim is the company’s other prospect. An airborne survey, geological mapping, stream sediment sampling and soil sampling over 10 targets have been completed at the site, showing copper, zinc and vanadium anomalies. TriStar Gold is considering the possibility of working Bom Jardim as a joint venture with a base metal company.

cds exploration program Soil Sampling

· Confirmation Barrick soil anomalies · Remaining target area

Airborne Geophysical Survey

· Area covered 790 sq km · Flight height 100 meters

Diamond Drilling · Esperança Center 14 drill holes 3,013 meters · Esperança South 18 drill holes 2,145 meters

Source: Tristar Gold

TriStar Gold was created in 2010, as part of the deal in which Eldorado Gold took over Brazauro Resources, the 100% owner of the 2.3Mt Tocantinzinho project and provided $10 million cash to start TriStar. In October 2010, the new company signed an agreement to take a 100% share of the Castelo de Sonhos gold project. The project covers more than 80,000ha. The first drilling phase of 5,662m showed interesting mineralized intercepts, related to paleo-conglomerates found at Jacobina in Brazil and Tarkwa in Ghana. Tristar is still interpreting the assays from its first drilling phase and the results will determine the pattern of the second drilling phase which will begin in July 2012. According to Pereira, the company will start by drilling a minimum of 3,000m.

gold

tristar gold

· Potassium Anomaly 1 drill hole 504 meters

Mining Leaders

company focus

Photo: Rio Novo

Rio Novo Gold (TSX: RN) Almas, Guarantã Almas: 796,027oz M&I Guarantã: 347,400oz M&I

Rio Novo’s flagship project lies in the Almas district, where mineral wealth was discovered in the 18th century. Julio Carvalho, the president of Rio Novo says, “the Almas gold district was always known for having gold occurrences.We’re reopening the mine previously operated by Vale. One of the things we follow is the garimpeiros activities.” The company’s main deposit in Almas is the Paiol deposit which contains approximately 665,000oz of measured and indicated resources and 92,000oz of inferred resources. Rio Novo has also drilled two other deposits to the north and northwest that lie along the same archean greenstone belt. These two deposits bring the total Almas Project resources to approximately 927,000oz. The company has plans to explore two additional targets in its Almas concessions during 2012 as well completing additional drilling underneath the Paiol pit aiming to increase its underground resources. Julio Carvalho and a great part of Rio Novo’s management were schooled in various stints at Rio Tinto. In fact Rio Novo’s name alludes to the new venture staffed largely by the Rio Tinto alumni. In the mid-1980s, Carvalho played a central role in the construction of Rio Tinto’s famous Parácatu gold mine, where gold reserves still total 17Moz today. He is employing the same strategy at Paiol that involves mining the available resources

2012

“Start with what you have, generate cash, use part of that cash to go deeper. Don’t be worried about being a small producer of 60,000-80,000 oz; it’s not a problem to expand.”

Julio Carvalho President Rio Novo

Tocantins

BRASILIA

rio de janeiro

immediately to generate cash flow to finance future expansion. Plans suggest that the Paiol open pit mine will come online in 2013 and will generate cash flow that may finance the development of a Paiol underground mine aimed at the riches buried beneath. The open pit phase of the project targets reserves of approximately 580,000oz, then the second phase will aim to extract a further 350,000oz through underground mining. Rio Novo has one other project in Brazil: the Guarantã project, in Mato Grosso, where current known measured and indicated resources total 347,000oz at 1.35g/t of gold in a deposit of porphyry and epithermal ore formation. Besides Brazil, the company is also exploring in Colombia where drilling is likely to lead to “very good surprises” later this year. With an experienced management team and a proven strategy, Rio Novo is sure to capitalize on its geographical diversity across South America.

ALMAS PEA – PEA PLANT FEED SCHEDULE

Source: Rio Novo

gold

rio novo gold

market focus

REAL EXCHANGE RATE

140

120

100

Inflation %

160

Lago Dourado

20 11

CEO

20 05 20 06 20 07 20 08 20 09 20 10

20 0

Forbes Gemmell

Real Exchange Rate vs. Basket of Currencies

INFLATION VS. BRAZILIAN REAL STRENGTH

the bottom

line

As Latin America’s largest economy, Brazil has experienced huge growth in the last 10 years. However, with that has come rising costs associated with land, labor, logistics and power, inflation and currency appreciation. Inflation for 2011 ended at 6.5% while GDP growth was just 2.7%. The government is aware of this problem and has been aggressively buying dollars and introducing new taxes on foreign inflows in order to ease real appreciation. Nevertheless, mining companies have had to adapt in order to remain competitive and to keep opex under control.

Robert Bell CEO INV Metals

Jim Bannantine President & CEO Aura Resources

“You can only keep your costs as low as the country you are operating in will allow. Brazil is not as cheap a country to work in as most people expect. This is due to the strengthening of the real plus the taxes and fees you have to pay on top of what you would normally pay for service and labor. We saw costs increase by about 10% last year. Wage increases are government mandated. There was a shortage of rigs in early 2011. With the recent market weakness demand has eased but prices still remain high. Currently, I am the only full-time Canada-based employee – our priority is to invest our money in the ground in Brazil.” “INV Metals has a fantastic exploration property in Carajás, with numerous Cu-Ag targets and similar geology to the neighboring Serra Pelada deposit. However, the inflated cost of exploration and the slow pace of drilling have delayed exploration. Demand for drillers is very high, making it impossible to get multiple quotes. Our drilling costs increased over 50% last year. Further, we have gold targets elsewhere in Pará state but it took 11 months to obtain our environmental permit so we haven’t been able to drill yet. Brazil is a country blessed with incredible mineral potential. It has a bright future which will benefit from lower costs and less bureaucracy.” “We have hedged the gold production at our mines located in Mato Grosso State. That was necessary because of the relatively high operating costs associated with small scale production as well as the strength of the Brazilian real combined with inflation. The Brazilian central bank lowered interest rates by 0.75% in March 2012 in an attempt to control the currency. In mining, our revenue is in dollars, not in reals. Because of inflation and because of currency appreciation there has been an increase in operating and capital costs of about 30%. This has been a challenge, but one which we are confident we can overcome.”

Mining Leaders

project round-up · Tapajós district

Cuiu Cuiu

Limão

MAGELLAN MINERALS (TSX-V: MNM) RES: 1.3Moz Inferred & Indicated 2012: $2m drill program

“Of the six properties with resource estimates in Tapajós, Tocantinzinho, Cuiu Cuiu and Coringa were discovered by the Magellan Minerals’ management team. By March 2011 our resource estimate based on 26,000m of drilling was 1.3Moz. We have drilled an additional 21,000m, identifying new ore bodies. In 2012 we are exploring the narrow high grade structures. In 2013, we will release a revised resource estimate which we hope to be in the 2.5-3Moz range.”

Alan Carter President & CEO

EL DORADO GOLD (TSX:ELD, NYSE:EGO, ASX: EAU) RES: 2.4Moz M&I 2012: Bankable feasibility study

Lincoln Silva Country Manager

AIM : SRB | TSX : SBI

Serabi Gold plc is a gold exploration company involved in the development of the Palito Gold Mine in Para, Brazil. Palito is a high grade vein deposit with a total gold equivalent mineral inventory of 667,000 ounces. Serabi is planning to put the mine into production during 2013 and will use the cash-flow generated to explore and develop two satellite discoveries located within 3 kilometres of the Palito Mine. Site infrastructure, grid electricity and an existing plant capable of processing 200,000 tonnes per annum are already in place and a mining licence has been issued. 2012

Steven Brunelle President & CEO

“The Amazon is a challenge. It’s hot, remote and expensive as hell. To build a successful mine here you need high grade. In the past Tápajos has seen high grade quartz veins hosted in narrow structures. A hole drilled in the 1980s on Limão found 47 g/t Au over 13m. We have to re-drill that hole to understand the geology of the structure. In 2011 we did extensive geochemical studies and a magnetic survey on the project. In 2012 we begin drilling.”

jardim de ouro

Tocantinzinho

“The focus now is on infrastructure - the construction of a 100km road and a 200km power line. When we get the EIA approval and complete the feasibility study we will be able to make a construction decision in 2012. The production should begin in 2015. At the end of 2011, over 60,000 meters of drilling was completed. The prefeasibility study developed last year showed an annual production rate of 159,000oz gold and a mine life of 11 years.”

AMERIX PRECIOUS MINERALS (TSX-V:APM) RES: Historical Intercept 47 g/t Au over 13m 2012: 3,000-5,000m drill program

4 Mike Hodgson CEO

SERABI GOLD (LSE:SRB, TSX:SBI) RES: 600,000oz gold equivalent 2012: PEA study and continued exploration

“In 2011, 12,000m of diamond drilling was conducted in nine targets within the district. We believe one target opens up the possibility of a strike continuity between the target itself and the Palito gold deposit, a possible 2-3km strike zone. In January 2012, $4.5 million was raised to conduct a PEA study. The idea of this is to look at the viability of modest production at Palito and continued mine site exploration. “

Mike Hodgson, CEO SERABI GOLD plc 30-32 Ludgate Hill London EC4M 7DR t +44 207 246 6830 e contact@serabigold.com

São Jorge BRAZILIAN GOLD (TSX-V: BGC) RES: Indicated 11.3Mt at 1.0 g/t 2012 : Exploration

“Brazilian Gold has title to one of the largest land packages (3,750 km2) in the Tapajós and adjacent Alta Floresta gold provinces. The land package contains greenfield to more advanced stage projects. The São Jorge project contains an indicated mineral resource of 11.3Mt grading 1.0 g/t gold (379,000 oz gold) and an inferred mineral resource of 20.6Mt grading 0.8 g/t gold (558,000 oz gold) at a 0.3 g/t gold cut-off.”

São CHICO

5 Ian Stalker CEO

KENAI RESOURCES (TSX-V:KAI) RES: Initial 1Moz at 30 g/t Au 2012: 3,268m drilling, updated NI 43-101

Dan Kuntz Chairman

“We acquired São Chico from Gold Anomaly Ltd. The project is five hours away from Itaituba and will be built as an underground mine following a combination of narrow veins totaling an initial resource base of 1Moz at 30 g/t gold. The project is located near to the “garimpeiro highway” which provides excellent access. Drilling programs for 2012 will be based on previous garimpeiro exploration activity in the area which has been successfully mapped.” Mining Leaders

project focus

Traira Project Cosigo Resources (TSX-V: CSG) Early stage exploration Amazonas State 2012: Dredging and RC drilling gold

TRAIRA

Since the 1980s the wide expanse of Amazon rainforest between the Orinoco River in the north and the Solimões River to the south has been known to be highly prospective for gold. The discovery of gold near the Apaporis River that forms the border between Colombia and Brazil led to the influx of 10,000 garimpeiros into the region in the 1980s. Around the same time Paranapanema and one of Eike Batista’s early projects were prospecting for gold in the area. As the drug war escalated in the late 1980s, it became too difficult to operate. Now Cosigo Resources, a Canadian exploration firm is taking up the mantle. But with an unexplored area well over 10 million ha, the firm is forced to sometimes take an unorthodox approach.

Cosigo currently owns several titles in the region, in addition to its projects on the Colombia side of the border. They are helped in the process by the ongoing work of Petrobras, the state oil firm. The force of the Amazon River has rendered the basin flat and it is difficult to identify the anticlines and synclines below the sediment. As Petrobras explores for hydrocarbons around the lower Amazon River, they step-out and move upstream from sedimentary basin to basement rock. When the firm starts drilling shallow 100m stratigraphic holes, Cosigo knows that the basement rock, their target, begins. Given that the shallow mountains present in the region have resisted millions of years of erosion from two powerful water flows,

2012

“We know other juniors will enter these unexplored regions that have great potential. We may have an elephant by the tail here, but both the elephant and the tail are still buried.”

Andy Rendle, VP S.A Operations Cosigo Resources

VEnezuela COLombia

PEru

BRAzil

the geological potential of these old rock formations is high. To isolate the source of the region’s alluvial gold, Cosigo has turned to a method that most exploration firms would balk at: dredging. Rendle accepts that it’s an unorthodox move but believes it could be decisive in the prospecting process. The firm has found gold in three buried serranias in the region. They believe that only one of these serranias is the source of the large volumes of gold that alluvial miners pan from the rivers downstream. By finding out the silver and gold content of the molecules, the firm hopes to match the grains to a specific mountain in the region where gold has been discovered. Maneuvering the dredge upstream, Cosigo will look to find the tributaries that lead into the main gold producing zones and home in on a target. The firm will then use reverse circulation drilling, which is cheaper, more portable and has less environmental impact to investigate further.

Taking the Indigenous Initiative

According to FUNAI, the National Foundation for Indigenous People, there are 300,000 indigenous people living outside of Brazil’s urban areas, with 215 ethnic groups speaking 170 languages across the country. These indigenous communities have often been wary of mining operations, and with reason – in most cases the only contact they have had with the industry has been through garimpeiros who illegally and forcefully enter native reserves in their thousands, contributing to deforestation and poisoning water supplies through use of mercury. A massive gold rush in the 1980s saw the state of Roraima and its native Yanomami and Yekuana populations devastated by disease and violence. Largely unexplored and highly prospective, the north and northwest of the country – where 60% of this indigenous population reside – has long been of interest to formal mining companies. However, with the 1988 Federal Constitution, the lands indigenous peoples traditionally occupied were officially recognized and any mining activity was prohibited by law. Cosigo Resources, a Canadian firm, is exploring for gold near the Apaporis River, close to the Colombian border to the west and in several indigenous reserves to the east. In Amazonas state, where their project is located, 34,713 ha has been demarcated as property of indigenous communities. Currently, the Brazilian Constitution, the mining code, the Statute of the Indigenous People, FUNAI and various national and international laws govern mineral exploitation in the area. However, constant garimpeiro activity in the region shows the difficulties of maintaining the rule of law in remote areas. Cosigo is taking a new approach which aims to facilitate communication in order to guarantee native populations are properly compensated for activity which takes place on their land. In December 2011, the company signed a letter of intent in conjunction with various indigenous leaders from Baniwa, Japura, São Gabriel de Cachoeira and other communities, seeking approval to commence a pilot project which could ultimately become an operating mine. What is unique about the initiative is that once it has been approved at the federal level Cosigo will enter a joint venture with local communities, meaning the company will retain a 75% ownership, while the local groups will hold 25%. Dennis W. Milburn, President and CEO of Cosigo announced in a press release, “This pilot project stands to lead to successful mineral development, where native communities can take a leading role in their economic future while maintaining environmental integrity.” Cosigo, which has a variety of titles in different sizes in the highly prospective Taraira Gold Belt, is attempting to communicate with the Brazilian government in order to show that a sustainable mining model is possible, one which is not as harsh on the environment as previous experiences and one which respects and recognizes native interests. This type of community interaction could be used as the blueprint for future endeavors.

Mining Leaders

base metals

2012

lead article

back to BASICs I Photo: Votorantim

n February 2011Brazil unveiled its National Mining Plan 2030, an ambitious program of reform aimed at boosting mineral production and investor confidence in the mining sector over the course of two decades. It was no surprise that the headline figures were saved for the iron ore sector. The metal currently accounts for around 80% of the countryâ&#x20AC;&#x2122;s mineral exports, worth over $35 billion in 2011. The government aims to triple this production in less than 20 years and expects around $270 billion to be invested in the mining industry over the same time frame. But iron ore is not the whole story. The anticipated growth, combined with the development of Brazilâ&#x20AC;&#x2122;s steel industry is opening major opportunities for producers of key alloys such as nickel, niobium and manganese. Meanwhile the copper industry looks set for a new wave of investment and junior explorers are developing promising projects in rare metals such as vanadium and thallium. Mining Leaders

lead article

842 Million tons

Brazilian niobium reserves Photo: Horizonte Minerals Horizonte Minerals’ $1.5 billion Araguaia nickel laterite project sits just 100km from Onça Puma and boasts similar grade and deposit size to Vale’s giant project

2012

of such world class firms will be vital if the country is to hit its target of 1Bt of production by 2030 set out in the National Mining Plan.

revenues. CBMM expects this figure to hit 100,000 tons by 2015. In 2011 a group of Asian firms took a 15% stake in CBMM for nearly $2 billion.

Brazil is already a world leader in niobium, an additive in the steel industry that improves strength and heat resistance. In 2010 the country produced 80,000 tons out of a total global production of 83,000 tons, principally through local firm CBMM’s Araxa deposit. The country has by far the largest resource of the mineral with proven reserves standing at 842Mt, according to the Department of Mineral Production. In 2010 exports of ferro-niobium, mainly aimed at the Asian markets, reached nearly 67,000 tons bringing in $1.5 billion in

While niobium rarely accounts for more than 0.1% of steel content, massive volumes of nickel are required for the world’s stainless steel industry. Following a drop after the financial crisis, demand for nickel is once again picking up and is expected to hit 1.5Mt by 2015. Unsurprisingly given its vast iron ore holdings, Vale has made bold moves in the nickel sector and the firm’s $2.8 billion Onça Puma project, located in Pará state near the Carajás iron ore mine, entered production in 2011. The plant has a capacity of 53,000tons/y of ferronickel which will be exported to

Global INVESTMENTS IN MINERAL ExPLORATION Global Area (sq.km) Investment x 1.000 (US$ 10.700.000)

Absolute Investments (US$)

Share of Investments (%)

Absolute Investments/ Area (US$/ sq.km)

Brazil Investment vs Countries

Canada

9971

2.033.000

0,2

5.4

Australia

7682

1.284.000

0,2

4.5

USA

9373

856.000

0,3

2.4

Mexico

1973

642.000

0,0

8.7

Chile

757

535.000

0,0

18.8

Peru

1285

535.000

0,4

11.1

Russia

17075

428.000

0,7

0.7

China

9600

428.000

0,1

1.2

Argentina

2780

321.000

0,1

3,1

Brazil

8547

321.000

0,01

1 US$ 1.000

Source: IBRAM

Despite reserves of 17.3Mt, mostly in the state of Pará, Brazil has never been in the top tier of copper producers. However, rising prices and strong domestic demand from the construction and electrical transmission industries have given impetus to a number of new projects which are due to come on line by 2015, more than doubling the current annual production of 213,000tons/y. Again, the bulk of this new production will come from the expansion of Vale’s major Salobo 1 mine, which will process over 250,000 tons of copper when its second phase is completed in 2013. Yamana Gold, through its subsidiary Mineração Maracá, and local firm Mineração Caraíba also have substantial projects in the country. But Brazil’s junior gold firms, whose projects often contain substantial deposits of the red metal, are also taking advantage of higher prices. Aura Minerals, a small gold producer, is undertaking a feasibility study to determine the economics of sending its copper by-product from the Serrote de Laje project to the Paranapanema smelter in Pará with a view to selling on the domestic market. For its part, Paranapanema is investing $180 million to boost its smelter capacity to 280,000tons/y. Chilean public company Codelco, the world’s largest copper producer, is also investigating two targets in Brazil, according to the firm’s CEO Diego Hernandez. The presence

lead article

Photo: Votorantim

Under the Mineral Plan 2030, Brazil intends to triple production of many base metals

the US and Asia. This, combined with AngloAmerican’s $1.9 billion Barro Alto project, located in Goiás state, puts Brazil at the forefront of the global nickel industry. No other country has two brand new projects of this scale. Also in Pará, AIM and TSX listed firm Horizonte Minerals is developing a promising nickel laterite project, which it acquired from Teck Resources in the wake of the financial crisis.

entered the country in search of diamonds, but soon switched focus to manganese development in Rondonia.

Brazil is also a modest producer of zinc, with measured and indicated reserves of the metal standing at 6.5Mt and with an annual production of 288,000 tons of concentrate. The zinc industry is dominated by Votorantim Metais, the mining wing of a major local conglomerate, which produces from four mines and owns two zinc smelters. However, smaller firms have managed to gain a participation in the zinc business. With most of the country’s zinc reserves located in Minas Gerais, Canadian junior Karmin Exploration discovered a major deposit in the state of Mato Grosso and has maintained a 30% stake in the Aripuanã project while Votorantim has taken over as operator.

17.3

Brazil is also a world leader in manganese ore production. Another key additive to the steel industry, it is the fourth most used metal in the world. It is also remarkably easy to mine. Cancana Resources initially

The basic facilities needed to separate and clean the manganese will cost Cancana no more than $1 million to purchase. “It’s a very, very easy material to mine, it’s readily sold to both the Brazilian steel industry and the local fertilizer industry,” says Bill Pfaffenberger, President of Cancana.

Million tons

brazil’s copper reserves Another junior mining firm that has rejected the allure of high gold prices to focus on lesser known materials is Largo Resources. The firm’s large Maracas deposit, in Bahia state, contains a world class deposit of vanadium, another mineral used to strengthen steel but also one with a growing importance to green industries such as wind turbines, solar panels and vanadium redox batteries. Also in Bahia, local firm Itaoeste is developing a thallium reserve, another rare metal used in optics and

electronics. The Rousseff government has made moves towards developing a strong level of self-sufficiency in rare earths, an industry that is expected to grow rapidly in the coming years from $5 billion per year globally to $25 billion. Following the discovery of major rare earth deposits near Vale’s Salobo 1 mine, local experts believe that Brazil could potentially account for one third of global production in an industry where China currently controls 90% of the market. The outlook for base metals and rare metals is not entirely rosy. The sector is affected by the same challenges that put a potential strain on the wider mining industry, namely access to human resources and infrastructure and a growing dependency on the continued rude health of the major Asian economies. Furthermore, base metals projects are often more sensitive to royalty raises than gold projects are. Nevertheless, the development of new mega-projects and the continued interest of foreign firms demonstrate that the scale and diversity of the country’s mineral wealth more than compensates for its inefficiencies. Through the National Mining Plan 2030, the government has set out bold plans for future production across a spectrum of minerals and private investment will be vital to meeting these ambitious targets. Mining Leaders

company focus

Anglo American Nickel Laterite Nickel Development $57 million turnover 2011 29,100 tons production 2011 BASE METALS

Anglo American Nickel Brazil is the tenth largest producer of contained nickel in the world, but with high quality ores and a developing stainless steel industry, the government plans to increase production. According to Walter de Simoni, CEO of Anglo American Nickel, a shift in nickel production patterns is imminent. In 2011 53% of global nickel production came from laterite ores and 47% came from sulfide ores. By 2016, 61% of nickel supply will likely come from laterite ores meaning the map of nickel production will shift more and more from countries like Canada and Australia to Asian countries and of course – Brazil. The nickel business unit of Anglo American produces 2% of global nickel supply and by 2013 the firm will double that share. The ramp-up of the Barro Alto project will make the company the world’s largest producer of ferronickel. Having spent $1.9 billion on the project, the mine will produce an average of 36,000t/y of nickel over 25 years. De Simoni insists that the firm’s biggest achievement is the project’s sustainability – in terms of water and energy consumption, safety standards and local community engagement. The site has employed 26,000 workers and racked up 37.4 million man-hours without fatality. Locally, more than $200 million have been invested in environmental control equipment and initiatives and more than $5 million in the city of Barro Alto.

2012

“Nickel is one of our strategic commodities for global expansion. Brazil has some of the best laterite mines around the world. The country has huge potential to become one of the major nickel producers in the world.” Walter De Simoni CEO Anglo American Nickel

JACARÉ

CODEMIN BARRO ALTO

Barro Alto brings the number of Anglo American’s operating nickel mines to a total of three – two in Brazil and one in Venezuela. As far as priorities, the Jacaré project in Pará state, a site with a potential resource base of over 500Mt of nickel ore has caused much excitement. Pre-feasibility studies are currently being conducted and one of the issues facing the project is infrastructure. The company is familiar with the investment needed to operate nickel mines. Producing 10,000 tons per annum of nickel, the Codemin plant celebrates its 30th anniversary of operations in 2012. The Barro Alto site is home to the mine, a smelter-refinery and a processing line which includes two 185 metre rotary kilns and two rectangular 83MW electric furnaces. Allowing for certain variables and with an expected production of 50,000 tons per year at a price of $20,000/ton, Anglo American’s nickel business unit could soon reach a billion dollar turnover.

project focus

Largo Resources (TSX-V:LGO) Bahia Vanadium-PGE Project Development stage 13Mt @1.3% V2O5

When other companies were racing to cash in on the climbing price of precious metals last year, Largo Resources didn’t get caught up in gold fever. Instead, the miner went hunting for bargains in other metals. “We buy world class properties very, very cheaply,” said Mark Brennan, the company’s CEO, describing Largo’s acquisition strategy. It was this constant search for low-cost, high-quality assets that led it to the Maracás vanadium project in Bahía state. Maracás has the potential to become a gold mine of sorts by providing low-cost production for a metal that is becoming increasingly sought after as an anti-corrosion and strengthening additive in steel. Maracás boasts the highest grade vanadium deposit in the world, with low silica content and no major contaminants. That means Largo will spend less on power and chemicals for recoveries – giving the miner the potential to be the lowest cost vanadium producer in the world.

In fact, Largo says vanadium produced from the site will cost just $14 per kg FeV, which undercuts the current industry average by $9. Maracás is also receiving financial support from mining-friendly Bahía, which has said it will support the project through tax incentives. The low cost operation at Maracás is expected to generate $75 million in cash flow per year over the next five years. Production is scheduled to begin next summer, and production capacity is expected to grow by 50% in four years. In February, Largo

“We’re going to dominate the vanadium world and we hope to dominate the tungsten world and to be a significant player in titanium. Maracás will always be our flagship - it is just the beginning.”

Mark Brennan CEO Largo Resources

http://www.largoresources. com/projects/maracas/default. aspx MIGGY!!

bahia

salvador

BASE METALS

MARacás

announced it had discovered a new high grade zone north of Gulcari, dubbed Novo Amparo Norte. Drilling shows the zone to be as wide as 600 meters, and 200 meters deep, but it also remains open in all directions. Brennan said there is a promising future for vanadium from Maracás as emerging markets such as China and Brazil significantly increase their steel consumption to satisfy construction needs. Maracás could dominate by providing as much as 40% of global supply over the next quarter century. “As long as we don’t see a new discovery, this project has a cost competitiveness which is about 50% cheaper than any of our competitors,” said Brennan, adding that Largo would maintain its low cost edge because of economies of scale. “Anybody who has higher marginal cost to us, we’re just going to expand our production and [their] banks will see that right away,” he said.

World Vanadium Supply & demand (tv)

Source: Roskill

Mining Leaders

lead issue

Mineral PLAN 2030 While changes to the mining code have attracted the most comment from mining investors, the reform is only one part of a larger plan to overhaul the Brazilian mining sector, preparing it for an anticipated period of unprecedented growth. Published in February 2011, the governmentâ&#x20AC;&#x2122;s National Mineral Plan 2030 provides the framework for the development of the industry over the next twenty years. The plan forecasts a tripling of production rates for many minerals and sets out a plan to increase the volumes of minerals processed domestically. It also anticipates $270 billion of investment in the mining industry until 2030, with a further $80 billion being spent on logistics and infrastructure upgrades. Iron ore production is expected to surpass 1Bt by 2030, with gold reaching 200 tons, up from 66 tons in 2011. Production of contained copper is expected to move past 1Mts with nickel reaching 132,000 tons. The government predicts that the number of workers active in mining and mineral transformation will increase from 1 million to 3.3 million between 2008 and 2030. In order to regulate the expansion of the sector the government plans to introduce a National Mineral Policy Council - a supraparty body reporting directly to the President on issues of mining policy â&#x20AC;&#x201C; and a National Mining Agency. The latter will be tasked with awarding titles and supervising the sector. The plan commits the government to undertaking wider geological mapping of the country, including the Amazon region and the offshore continental shelf. It also expresses two main concerns. First, that the industry has become over dependent on iron ore exports to China and that a diversification of products and export markets is required. Second, although it has annunciated no clear strategy to increase domestic processing of minerals, the government has made a strong statement of intent in this regard.

2012

Exporter

Self-sufficient

Niobium (1st) Iron ore (1st) Manganese (2nd) Tantalum (2nd)

Nickel Magnesium Kaolin Tin

Industrial diamonds

Graphite (3rd) Bauxite (2nd) Dimension Stone

Vermiculite Chromium Gold

Tungsten Talc

Importer/ Producer

Limestone

External Dependency Metallurgical Coal

Potassium

Titanium

Copper Phosphate Diatomite Zinc

Source: IBRAM

Exporter (Global Player)

Sulphur Rare Earths

STRATEGIC

investments In the mineral sector by mineral from 2010 - 2014 In millions of US$

Source: IBRAM

BASE METALS

MINERAL PRODUCTION: GLOBAL POSITION OF BRAZIL

lead ISSUE CLASSIFICATION OF THE PRODUCTION AND MINERAL RESERVES OF BRAZIL IN THE WORLD Mineral Bauxite Copper Dimension Stone Gold Iron Ore Kaolin Manganese Niobium Tantalite Tin Zinc

Ranking Position

Reserves Brazil

Ranking Position

14%

3rd

6,8%

5th 13th

5th

7,7%

3rd

5,6%

6th

2,3%

12th

3,3%

9th

17%

2nd

11%

5th

6,8%

5th

28%

2nd

20%

2nd

1,1%

6th 1st

98%

1st

98%

28%

2nd

50%

1st

4,1%

5th

13%

3rd

2,4%

12th

0,85%

6th

production forecast for several selected and mineral-based products

iron ore

Production Brazil

gold

Source: IBRAM

copper

(contained)

Mining Leaders

q&a

looking beyond Jeremy Martin CEO Horizonte Minerals

the horizon

BASE METALS

Horizonte Minerals’ $1.5billion Araguaia nickel laterite project sits just 100 km from Onça Puma and boasts similar grades and resources to Vale’s giant project. Hitting all of his milestones on time and on budget, CEO Jeremy Martin is moving the company from a junior to a mid-tier producer. The company also has an early stage gold portfolio, which it will likely spin off into a separate junior. Horizonte Minerals has joint ventures with some key players, such as Teck and AngloGold. What factors shaped this strategy? We are focused on making new discoveries - our management is an exploration team. David Hall, our chairman, was head of exploration for AngloGold South America. Our expertise in exploration has been recognized and now we have two joint venture gold projects worth just under $10 million with AngloGold. In August 2010, we acquired a major nickel project from Teck Resources, called Araguaia. We had made a large discovery next door and as a result of the financial crisis were able to acquire Teck’s project. If you are doing generative exploration, you can’t dictate what you find. We went in with a gold focus, but also with an open mind and that’s how we’ve come out with a commodity split between gold and nickel. How do the fundamentals of Araguaia compare to other up-andcoming nickel projects in Brazil? There are four producing nickel operations in Brazil. It is the only district in the world with two new ferronickel operations. Brazilian nickel deposits stand out because they are at the upper end of the grade curve, averaging over 1.3% nickel as opposed to 0.9% in Australia, for example. The infrastructure of Pará is appealing. Hydroelectric power is readily available and cost-effective for the high-energy consumption associated with nickel production. Existing road and rail facilities help keep transportation costs low. Brazil is a great place to produce nickel. Five years ago there were no recorded nickel occurrences in the area around Araguiaia. Now in addition to our project, Xstrata have made a major discovery 50km north of us. At what stage of development is the Araguaia project? Following 15,000m of drilling in 2011 we released a new resource, which put us at 100Mt, placing us in the upper quartile globally. It’s one of the biggest projects in Brazil not being developed by a major. In the middle of 2012, we will start the pre-feasibility. We hope to have a bankable feasibility study underway in 2013. We will most likely go the ferronickel route, selling directly to the stainless steel market in Brazil, China or the US. The beauty of this is that you can get direct sale at market price. We have six targets identified

2012

for exploration around the site, so the aim is to take the project to 150Mt and increase the high-grade core. What does the development of similar projects globally suggest about the potential for building value on the Araguaia project? There are very few companies with nickel laterite projects. The standard industry format for valuing nickel projects is in terms of pounds of nickel in the ground. Our nearest peer-group company is in Guatemala - it’s about six months ahead of us and has its preliminary economic assessment. They’re trading at around $0.07/lb of nickel in the ground. If you look historically at nickel projects, there is a set evaluation range depending on the stage of development. We look at Canico Resources, who spent $37 million developing Onça Puma to bankable feasibility. The project was acquired by Vale for $870 million, which put the nickel in the ground at $0.23/lb. In March 2012 we were trading at around $0.02/lb but within 24-36months we could be up to the same level. That gives you an understanding of the evaluation uplift that we expect. We will reach certain derisking milestones, which will see us move up the value curve. Will domestic nickel prices be affected by the multitude of nickel projects coming online? There is talk of oversupply in the next 12-24 months. Metal forecasters tend to remark that these big projects are using very new technology and the consensus is that they may not ramp up to full capacity. From 2014 there are no new projects coming online, in fact a number of big projects will come offline, so the market will move through the potential oversupply and there could be a position of net deficit at that stage.We will be feeding into the market at a time when there is a scarcity of new projects. We see good fundamentals for nickel. There are a lot of companies competing in copper, but far fewer in nickel. What plans do you have for Horizonte’s gold assets? Within the next eight months, we are looking to spin our gold assets out with another third party as a separately listed company. We want to create a junior gold company in which Horizonte has a major claim, monetizing those assets and allowing us to be a pure nickel company.

market focus brazilian copper reserves By state

“Since 2011, demand for Brazilian copper has begun to decrease due to cheaper imports of finished products and greater competition from other materials, such as plastic and aluminum. Since copper has an extremely high market value, companies have begun to look for cheaper options when purchasing raw materials for manufacturing. To remain competitive, Termomecanica focuses on the production of specialized products which add value Regina Celi Venâncio through technology. Since the company does not have President any mining projects in Brazil, the FTA with Chile allows Termomecanica us to acquire the copper needed for manufacturing.”

Source: IBRAM

seeing red

“Despite alternative materials entering the market, copper’s versatility means that demand is growing. The commodity’s malleability allows for the composition of diverse alloys and its high conductivity provides better performance in electrical and electronic applications. Copper is an infinitely recyclable material making it environmentally sustainable. Exports in 2010 were more significant for refined copper and copper concentrate Nelson da Silva Leme due to demand in China. The increase in average prices President quoted on the London Metal Exchange in the first months Brazilian Copper of 2012 also contributed to the increase in export revenue.”

Ranking 21st amongst global copper producers in 2009, Brazil, traditionally has seen very little copper exploration However, domestic demand combined with global supply shortages mean that Brazil is looking to increase production with a raft of projects which will likely double its output by 2014.

According to Bloomberg, copper averaged at a price of $9,750/t in 2011 and will average at $10,000/t in 2012. The metal, which is highly adaptable in various industrial applications, is increasing in price as grades are lower and deposits harder to find. Exploration in the Amazon region and the development of deposits previously thought uneconomical look set to boost national production. Vale is Brazil’s biggest copper miner. As well as increasing production in its Salobo mine, a FINAL Brazil Mining 12.03.26 number of smaller projects will bring its total Jim Bannantine output to 150,000tons by 2015. The company President & CEO is also attempting to buy up African projects in Aura Minerals order to appease domestic demand.

“Brazil’s base metals market has plenty of potential. There’s a deficit of Brazilian produced copper concentrate, so the country is forced to import. National demand is strong. It costs a lot to transport the concentrate to Brazil from the countries, predominantly Chile, where it is produced. By producing copper concentrate in Brazil we generate quite a bit of value. From a national accounts level, it helps balance the payments, and reduces transportation costs. Our mine is quite close to smelters in the states of Alagoas and Bahia in northeast Brazil.”

TSX:HZM AIM:HZM

Developing the next major nickel project in Brazil www.horizonteminerals.com • Teck Resources 42.8% shareholder and AngloGold Ashanti as strategic JV partner advancing gold portfolio • Araguaia Nickel Project - Indicated Resource of 39.3 million tonnes grading 1.39% nickel - Inferred mineral resource of 60.9 million tonnes averaging 1.22% nickel - High grade zones - Pre-feasibility planned mid 2012 - Excellent infrastructure

• Falcao Gold Project - Falcao Gold Project JV fully funded by AngloGold Ashanti to US$4.5M

Tangara Falcao

Pantone 873c

80% black

CMYK 30,30,60,10

CMYK 0,0,0,80

Mining Leaders

Araguaia

FERTILIZERS

2012

lead article

a market to harvest “T Photo: Vale

hey’ve got an awful lot of coffee in Brazil” sang Frank Sinatra, but he didn’t know the half of it. As well as accounting for around a third of the world’s daily production of Arabica beans, over the last thirty years the country has risen from a net importer of food to a leading exporter of beef, soya beans, poultry and sugar cane. Following the pioneering work done since the 1970s by Embrapa, a public company dedicated to developing solutions for the country’s agricultural problems, Brazil has become the undisputed rising star of the agribusiness world. Central to this quiet revolution has been the regeneration of the cerrado, a huge swathe of savanna that traverses the country’s interior from the border with Paráguay to the northern states of Maranhão and Piauí. Embrapa’s crucial role has been to organize the dispersal of hundreds of millions of tons of lime onto the region’s acidic soil Mining Leaders

FERTILIZERS

$3.8 BILLION Vale’s acquisiton of Bunge’s Phosphate Assets Photo: MBAC MBAC Fertilizers is at the forefront of a new wave of Brazilian fertilizer projects

Fertilizers are an essential factor in fueling this boom. Despite the wide acres of land ready to be sown, the natural fertility of Brazilian soil is relatively poor and contains excess iron and aluminum oxides. Added to this, many of the crops that the country grows are potash intensive. Brazil’s pioneering bio-ethanol industry has resulted in over 8 million ha of sugarcane plantations. Each hectare requires around 160kg of potash per year. But as demand for potash has increased steadily since the 1980s, reaching 4.5Mt in 2011, no new Brazilian potash mines have come online. As a result the country has been forced to import ever increasing volumes of fertilizers. In 2011 the country imported 45% of its phosphate and 93% of its potash and in global terms was the third biggest importer behind China and India. Potash prices skyrocketed to $1100/t in 2008 before dropping off and growing steadily to around $480/t by the end of 2011. But this still compares favorably

2012

to the sub-$200/t prices that were the norm prior to 2007. With Brazilian farmers claiming more land each year and with a firm expectation of further price rises, private companies are investigating new potash and phosphate projects. As one might expect, Vale has become a dominant force in the sector and fertilizers have been a strong focus of the local giant’s diversification plans in recent years. The firm runs the majority of the country’s former state-owned potash mines, including Tapira in Minas Gerais which has a production capacity of 2mtpa. In January 2010 Vale shelled out $3.8 billion to acquire Bunge’s interest

in Fertilizantes Fosfatados, a major phosphate producer. Having purchased mining rights in Saskatchewan, Canada, the Brazilian giant is looking to build a plant with a capacity of nearly 3mtpa of potash. Vale’s projects are set to account for the lion’s share of new investments in the Brazilian fertilizer sector, which IBRAM estimates at $2.7 billion for potash projects and $1.9 billion in phosphate ventures between 2011 and 2015. However, junior firms are already starting to find their feet in the market. MBAC Fertilizer, a TSX-V listed company, has grown from an owner of a small phosphate mine in December 2009 to one of the

World Fertilizer Consumption (2010)

Source: IFA, ANDA

and to breed a strain of soya that can flourish in the region’s tropical climate. Agribusiness currently accounts for around a quarter of Brazilian GDP and the country holds the largest area of uncultivated agricultural land anywhere in the world. As populations expand and diets change, Brazil will play a key role in meeting the ever increasing global demand for food.

lead article

Photo: Verde Potash

Brazil has embarked on the long road towards fertilizer self-sufficiency

leading new players in the sector, with several phosphate projects showing promising resources.

respect of the major environmental and technical challenges facing production there.

companies operating in the region and open up new areas of the cerrado for agricultural projects.

Rio Verde Minerals has picked up a portfolio of phosphate projects mainly in the northern states of Pará and Piauí and another Canadian junior, Eagle Star Minerals, ditched its iron ore projects in 2012 to focus squarely on developing its Samba and Ruth phosphate deposits in Minas Gerais. Both MBAC and Rio Verde have plans to develop potash mines, funded in part from cash flow from their phosphate projects that are both cheaper and quicker to bring online.

In fact, ease of access to market is fundamental to all fertilizer projects in Brazil. The country cannot hope to compete with Canadian or Russian mines in terms of operational costs. But the delivered price is all that matters and with transportation costs for Russian and Canadian products often reaching in excess of $170/t, proximity to the fast growing agricultural regions of the country is key. Developing

The development of such crucial infrastructure in the region is just one example of the government’s sustained commitment to the development of the agricultural potential of the northeast. The government has targeted 2020 as the date by which the country should achieve self-sufficiency in fertilizers. Local players expect this target to be reached in terms of phosphate production, but given the sheer scale of demand for potash - which is thought to be around 12.6 million tons per year - and the cost of mining it, most expect this commodity to be imported for the foreseeable future. New discoveries will need to be made and projects developed. Key development banks, including BNDES and the IFC have shown a willingness to support fertilizer projects and both have put up capital for MBAC’s expansion. The government has even suggested that the royalty rate on fertilizers will be dropped when the new mining code passes through Congress. If this is the case, it would be a welcome sweetener for those companies working in the sector, but with Brazil growing as a food producer in an era of ever increasing global demand, the fundamentals of domestic fertilizer projects are compelling.

A number of companies, however, are making pure potash plays. Verde Potash is using technology developed by researchers at the University of Cambridge to convert surface deposits of potassium silicates into potassium chloride. The firm’s Cerrado Verde project, a planned open pit mine in Minas Gerais, will be the showcase for this technology. Elsewhere the most prospective areas for potash projects are the small state of Sergipe - where Vale, Rio Verde and ASX-listed Aguia Resources are operating – and Amazonas. However, the prospectivity of the later state, which has seen world class potash discoveries by MBAC and Potassio do Brasil, needs to be viewed in

93% of Brazil’s Potash was imported in 2011

projects in strategic locations near more remote areas of the agricultural belt is a strategy pursued by junior firms looking to gain a cost advantage not just over foreign suppliers of fertilizers but over Vale’s major projects too. The construction of the $760 million Transnordestina railroad, due for completion in 2013, will open up new transportation options for fertilizer

Mining Leaders

q&a

Worth

Antenor Silva CEO MBAC

the Risk

FERTILIZERS

Canadian company MBAC Fertilizer Corp aims to become the second largest producer of phosphate and potash fertilizers in Brazil. Boasting a number of projects close to emerging Brazilian agribusiness areas, the company looks set to become an important supplier over the coming years. MBAC has one operating phosphate mine which is being upgraded and expanded and will increase its portfolio of assets in Brazil. MBAC Fertilizers is an integrated potash and phosphate company. What is your strategy towards developing the two commodities? These are two very different commodities, coming from unique geological deposits. Potash is critical for Brazilian agribusiness but currently our base is in phosphates – we have one project under construction and will begin another in 2013. Our project will be the first phosphate mine constructed in Brazil since 1985. We are actively looking for opportunities in potash in South America. Two years ago MBAC had an initial resource of 13Mt from one mine and today the company has a combined resource of over 100Mt. How have you achieved that growth? Drilling. In the last two years, we have drilled 100,000m. Close to 80,000m at the Itafόs project in Goiás and Tocantins states and 20,000m at the Santana project in Pará state. We discovered the deposit in Pará state so we had to overcome infrastructural problems and certain issues with geological modeling. Itafós, on the other hand is 12km from paved roads, there is energy on site and we have internet access so it was less challenging. Are the locations of your projects driven by local demand? Each location gives each project a competitive advantage logistically. Brazil imports 70% of its fertilizer, so we looked in areas where there is a strong local market and developed our projects accordingly. The Cerrado savannah is located largely in central Brazil running from the southwest to the north east. The northern Cerrado is the new frontier for agribusiness in Brazil, with production of cotton, sugar cane, soya bean and large scale cattle rising. Brazil is trying to stop deforestation in the north west of the country, which means there will be a need to improve productivity through increased fertilizer use in traditional agricultural areas. The U.S and Brazil produce roughly the same amount of beef, but the U.S use half the land, so we have to increase efficiency in land use. We will start as a small producer producing 330,000 tons of phosphate concentrate a year, but our location, as Brazil develops, will keep us competitive.

2012

How is your project financed? Our project was financed through the Brazilian National Development Bank and the World Bank. It was relatively easy. Fertilizer projects are easy to finance in Brazil at the moment. How important is government support to the fertilizer industry? We benefit from two incentives in this project. One is an income tax redistribution scheme, which allows us to channel 75% of income tax back into investment in the area. This is open to all projects operating in the Amazon political area. The second is a VAT tax rebate in the Tocantins state. We don’t expect anything drastic from the proposed mining reform. Some changes will help the industry by cutting down on speculation and increasing regulation. Do you expect to see consolidation of this sector in the future? I don’t see Vale embarking on more acquisitions because they have enough of their own opportunities. There could be consolidations amongst Anglo and small operators, but it won’t affect the market. There is a major phosphate project coming on line in Saudi Arabia. Is demand strong enough to maintain global prices? It is a large project, but it is only replacing other projects that are coming to the end of their life. It will produce DAP (diammonium phosphate), which is not consumed in Brazil on a large scale. Even if they start to produce MAP, (monoammonium phosphate) the transportation costs will make them uncompetitive. They will supply India mainly. In our case, we are producing SSP (single super phosphate), a kind of fertilizer that the farmers in central Brazil use due to the sulfur content. I don’t think the supply demand gap for potash will ever close. But for phosphate, I think Brazil could be self-sufficient within 10 years. Do you have plans to expand in Brazil? We are exploring at Santana and expect to have feasibility at Itafόs and a pre-feasibility at our hard earth and phosphate project, Araxá, by the end of 2012.

project focus

Verde Potash: (TSX.V:NPK) Feasibility study underway Potash HQ: Minas Gerais Indicated mineral resources: 71.08 Mt, 9.22% grade

As Brazil grows into a food-producing juggernaut, one company is hoping to cut the country’s dependence on expensive-to-import Canadian and Russian potash by providing a home grown solution. Verde Potash uses a patented technique developed by professors at the University of Cambridge to convert its potassium silicate rock from its Cerrado Verde project into potassium chloride, KCI. In recent years the firm has scaled up the process from a lab experiment into the semi-commercial stage.

In Brazil, new potash mines haven’t been opened in decades because of staggering start-up costs, and a decadelong wait until full production. Verde has a total indicated resource of 71Mt, but an inferred resource of 2.8Bt, with potash mineralization down to 85 metres. Importing potash from Canada and Russia is expensive. Potash from Canada’s Saskatchewan region costs $43/t, but Verde says Brazilian blenders pay between $173 and $249/t once massive shipping costs and port charges are taken into account.

“Our deposit has enough potash from surface to make Brazil self-sufficient in potash for around half a century. It’s a massive deposit in a country that imports more than 90% currently.”

Cristiano Veloso President & CEO Verde Potash

Belo horizonte

sÃo paulo

rio de janeiro

FERTILIZERS

Cerrado verde

unusable, damaged powder from potash granules which can occur in transport. Brazil’s KCl consumption is expected to grow to 12.6Mt over the next eight years. Verde hopes to produce ThermoPotash alongside KCl and estimates that a 2Mt ThermoPotash operation could bring in $300 million in revenue, while a three million tonne per year KCl operation could bring in $2 billion. The project has potential to receive financing from the Development Bank of Minas Gerais, and may also be eligible for government tax breaks. Verde has already raised $10 million more than the $15 million it had predicted to raise from international investors, meaning the project is financed until 2013, with money left over. The project already has 25,080 metres drilled. Verde is working on a feasibility study and expects to be in the construction financing stage by the first quarter of next year, with production beginning in 2015.

verde potash ONE year stock chart (2011-2012)

Source: Bloomberg

Verde, a company founded and run by Brazilians, hopes to provide the world’s lowest cost delivered potash for the Cerrado by cutting out the major transport fees that are associated with shipments from abroad. Local shipments would also reduce the possibility of Mining Leaders

lead issue

reaCHING SUFFICIENCY With Brazil’s reputation as an agricultural powerhouse firmly established, reaching self-sufficiency in fertilizers is a priority. The UN Food and Agricultural Organization (FAO) forecasts by 2019 Brazil will have the largest agricultural growth of any nation in the world. Sugar cane production is anticipated to reach 47Mt, a 31% increase. From 2010, ethanol production will increase 7.5% per annum, on average, to reach 55bnl in 2019. The FAO expects Brazil will account for nearly 60% of all the meat exported from nonOECD countries in 2019. Other major commodities such as soya beans, coffee and corn will also increase. Being home to 60% of the world’s undeveloped arable land, Brazil undoubtedly has the space for such huge expansion, but the poor soil quality means that heavy use of fertilizer is necessary. Currently, Brazil imports large amounts of fertilizer from Canada, Russia, China and the U.S. Consumable agricultural inputs accounted for 8% of all imports into Brazil in 2010, with potash being the largest component. According to Ibram, Brazil imported 1.4Mt of phosphate rock and 6Mt of potassium in 2010. Vale’s move into phosphates signals the huge importance fertilizers will have for the economy. With massive capital investments required for potash, smaller companies are looking at phosphates and manganese. Domestic supply will have higher production costs than Canadian or U.S alternatives but lower transportation costs will make it cheaper on delivery. In coming years, if Brazil wants to remain cost-efficient and competitive in its agricultural production it will have to increase its domestic fertilizer supply.

2012

1. Belém: 2. São Luís: 3. Recife: 4. Maceió: 5. Aracaju: 6. Salvador: 7. Sapezal: 8. Sorriso: 9. Rondonópolis: 10. Alto Araguaia: 11. Rio Verde: 12. Catalão: 13. Campo Grande:

30,000t 112,187t 45,374t 48,120t 11,451t 407,204t 61,771t 154,429t 875,098t 185,315t 348,068t 296,881t 329,168t

14. Uberaba: 15. Ribeirão Preto: 16. Vitória: 17. Manhuaça: 18. Varginha: 19. Paulinha: 20. Ourinhos: 21. Londrina: 22. Cascavel: 23. Ponta Grossa: 24. Paranaguá: 25. Imbituba: 26. Porto Alegre:

553,771t 81,947t 83,275t 28,643t 210,051t 204,867t 22,920t 114,579t 126,037t 143,224t 452,589t 109,184t 759,252t

1 belém

palmas

salvador

cuiabá

9 11

12 belo horizonte

15 20 21 22

curitibá

18 sÃo paulo

rio de janeiro

24 25

Fertilizer Blender Cluster KCI Consumption (2011) Phosphate Rock Mine Vale Potash Mine Amazon Forest Savanna (Cerrado)

Source: ANDA (jan-nov 2011)

FERTILIZERS

potash consumption per fertilizer blender district (2011)

lead ISSUE

Source: Food and Agriculture Organization, UN

undeveloped potential arable land

import vs.domestic fertilizer supply

BRAZILIAN npk consuMption (thousand tonnes)

Eran Friedlander President & CEO Eagle Star Resources “90% of potash and 50% of phosphate is imported. The government is encouraging local supply - the royalty on agro-minerals is lower than other commodities - however, analysts are still doubtful about whether this gap will ever close. Our projects are located where there is huge demand and international prices are paid. Local supply is essential if Brazil wants to maintain its position as the largest agrarian country in the world.” Ricardo Dequech CEO Kalium Mineracão “Brazilian soil is very poor. It rains a lot in the north, dissolving most of the potassium in the ground. Potassium chloride, which is one of the most common fertilizers, is not suitable for this soil as it too acidic. Potash adds both potassium and sulfur to the soil making it a very nutritious mineral. Big companies like Vale are investing to meet demand, but it is important that small companies, like ours, also contribute.” Cristiano Veloso President & CEO Verde Potash “The requirement for increased food production is real. You need about 10kg of grain to produce 1kg of beef – so that drives the need for grain production. About 20% of potash in Brazil is used by the sugarcane industry – on a delivered basis that alone is $1 billion. The industry wants to double its acreage in the coming years in a country that imports more than 90% of its potash.” Andrew R. Male CFO Cancana Resources “Brazil is a net purchaser of fertilizer. Our focus is manganese, because it is less technically demanding. We can take manganese rock, pulverize it, put it in a bag and sell it to the fertilizer industry. Brazilian manganese grades are consistently 50% or higher, which is better than our competitors. Our Valdero project should be supplying 30,000 tons of manganese to the local market within 24 months.” Mining Leaders

q&a

PLenty of

Stephen Keith CEO Rio Verde

potash

FERTILIZERS

Before entering into the Brazilian fertilizer market, Stephen Keith worked as a consulting engineer and investment banker on several small Brazilian gold, nickel and copper projects. With growth potential in these areas apparently limited, he turned to fertilizers, developing strong local partnerships and picking up a number of phosphate and potash projects across the country in late 2010. The company listed in August 2011. What fundamentals of the Brazilian fertilizer market motivated Rio Verde’s entrance into the sector? Brazil presents the greatest opportunity in the world for fertilizers. In 2011, the country imported more potash than China. It’s is one of the few countries in the world adding arable land. However, the areas in which this is taking place are very nutrient poor and thus very reliant on fertilizer. Last year, Brazil imported 92% of their potash and over 50% of their phosphate. Brazil wants to be the largest agricultural economy in the world, so demand will only grow. Currently, their potash comes from Canada and their phosphate comes from Israel and Morocco. Entering into this, I had a great team, with lots of experience, two highly prospective assets plus a positioning in the best place globally for fertilizer demand. I couldn’t say no. What is the importance of having local partnerships? Developing a potash project as a junior mining company is next to impossible to do on your own. They tend to cost billions of dollars upfront in capital and you are competing against large players – Vale is the only producer of potash in Brazil and controls a large section of the phosphate industry too. If you have a view towards bringing your project to production, access to Brazilian partnerships and investors with ties to the government is essential. Two fifths of my board is Brazilian. My entire operating team, save two people, is Brazilian and lives there. Our main operating office is in Rio. Making it a Brazilian project for Brazilians will make your life a lot easier. Sergipe Potash is Rio Verde’s flagship project. In what stage of development is it? We are still in early stages. We will have a resource estimate for Q4 of this year. We have a strong geophysical anomaly and a historical database which we acquired from the public records. We looked at the historical drill logs, and were able to create a 3D model of the basin, which highlighted critical

2012

targets. We began drilling in November 2011 and that came out with a significant sylvinite hit, approximately 17 meters of combined sylvinite horizons, with an average grade of 25% and some grades of up to 40%. It’s similar to some newer projects in Saskatchewan. Sergipe is a much more faulted basin than Saskatchewan, so projects here are on a smaller scale - with 2530 year mine lives at 1-1.5Mt production per year. Following the publication of our resource, we can move quickly into feasibility and have a construction decision within two years. We have seven known targets with potash mineralization, but we are planning to develop them separately. There are sylvinite and carnallite ores in the basin - our preference are the sylvinite ores since they are higher grade and subject to a much simpler extraction process. As of yet no one has commercialized a carnallite mine. What pricing models do you forecast for future potash projects? Most people are looking at $500-550 per ton. Potash reached $1,000 a ton in 2006/7 and people suddenly thought it was time to start looking for it elsewhere. Frankly, Saskatchewan can supply the world for the next 100 years, but the risk of those spikes is what made people get interested in diversifying supply. Canpotex can manipulate the price but they still have to ensure margins make sense. But really, I don’t know where the low end is. Due to the high cost of the capex on these projects, I think everyone is comfortable around $500 per ton. I’m not expecting price bumps – I expect some downward pressure now and again, but in general flat. What is the status of the company’s phosphate assets? There are over a dozen newer term phosphate assets within the company’s portfolio. Originally, we had five potash and phosphate assets we had identified in Sergipe and Pará that had known mineralization, near or on infrastructure and in friendly jurisdictions. However, an opportunity arose to acquire the assets of a small private company. They had already started construction, so acquiring this would allow us to put it into production quickly,

q&a generate cash flow and avoid diluting our shareholders on the market. Our potash developments are giant projects and they will add a lot of value, but it takes time. This project is a $10million capex, which includes working capital and contingency. We will begin producing 150,000 tons of final product a year in 2013. It has allowed us to hire more expertise, such as an agronomic marketer, which puts us into a cash flow position and gives us more control. From there we have a number of attractive targets for development – we are doing triage on our top assets to determine which our best are. What is the strategy for Rio Verde in the next two years? Our key focus in the next year is in the ground. We need to deliver success on the potash – we need to get a resource. We have great geologists focused on that. The second priority is to build the phosphate mine. The long term value of the company is not driven by this mine, but it is worth $50-60million npv to us, which is more than our current market capitalization, though not for long, we hope. The cash flows and expertise we will gain will be a game changer for us. Following this, we will need a senior engineer and a fertilizer marketing person. The third phase will be partnerships. I think we will

do better by finding a strong local partner. So this year we will be defining the potash resource, producing phosphates, moving towards potash engineering and economic studies and finally moving towards a second phosphate mine. The thing that will strengthen us in the midterm will be the people and potential partnerships we can bring to bear. With that, in two years, we could be at a construction decision on a billion dollar plus capex mine and looking at another phosphate mine. Do you think we are seeing the start of a fertilizer rush? From the demand side, the answer should be yes, but it’s not that simple. Potash, so far, has three basins. There is Sergipe, where we are working, along with Vale, but there is not too much land left. There is the Cerrado basin, where Verde Potash is working, however, the technology for extraction is still being proven. The only other basin with potash is in the Amazon, which comes with many problems, particularly in salt disposal, but also with thinner seams, often under two meters. Technological, environmental and time constraints at these other basins will limit further growth. There are more phosphate projects available, but uranium is often involved, so again there can be difficulties.

things could be sweeter Brazil’s bio-ethanol industry is suffering from something of a homegrown problem. Demand for the Brazilian product is booming - primarily fueled by a chronic shortage in the US, the world’s largest consumer of the sugarcane-based product. A new government report suggests there is a similar shortage in the domestic market, where demand is expected to reach 50 billion liters per year by 2018. But while this would typically indicate rapid growth to come, Brazil remains frustratingly undersupplied. After a 19% drop in production over the last growing season, Brazilian sugarcane growers are unlikely to take full advantage of global potential and surpass the US as the world’s leading exporter. In February 2012 the government proposed an $8.4 billion stimulus package through to 2015 in an attempt to catch up to the global appetite for ethanol. The reason for this uptick in demand is the high efficiency of ethanol. Brazil’s bio-ethanol, which is made from sugarcane feedstock, requires just half the energy to produce as American bio-ethanol, a corn-based product. That has given serious credentials to a fuel whose main selling feature is its low carbon emissions. There has also been sharp growth in the number of flex-fuel vehicles in Brazil, which run on a liquid composed of roughly 30% ethanol. An enormous gap now lies in Brazil’s ethanol supply chain. But there are signs this gap could be closing. Brazilian-based Raízen, a JV between Royal Dutch Shell and Cosan, just completed research on an ethanol fuel made entirely from the

waste of sugarcane production, the Financial Times reported. “As soon as someone can crack this, it’s going to explode,” says Vasco Dias, the company’s chief executive. He is looking to build a facility that would convert sugarcane waste into 10 million gallons of ethanol every year. But if any major changes are to come in the ethanol industry, a major rejuvenation will be needed to pick up dwindling output. The cause of this slump in ethanol production runs deeper than research and development. It is largely due to a lack of investor confidence. Brazil cut its ethanol production following the global financial crash in 2009, leaving it years behind its past projection targets. That has caused indecision for investments in infrastructure and processing facilities. In 2008 Brazil invested $7.84 billion in ethanol production, according to an analyst at Bloomberg New Energy Finance. Last year it invested a mere $700 million. For the first time in a decade, the country imported more ethanol than it exported. Its overall exports fell by more than 3 billion liters during that same period. Not a bullish forecast for an industry whose market potential is begging to be tapped. Mining Leaders

Engineering, construction & automation

2012

lead article

FROM START TO FINISH I

tâ&#x20AC;&#x2122;s never been a better time to be an engineer in Brazil. Across the board demand for engineering and construction services is hitting new heights as the country seeks to develop the infrastructure needed for its resource boom and forthcoming major sporting events. International and local companies, flush with new contracts, are looking to expand their businesses and diversify their services. But a lack of manpower and insufficient investment mean that infrastructure remains a bottleneck for many mining projects in Brazil. Finding the right engineering partner is becoming a crucial task for many firms operating in the country.

Photo: Anglo American

According to a 2010 report by Morgan Stanley, a financial service firm, Brazil needs to double its investment in infrastructure to around 4% of GDP to avoid holding back the development of export industries. Given the scale of the contracts on offer many foreign firms have already established offices in Brazil and local engineering firms have become acquisition targets for international groups. May 2012 saw two such takeovers. First, California engineering and consulting firm Tetra Tech purchased CRA Mining Leaders

lead article

$80 billion Engineering, construction & automation

Brazilian engineering industry’s 2010 revenues

Engenharia, a Belo Horizonte based mining engineering firm. A week later Canadian engineering and consulting firm Hatch Group, which has an office in Belo Horizonte focused on the mining sector, acquired MEK Engenharia, a Rio based firm specializing in hydroelectric plants and wind turbines. The presence of foreign engineering firms with wide international experience is a major boon for the growing number of junior mining firms in Brazil. Whereas majors such as Vale tend to offer separate contracts for each stage of the mine construction process, smaller firms are more likely to outsource the entire process to a single ‘turn-key’ contractor. While engineering, procurement and construction management (EPCM) contracts are common internationally and have been used in the local oil industry, they are relatively new to the Brazilian mining sector. Global engineering firm Ausenco has taken the lead in this respect. In May 2011 the firm secured a $75 million EPCM contract for the design and construction of a processing plant of Beadell Resources’ Tucano gold project in Amapá state. Cost, risk and control are weighted towards the contractor so that the project is centralized, benefiting from clearer planning, standardized safety procedures, faster permitting as well as savings in capital, administration and legal costs. As more foreign juniors look

2012

High import taxes and a lack of human resources are proving challenging for engineering and construction companies

to move their gold and iron ore projects into the production stage, the number of EPCM contracts on offer looks set to rise. The recent acquisitions by Hatch and Tetra Tech highlight another key issue facing the sector: the need to secure local talent. Each year around 40,000 students graduate in engineering from Brazil’s universities, compared to 80,000 in South Korea and 400,000 in China. The Brazilian Federal Council of Engineering, Architecture and Agromony estimates that there is an annual deficit of around 20,000 engineers in the country. As a result companies are increasingly resorting to outside talent. But the general lack of human resources in the Brazilian mining industry is also opening opportunities to the companies focused on the automation of mines. With the growth of Vale’s iron ore projects over the last two decades, the country has become well represented by local automation firms including Cemi and Devex Mining. While processing plants are usually fully automated, a lot remains to be done before mine sites are automated

on a level equivalent to those of Chile or Australia, the two leading countries in the field. Both Cemi and Devex have successfully developed their own products and technologies for implementation in the Brazilian market and have exported them abroad. However, representatives of each firm accept that a shift in corporate culture is needed before mining firms fully embrace the potential of high-end automation equipment. All in all, the Brazilian engineering and construction industry had estimated revenues of around $80 billion in 2010 and analysts predict a growth rate of over 8% in the years leading up to 2015 by which time it will surpass the $111 billion mark. Engineering and construction firms look well placed to take a significant portion of the anticipated $70 billion investments in the mining industry between 2012 and 2016, especially since a raft of new projects in the iron ore, base metals and gold sectors are reaching the planning and construction phase. With the demand in place, the question remains whether equipment and manpower can be supplied at the volumes required.

Mining Leaders

company focus

Engineering, construction & automation

Brazilian Rockhounds Construction, geology, geotechnical engineering, process technology, NI 43-101, EIA HQ: Cotia, São Paulo Clients: CSN, ENGEVIX, IBC

“We understand the importance of the NI 43-101, so we work with the most qualified people when conducting those surveys. One of our engineers has 50 years of experience and has participated in some of the most important projects around the world.” Rafael Hernandes, Thatyana Benevides Owners Brazilian Rockhounds

BRAZILIAN rockhounds Mining companies in Brazil often face difficulties in finding the exact service they need. Brazilian Rockhounds, tired of the endless delays resulting from third party dependency, decided to diversify its range of services in order to cut out the middle man. One of the company’s greatest challenges is meeting the current construction demand. As a direct result, companies such as CSN are looking to Brazilian Rockhounds to assist them with data analysis for ongoing projects. Rockhounds has technology that allows it to analyze strain rates on rocks, soils and concrete before construction, assisting in developing better solutions in pit design

2012

and slope stability, delivering more accurate results and reducing delays.

topographical studies, environmental investigations and geological testing.

In recent years, project licenses have only been granted for three years and can only be renewed upon delivery of a positive survey report. Brazilian Rockhounds has been able to adapt to this new competitive climate and has been awarded an impressive array of projects. The company has been supplying geotechnical support on the construction of the North-South Railway, an ambitious project that will connect major mining assets and increase export capabilities. Brazilian Rockhounds is also involved in ten other projects in various service lines such as

Rockhounds has doubled its growth each year since 2008 in terms of projects and revenue. The company’s dynamic and forward-thinking strategy has meant it has been successful in adapting to the changes in the Brazilian market. Despite being in operation for less than 10 years, the company has formed such a wealth of knowledge that it is ready to expand into other markets in Latin America. Over the coming decade, Brazilian Rockhounds looks set to become one of the next major international players in geology, environment and infrastructure services.

q&a

aNywhere on

Paulo Almeida General Manager Atlas Copco

the atlas

What role do Atlas Copco’s Brazilian operations play in the firm’s international strategy? All over the world, not just in Brazil, people are familiar with Atlas Copco - they know we are a leader in drilling. Brazil is a fantastic country in which to explore and there are many opportunities here. Our head office is in São Paulo and we have two branch offices, one in Belo Horizonte and one in Carajás. In 2012, we signed a contract which more than doubled our operations in Belo Horizonte, Minas Gerais, the hub of Brazilian mining. Currently we have 270 people working in the mining sector of the business and more than 60 service contracts. Our clients include Vale, Kinross, Mirabella, Jaguar Mining and AngloGold Ashanti among others. We work in all types of minerals – anything that you need to drill. We are very strong in underground mining because we not only have the drills; we have the loaders, the trucks and all supporting equipment. In 2010, Brazil was the fourth most important branch of Atlas Copco. What types of contracts does Atlas Copco offer Brazilian customers? Our products and systems are consistent. The most important thing for our customers is ensuring the functionality of the machines. We have all types of servicing contracts – from a simple, basic format to full support and servicing. Our contracts can also be priced on meters drilled. The most common type is the technical assistance, in which we send our people to the mining site to support the machines. About 150 of our people work in the parts and services department. Every customer has their own preference and we adapt ourselves to each contract. Brazil is a very difficult market. What differentiates Atlas Copco from competition? Our main competitors in drilling are Sandvik and Caterpillar. They are very strong companies, but we have good coverage of the mining sector through our customer support teams and spare parts inventory. We have a business development manager who maintains contact with juniors and newcomers to Brazil. This facilitates communication, since Atlas Copco is such a large company with

Engineering, construction & automation

Atlas Copco is an established name in the global mining industry, providing mining and construction equipment to the world’s leading firms. The company has a strong presence in Brazil, with excellent coverage and an impressive spare parts inventory, all supported by a skilled team. The firm is currently expanding its Belo Horizonte customer center in order to better facilitate clients. many divisions - it can be intimidating for juniors. Atlas Copco has never cut budgets for research and development. Even in crisis times, the budget remains strong for this area – it has kept the company relevant. The company is the best in the sector and we offer great support to our customers. We think of our customers as partners – we make money together. Import taxes remain high in Brazil. Is local production an option for the company? To produce here you need to have a certain volume of equipment to keep the production unit competitive. We don’t manufacture mining equipment here. Mining equipment volume still doesn’t justify a full plant. We import 100% of our mining equipment. Depending on the product, import tax can vary from anywhere between 2% to 14%. However, the fact that all the other major players are in that position means that it does not affect our competitiveness - it is the end user that-pays. On some specialized projects, import tax is waivered, which is helpful. What are the biggest challenges of the Brazilian mining sector? The biggest challenge is to keep Brazil abreast of technological changes and innovations and to familiarize the clients with the benefits which come from their implementation. We encourage our customers to travel to other Atlas Copco projects in other countries in order to demonstrate how everything functions. Furthermore, I think the Brazilian mining sector has seen huge growth in the last five years and that we should be prepared for smaller growth figures in years to come. The new mining code is a concern for future investment in the country. More regulation means less investment. But I think this is more of a long term issue. What are your plans for development over the next five years? Atlas Copco is considered one of the most creative companies in the world. We focus on research and development and will continue to do that. We are customer orientated, product driven, therefore our expansion is driven by market conditions and client needs. Mining Leaders

leader insight Paulo Libãnio General Director Ausenco

Engineering, construction & automation

Ausenco listed on the ASX in 2006 before embarking on an aggressive acquisition strategy that led to the purchase of PSI, Sandwell and Vector in 2008. The knowledge and technology gained from these purchases has allowed Ausenco to become a one-stop engineering firm with a history of undertaking difficult projects in remote parts of Africa, Asia and Latin America.

A Time for Turn Key For many years in Brazil, EPCM contracts (engineering, procurement and construction management) have been common currency in the oil sector. State oil firm Petrobras and other private companies have benefited from this contract model, which allows mining firms to centralize their project with a single contractor and provide a clear identification of responsibility. Although a similar model has proved successful for mining projects in Chile and Peru, so far the Brazilian mining sector has been slow to adopt it. At Ausenco we have embarked on our first EPCM project in the Brazilian minerals sector, upgrading a heap-leach processing plant to a carbon-in-leach facility for Beadell Resources’ Tucano gold project in the state of Amapá. In January 2012 the civil engineering works were almost completed and the erection of equipment was about to begin. The plant is due to enter production in the second half of 2012. In pure capex terms, the Tucano project is relatively small and it is not a particularly complex operation. However, it “An EPCM contract includes is an important opportunity for Ausenco to show the possibilities of EPCM contracts to all the guarantees, terms and the mining sector. Having worked at Vale as the Director of Project Implementation with a budget of nearly $10 billion, I have experience of how complex contracting for large scale projects can be. On one major project, which had an end product of 30Mt/year of iron ore, my general manager on the site had to deal with around 750 contracts. Mining giants such as Vale have the scale and pipeline of projects that can justify developing an in-house team of engineers, procurement specialists and construction managers. But for junior gold companies and the host of new firms entering the iron ore sector in Brazil, many of which only have one project, it does not make sense to develop their own structures and tools to manage projects. Even for companies like Vale, EPCM contracts may be the norm for overseas projects in

2012

areas such as Africa, where it is difficult to mobilize good contractors. So how can private mining firms benefit from delegating their projects to a single engineering firm? An EPCM contract includes all the guarantees, terms and conditions necessary for the company to complete the work on-time, on-budget and according to safety procedures. The client can hand over risks and responsibility for the project to a single contractor. International firms like Ausenco, which has worked in tough environments in Africa and Asia, already have the knowledge and experience required to perform.

conditions necessary for the company to complete the work on-time, on-budget and according to safety procedures.”

From the contractor’s perspective, it is crucial to elaborate a procurement plan and then fit this into the market place. Taking the Tumaco project as an example, we are working in a very remote area close to the border with Guyana. The challenges are infrastructure, labor and logistics. It’s very difficult to import machinery and bring it to site over the poor roads. It’s no use hiring a big contractor from Minas Gerais to work in these conditions, probably at three times the price. Fortunately the northern states of Amapá and Pará are also very used to the mining industry and in Brazil we have very good contractors that have experience in EPCM contracts as a result of their work with oil players. For Ausenco, the Tucano project is an exercise to perform larger EPCM jobs in Brazil and elsewhere. Since we moved to our new Belo Horizonte offices in April 2011, we have seen our local staff grow 40% to nearly 300. At the moment the majority of our revenues come from engineering and consulting work, but in the coming years I expect to see over 40% coming from EPCM work. You have to do a lot of consulting work just to reach the scale of one significant EPCM contract. So for one-stop engineering firms like Ausenco, the growth of the EPCM contract is an exciting opportunity for the Brazilian mining industry.

power up Less than a decade ago, a prolonged drought left Brazil’s hydroelectric-dependent electric grid useless, leading to powercuts and electricity rationing. Today electricity prices in Brazil, at about 18 cents a kilowatt-hour, are double those of the US and 80% more than Peru’s. High taxes, strong demand, and inefficiency of the grid have led to energy costs creeping up in step with Brazil’s growth. In 2011, electricity use totaled 404 billion kWh, an amount that has stayed nearly flat since 2008. This level of consumption is worrying many policymakers as Brazil moves towards its upper limit of 438 billion kWh of electricity production. The grid will have to be enlarged to cope with the soaring demand or else blackouts will be rampant. Electricity consumption began to grow in 2003 after the then Energy Minister, Dilma Rousseff, instituted Luz para Todos (Light for All), a program to connect rural homes to the grid. Since then, more than 2.4 million homes have plugged in. The government estimates electricity demand to increase by 5% over the next decade. Rising electricity demand threatens to spike prices to levels that will limit growth. Seeing a threat to competition, the government has planned investments of $128 billion to improve and increase the electrical capabilities of the country. The Programa de Aceleração de Crescimento (Program to Accelerate Growth) has commissioned more than 76 power plants that will add 26,353MW of electricity generation. The Estreito power plant alone will generate 1,087MW - electricity for 3.5 million people. A series of dams will add to the country’s already immense hydroelectric capacity. There are complaints from energy industry executives on the lack of foresight - for example, by building transmission lines and substations with capacities obviously far too low, the government has failed in developing adequate energy infrastructure to keep the lights on. Firms are planning renewable energy projects including wind and biofuel to complement the extensive hydroelectric grid. Outotec is developing a process to convert oil shale into oil. With over two thirds of the country’s electricity coming from hydroelectric plants, Brazil has been able to keep its greenhouse gas emissions down compared to its other BRIC counterparts. Brazil can hopefully generate sufficient electricity in a clean manner by continuing to invest in the hydroelectric and renewable sector. Mining Leaders

q&a

all in the Sergio de Brito President BVP Enghenaria

details

Engineering, construction & automation

Using its geotechnical expertise, BVP Engenharia offers various services in the mining cycle, including risk assessment, technical works, design, procurement, construction, management and technical supervision. Being a Brazilian firm, BVP leverages its local knowledge and agility in addressing the needs of both local and international clients. The company is working on about 40 projects with a team of 90 people, making staff adaptable to the specific demands of clients. Since 2003, BVP has experienced exponential growth in Brazil. What has been the reason for this trend? BVP’s growth has been largely thanks to the boom Brazil has experienced in mining over the past decade, plus the related increase in demand for hydropower which enabled the company to expand its work into the area of consulting. Our expansion means we now deal with all geotechnical issues that exist in the mining industry. How is the company dealing with this increased demand? BVP handles various types of contracts. We are currently implementing an umbrella contract, designed to circumvent the bureaucracy that big business, especially in Brazil, tends to experience. Contracts are signed quicker. Using this type of contract, we normally get approval within the month. In contrast, previous contracting practices could take up to three months to process. What are the differences between an umbrella project and an EPCM project? EPCM projects are those in which you make a future delivery as part of a larger undertaking in conjunction with other companies. This involves management, infrastructure and diversification. We have participated successfully in these projects through the provision of geotechnical services, but are forced to operate under the control of larger companies since we don’t have the necessary infrastructure. Umbrella contracts, on the other hand, can be seen as a way of providing one specialized service inside an EPCM project. What is BVP’s strategy to ensure quality of service? BVP works particularly hard to meet specific goals within a rigid schedule. Logistics are hugely important, as is the ability to deal with the unpredictable surprises that come up in the process of MTS provision. Speed, good management, planning and oversight are the factors that allow us to commit to and achieve deadlines. We use integrated management systems, project flows and filters to control the quality of our projects thus allowing clients to make

2012

changes during the process rather than being disappointed at the end. There are four gates which ensure quality verification conception, acquisition of data, analysis and dimension. Does BVP work with partners? We outsource a lot of the basic work, using external laboratories and topography surveys for example. BVP has a complex selection process, which ensures the partners we work with comply with and understand our values. For example, if today one of our priorities is to have complimentary laboratory work done, we can go to our partner and know that we will be their priority and that their results will be accurate. However, due to demand, We established a briefing company to support our activities and to conduct research for our own projects. The prospective growth of this specific field is really big for us. The demand for briefing in all areas from mineral research to geotechnical studies, both inside and outside Brazil, is a large part of our business. BVP has created this research company and has the necessary equipment, decreasing the need to bring in anything from outside the country. The only thing that the company does import is software. What are the main challenges BVP faces in the engineering services sector? Our main challenge is finding experienced people. We are working on building links in Latin America. We have started to look towards Colombia which has really high quality personnel in the geotechnical field. It is important for us to offer attractive positions, in order to draw the best people. BVP has extensive training for new-hires, ensuring the effective transfer of key ideals. What is BVP’s strategy for the next two years? BVP plans to expand its fields of expertise.We hope to develop into logistics, transportation, energy and infrastructure. Mining will remain our focus. We hold Vale as a model. In two years’ time we will have solidified our reputation and we hope to be a leader in the Brazilian engineering sector.

market focus

destination automation

Ricardo Hirschbruch CEO ABB

Devex

“Companies face numerous challenges in controlling mobile and remote assets in mine sites. It is crucial to have control over overlapping processes to ensure increased production, reduced operational delays, and adherence to quality speciﬁcations, among other objectives. It is estimated that the costs involved in the operation of the mine account for more than 50% of the total cost of production. Taking this into consideration, throughout the past decade huge investment has been made in research and development of solutions to optimize mining assets - reducing costs and offering a safer work environment.”

Gilson Krause CEO Promon Engenharia

“Process automation has been transforming the mining industry. Several operations at site might be executed from control centers located far away using cuttingedge networks. Such arrangements reduce man power in remote regions. In addition, a couple of technologies are reshaping mining activities allowing truckless operations contributing to CO2 emissions reduction. Promon has been evaluating several automation and IT technologies to integrate them in the current engineering offer aiming at providing to the clients maximum efficiency and sustainable operations.”

Control over all types of mining operations is crucial to ensure increased production, reduced operational delays, and adherence to quality speciﬁcations. It is estimated that mine operation accounts for more than 50% of the total cost of production. Rio Tinto is currently developing its so called “Mine of the Future” in Australia which will allow control from thousands of miles away, cutting down on labor costs and improving safety. As of yet, investment in the project has not been disclosed. Closer to home, AngloGold will become the first underground Brazilian gold mining operator to manage its mining operations from a control room. This pilot test expects to see an increase in control, security and efficiency. Automation of mining processes is likely to become more popular in coming years as companies embrace benefits that arrive from such investment.

“Automation is part of the core business of ABB. Automation systems inside process industries represent the most technologically-advanced part of any company and therefore require investment. ABB can integrate process automation with electrical automation and provide full control to our customers, from the instrumentation up to enterprise resource planning. This whole system encourages a collaborative environment of operation that helps our customers to improve productivity, efficiency and results. It is worth the investment.”

Dr Guilherme Bastos

CEO

Mining Leaders

company focus

CEMI Engineering & process technology HQ: Belo Horizonte Clients: Vale, CSN, Kinross Engineering, construction & automation

cemi

Brazilians have earned a reputation over the years for favoring imported products ahead of domestic goods. However, in the mining sector at least, this situation is rapidly changing. Belo Horizonte firm CEMI started life as a representative for foreign mining technology companies but over time it has developed its own technologies and diversified its products to meet demand from Brazil’s burgeoning mining and cement industries. With a domestic client list including Vale, CSN,Votorantim Metais as well as international diversified mining firms such as AngloAmerican and Kinross, the company is now expanding to new markets in Latin America and beyond. Throughout the past decade, CEMI has had to overcome many barriers such as a local preference for foreign products and a level of conservatism in the mining industry regarding the adoption of new technologies. CEMI’s is currently focused on identifying constraints in the production process in order to help firms increase the efficiency of their operations. Specific products range from simulation and advanced process control through to expert system software and image analysis. Samarco, a privately held Brazilian mining company, controlled in equal parts by Vale S.A. and BHP Billiton, has been able to successfully use CEMI’s services to significantly

2012

“CEMI’s expansion plans aren’t limited to Brazil. We showcase the quality of Brazilian MTS companies and their capacity for innovation.”

Marco Soares Martins Director of Operations CEMI

reduce their energy costs and increase their production capacity at their Ubu project in Espirito Santo. The Samarco case is key to changing the mindset of local companies and provides a way to expose the value of processing and information technology in the mining sector. As well as investing in new technologies, the firm endeavors to showcase the aggregate value of its products to new

and existing projects. The company’s Director of Operations, Marco Aurélio Soares Martins, says that in projects that CEMI has been called upon, the savings made have been remarkable. The company’s reputation has grown and today the firm holds a substantial market share for intelligent technology in the mining industry. With many mining companies yet to implement these solutions, the potential growth in the Brazilian market remains irrefutable and Soares is targeting a two-digit increase in sales until 2015. This growth will be bolstered by the internationalization of the brand. CEMI has already established a presence in Chile, Colombia, Venezuela, Honduras and Oman. Through its close relationship with local clients such as Vale, CEMI also expects to be involved in projects in Africa and elsewhere. In the coming years CEMI aims to show that Brazilian technology can cut it in any market in the world.

Bank-rolling brazil Eike Batista has called the BNDES the “best bank in the world.” Since its creation in 1952 the state run Banco Nacional de Desenvolvimento Economico e Social has played a central part in the growth of Brazil’s economy through the provision of low-cost loans. The bank does not lend only to large corporations, but also to ‘micro’ businesses and startups in order to stimulate growth evenly across the spectrum. The prerequisites are that companies are headquartered in Brazil and have at least 60% local content such as employees and suppliers. Mining firms have been major recipients of BNDES finance. In 2008 roughly a fifth of all loans - equivalent to nearly $10 billion - went to mineral projects including Vale’s Carajas and Salobo mines. TSX-V listed companies, including MBAC Fertilizers and Largo Resources have also tapped into the system, the latter securing a $175 million loan in May 2012. BNDES’ portfolio of loans is about four times the size of that of the World Bank. Under ex-President Lula da Silva, BNDES saw a five-fold increase in lending. After one year in office, Lula saw economic growth at 5.7%. The global financial crisis was an important test for the BNDES, and it played an extremely important role in ensuring that Brazil only experienced a mild 0.5% contraction in 2009 by boosting its lending. Private banks nearly shut off new credit, while public banks increased credit by 50% between September 2008 and January 2010; BNDES was responsible for half of the money lent by public banks. Despite the vast contribution to development, many critics point out the opaque ties between business and politics, accusing BNDES of distorting the market and strangling the private banking sector by offering “subsidized rates.” Some complain that the government is intent on creating conglomerates to compete on an international level instead of directing investment to small businesses. One fact is startling; four-fifths of loans go to large companies like Petrobras, JBS, and Vale. Brazil’s benchmark lending rate, the Selic, is 9%. BNDES forbids lending to the financial sector, and seems further intent on removing all competition by offering loans that carry a rate of about only 6%. Despite the criticism, BNDES has been largely responsible for the growth in the country and will hopefully adapt to counter any external shocks that may emerge as Brazil continues down the path of development.

Discover the way to SMART TECHNOLOGY Since 1991 CEMI has been developing integrated solutions in the field of mineral engineering. CEMI specializes in: • • • •

High performance equipment Technologies of dynamic and static simulation Advanced control and process optimization Image analysis for flotation and size distribution of ore and pellets • Multidisciplinary engineering. CEMI’s recognized expertise, mastery of modern technologies and use of advanced tools have allowed for the development and successful execution of projects, ensuring complete satisfaction and return on investment for clients.

CEMI - PROCESS TECHNOLOGY AND ENGINEERING Rua Fernandes Tourinho, 602 - Térreo - Funcionários Belo Horizonte / MG - Brasil CEP.: 30112-000 Tel.: +55 31 3116-3700 / Fax.: +55 31 3116-3740 Mining Leaders www.cemi.eng.br / cemi@cemi.eng.br

company focus

Pimenta de Ávila Consulting Geology, hydrogeology, geotechnics & water resources HQ: Belo Horizonte Clients: Anglo Ferrous, Bunge, CSN, MMX, Vale Engineering, construction & automation

pimenta de ÁVILA Joaquim Pimenta de Ávila, founder of Pimenta de Ávila, has adopted a policy of unhurried and steady growth for his company. Anticipating the 2008 financial crisis in the US, the company had various contingencies to deal with the fallout, instead finding that growth continued at 20% that year and for the following two. So why was its negative predictions wrong? “Our main products are focused towards operational mines and our main clients have been working with us for over 10 years,” Ávila explains. The company has a team of 60 engineers, over 40 of whom have master’s degrees and a further dozen boast PHDs, who offer highly specialized geotechnical, geo-mechanical and water management services. Technological advancement lies at the core of Pimenta de Ávila’s service. Though working with many large companies, Pimenta de Ávila also considers smaller projects extremely interesting, as it allows the company to advance into new areas. It is only through these types of progressions that the image of the mining sector can improve, “I think the biggest challenge is to convince society that mining can be clean. This means that the technology for ore processing, water management, and tailings disposal be sound and meet the requirements of society.” Likewise, Pimenta de Ávila feels the sector lacks clarity in environmental permitting and is often

2012

“Don’t shoot yourself in the foot. Invest in conceptual design. I’ve seen it countless times – a company goes with the cheapest contract and ends up paying more for construction.” Joaquim Pimenta de Ávila Founder Pimenta de Ávila

victim to political bias or personal subjectivity and considers the use of advanced technologies to be essential to environmental impact assessment. 50% of the company’s contracts include environmental geotechnics, “Our clients are facing continuing resistance to their work because of tailings dams, and the effect they potentially have environmentally. We are developing systems which decrease the risks”

Pimenta de Ávila’s innovation and expertise has been accepted by the industry. IBRAM contracted the company to train people in improving the safety of tailings dams, “We provide courses for directors, detailing how dam safety influences the business, for engineers, operators and contractors in how to improve design, and finally for technical supervisors, explaining better day to day operational standards.” Ávila asserts that the company is constantly updating design and management systems for tailings disposal, making them safer to operate and more environmentally sustainable – in some tailings projects Ávila’s engineers avoid using a dam at all. Another area of expertise for the company is mine closure. Pimenta de Ávila works with public authorities and big and small companies in closing abandoned mines. The company is based in Belo Horizonte.

market focus

Source: World Economic Forum

Problematic Factors for Doing Business in brazil

taxing times

With rates up to 35%, Brazilian import taxes are some of the highest in the world. Taxes vary between states and depend on the product being imported. Import tax is calculated in reais when the good enters the country and has to be paid in full before it will be released to the buyer. The import tariff rate is applied to the “customs value” of the goods - the sum of the cost price, insurance covering the goods during shipment, and ocean or air freight. According to Morgan Stanley, it takes companies in Brazil 2,600 hours per year to prepare and pay taxes compared to a median of 224 hours in other countries. With increasing costs from inflation and cheaper Chinese imports, President Dilma Rousseff introduced the “Bigger Brazil” plan, which aims to protect domestic industry which will include tougher controls on imports. This forces companies to come up with more creative ways of manufacturing their products - though in some cases, it still remains cheaper to import.

“One of our greatest challenges is to convince our customers that the technology being imported from the United States and Europe can be manufactured locally, with the same quality and reliance. Not only will you be able to bypass the high Brazilian import taxes, which are only one set of taxes to be paid, but you will also create a good trustworthy connection with local companies that will assist you throughout your projects. This sometimes may not apply João A. Barretto to more controlled industries such as the chemical industry Sales Director but when it comes to mining equipment, I am sure we can SEMCO Equipamentos deliver the same quality without the need to import.”

Lars Quaiser Director - Commercial Services & Sales Outotec

José César Grande Managing Director Sulzer Pumps

“Import taxes have been a challenge for Outotec. Some eight years ago, restrictions and high import taxes aimed at protecting local markets made it more attractive to buy locally. However, today with increasingly high costs of labor and production in Brazil, it is often more attractive and cheaper to import even with the tremendous tax burden for imports. We manufacture heavy and non-sophisticated equipment in Germany and import it here resulting in lower landing costs than equivalents produced in Brazil. It is necessary to do “tax engineering” at the conceptual stage of any project to optimize the overall costs.” “Brazil is a key market and occupies an important position in the strategy of the world’s biggest companies. We know that the country has to face great challenges in terms of taxes to increase its competitiveness level. But our presence in Brazil shows our confidence in its growth and development potential. To be closer to the customer, to have local solutions, to understand the market better and to be quicker in response we have decided to invest in local manufacturing and service centers despite some eventually challenging operation conditions.”

Mining Leaders

q&a

Mine to

Dr. Guilherme Bastos Alvarenga CEO Devex Mining

Control

Engineering, construction & automation

Devex Mining is the leader in the development of solutions for the management and control of mining operations. Offering solutions for both underground and open pit mines and holding 82% market share, the company has a solid client portfolio, which includes major mining companies such as Vale, CSN, Anglo American, Yamana Gold, Kinross, Mineração Rio do Norte, MMX and AngloGold Ashanti. What benefits do Devex’s products offer to mining companies? Devex´s products aim, in a broad way, to increase control and improve performance of mine operations, including production, quality, maintenance and operational safety. These benefits are quickly recognized after the implementation of SmartMine.UG or Extreme. The solution built into these products is a state of the art optimization algorithm, capable of finding the best configuration for the mine at each instant and generating surprising and beneficial results. These solutions are focused on reducing operational costs and on increasing production by 20% after implementation. Our customers are the ones who provide this information to us. They tell us that their investment return generally occurs in less than six months. Another major differential of the Devex solution is that it is not plastered and isolated. Today, the integration with different systems is fundamental for a better result for the company as a whole. Additionally, we have products such as SmartMine.UG and Extreme which were designed to supply all organizational levels with information on production and assets involved in the operation. What are the major challenges found in mining technology related to automation? Mine automation is a big challenge because it is only beginning to be introduced into mine operation, although it has been established worldwide in other industrial sectors for the last 30 years. In mining, as with industries, the plants were already automatized but not the mine and its mobile and remote assets. It is estimated that only 20% of mining companies globally manage their transportation and load equipment remotely, which does not represent the complete automation desired. We can say that companies have only just started to implement automation for the processing part of the operation - that is to say from the mining site to the primary crusher. This is one of the most costly steps in the mine, but because it is not fixed and connected to the network structure and control room, it was the last step to be addressed. Devex´s aim is to completely

2012

change this scenario, and we are already reaching this goal with our clients. In Brazil, the automation index of transportation and load system in mining companies is 35%- one of the highest in the world, alongside Chile and Australia. However, transportation and load management systems are only a step towards mine automation. For Devex, it is necessary to go beyond. Thus, in 2011, we released two new productsExtreme and SmartMine.UG, which are two new solutions that specifically address the automation of mobile assets under this broader paradigm, visualizing the entire mining process as a single process. These two products places Devex as the global pioneer in the complete automation of the mine. Systems with open architectures are the ones that will allow advancement of its applications, always working together with clients and partners to aggregate value in partnership with Devex. What differentiates Extreme and SmartMine.UG from other systems already on the market? What Extreme does for open pit mines and SmartMine.UG for underground mines is to go deep into the concept of optimization and automation of processes. The solutions offer the entire platform for automation of mining operations, which goes far beyond the fleet and dispatch management offered by other systems on the market. Extreme and SmartMine.UG optimize and automatize all of the mine´s systems, equipment - whether fixed or mobile, auxiliary or productive fronts and even people and their activities. These two systems are the product of Devex´s 15 years of experience in the mining sector. Our challenge now is utilizing these new concepts, to take these new released systems to our clients, maximizing the results and improving costs. What projects has Devex recently been involved in? We have been developing plans for a fully automated mining operation. One of AngloGold’s underground gold mining operations will become the first mine in the world to manage all planned tasks from a control room, using

SmartMine.UG. This pilot project expects to see an increase in monitoring operator security and conditions, optimization of the drill, blast, load, transportation, control of pumps and wells, oversight of dust and vibration sensors, telemetry of vital equipment signals, cameras, remote sensors, and other important operations. With this technological advance, both underground and open pit mining hope to achieve a breakthrough in automation practices. In which regions in Brazil does Devex plan to operate in the next two years? Devex is already the market leader in Brazil. We will be where mining companies are. We can observe a broad expansion to many new states, where mining was in the past less present. Additionally, traditional states such as Minas Gerais and ParĂĄ continue to receive new and important mining enterprises. What are Devexâ&#x20AC;&#x2122;s global development strategies in for the next five years? Today, Devex is in four countries. Besides Brazil, the company has offices in Chile, Peru and Australia. Our global strategy for the next five years is, first, to establish the existent offices and secondly to expand to countries across the globe with the longest and most established mining traditions. Currently, it would be strategic to work in countries such as Canada, Russia, the United States, Mexico, South Africa, and other countries in the African continent. However, this will have to be a very well planned move so we can maintain the excellent standard of our products and services in each of the countries where we might operate in the future. We are excited about developments to come in the next five years. Mining Leaders

mining Equipment, technology & services

2012

lead article

AT YOUR SERVICE B

efitting a market of its size, Brazil has a well-developed and consolidated mining equipment, technology and services (METS) sector with over 250 foreign firms having established a presence in the country and dozens of local companies offering a variety of products and services. Given the importance of the countryâ&#x20AC;&#x2122;s huge iron ore industry, most firms have traditionally focused their business on this sector, with a long-term contract with Vale being the ultimate goal. However, the diversification of the countryâ&#x20AC;&#x2122;s mining industry has led to a steady growth in the number of private companies operating in Brazil, exploring and producing a wider variety of minerals. Today the METS sector is becoming increasingly dynamic, with firms looking to improve the quality of their products and services while at the same time remaining price competitive with regards to outside imports.

Photo: Crusader Resources

Given the long supply chains involved in the mining industry and the divergent requirements of each project, the METS sector is made up of a diverse set of companies and so statistical information is scarce. Mining Leaders

lead article Nevertheless, BricData, a business intelligence provider, estimated the Brazilian mining equipment market to be worth $3.8 billion in 2010 and forecasts growth to reach $5.8 billion by 2015. In addition to iron ore mega-projects, the development of the gold and base metals sector, and the demand for heavy equipment for construction of infrastructure for the FIFA World Cup and Rio Olympics, is driving this strong growth. With their historical expertise in heavy duty equipment and machinery, many German and Scandinavian firms, including Metso, Sandvik and Aerzen have set up shop in the main business cities of São Paulo and Belo Horizonte. Foreign firms can chose to operate either as a distributor or establish a local branch, often with domestic production facilities. Brazil has long employed a strong industrial policy and high import tariffs push up prices for those firms that bring in their products from abroad. But even given these high tariffs, the appreciation of the Brazilian real has made cheap Chinese imports highly competitive in the market. China accounted for 14.5% of total imports in 2011, compared to just 5% in 2003. This was the background for the industrial stimulus package introduced by the government in April 2012 which slashed taxes for domestic industry and injected $23 billion into

Brazilian service firms are targeting the country´s growing contingent of gold exporers

state-owned development bank BNDES to stimulate domestic business. “Given the international outlook, we must continue to take measures to stimulate public and private investment,” said Brazil’s Finance Minister Guido Mantega. The logical response for many firms facing increasing competition and shrinking margins has been to focus on service and innovation. SGS, a major service provider in the analysis sector, is fast expanding its number of laboratories - investing $5 million in its testing facilities in Colombia, and another $3 million in a testing station in Minas Gerais. Brazil has grown as a continental industrial powerhouse, developing new technology and even exporting to neighboring countries. “More and more, Brazil is becoming a [supply] hub for South America,” says Carlos Facirolli, Managing Director of Aerzen do Brazil which supplies compressors and blowers to the mining industry. As high commodity prices have made lower-grade and harder to reach ores economically viable, demand has grown for innovative equipment needed to extract these resources and to reduce manpower requirements in a tight talent market. Indeed, human resources shortages remain a bottleneck for the METS sector. The development of the country’s massive offshore oil deposits and the construction of numerous mega-projects means that engineers and project managers are increasingly hard to find. Financing is another major challenge. Even as Brazil has moved firmly into the crosshairs of international investors, the sheer number of projects across all sectors of the economy has left firms competing for funds. While the private equity business is developing rapidly, much of the focus has been on developing firms linked to Petrobras’ supply chain. So while Brazil’s mineral boom may look enticing, METS firms will have to work hard to reap the benefits.

COMPANY FOCUS

Aerzen do Brazil (1999) Rotating Equipment HQ: Cotia, São Paulo Clients: CBA, Vale, Samarco, AngloAmerican, Minerconsult

“We arrived in Brazil in 1999. Since then the company has grown significantly, increasing 90% in size between 2009 and 2010. Having built a strong reputation for energy efficiency, we have a solid and loyal client base which includes Minerconsult and Vale.” Carlos Facirolli Managing Director Aerzen do Brasil

German company Aerzen was founded in 1864. Since establishing Aerzen do Brasil in 1999 and through a strong adherence to quality standards, as well as a focus on environmentally efficient technologies, the company has become market leader in the provision of rotating equipment for the local mining sector. Mining accounts for 35% of the company’s turnover. Blowers and compressors are Aerzen do Brasil’s main products, and can be applied to various functions related to mine exploitation. The company is continually updating their portfolio of products to incorporate new technology. One such product, the

Delta Hybrid, is a combination of a low root blower and a screw compressor, allowing for higher pressures and better efficiency - the result is a 20% increase in energy savings. The company imports the core of its machines from Germany and buys all auxiliary parts from local sub-suppliers, which they then adapt in order to meet the requirements of the local market. This system is motivated by a desire to avoid high import taxes and large upfront cash costs. Likewise, local suppliers are beneficial in order to maintain a credit line from the Brazilian National Development Bank, which demands that

MeTS

Aerzen do Brasil international companies source at least 60% of their inputs from local firms. Aerzen works with big OEMs and engineering companies, including CBA, Vale, Samarco, Kinross, AngloAmerican, and Minerconsult. Brazil is the hub for South America, but the company has an office in Bogota and a distributor in Argentina, with potential plans to open offices in Peru. The company expects to grow by 60% in 2012. Aerzen International is investing in Australia and China and aims to double its turnover within seven years to reach $658 million globally.

Mining Leaders

COMPANY FOCUS

Geosol (1953) Drilling 1,338 employees HQ: Belo Horizonte

100

2012

João Luiz N. Carvalho President Geosol

Despite Brazil’s vast geological potential, miners are readapting their business models to the country’s new mining code, high taxes, and environmental regulations. Geosol is not directly affected by the mining code. Their clients, however, are impacted by the higher costs and red tape resulting from it. In response, Geosol has implemented a cost oriented strategy to maintain its margins. On the environmental front, the company has done a lot to

One of Geosol’s strengths is its diversification and scope in the drilling field, providing a range of specialized solutions including air core and reverse circular drilling. Services include everything from road construction to geochemical analysis. Perhaps the most important aspect of Geosol is its experience and knowledge of the Brazilian market. After 60 years of success, Geosol has the capabilities, resources, and knowhow to meet clients drilling targets anywhere in Brazil.

636

560

478

615

501

475

700

ensure that its environmental impact is minimal. Geosol has acquired ISO 9001, ISO14001, and OHSAS 18001 certifications; it has trained all its personnel to minimize environmental impact; and finally it promotes the reusing of resources, such as water, when drilling. Besides its operations in its home market, Geosol has plans to expand into Africa and other countries in Latin America including Colombia and Peru.

YearLY evolution of Drilling in thousand meters

800

402

600 500 Source: Geosol

400 300 200 100

11 20

10 20

09 20

08 20

20 06

For those looking to explore in Brazil, Geosol has the experience and technology to drill and produce core samples. João Luiz Carvalho, Geosol’s President comments, “we acquire technology, and we adapt to our markets. We create synergy between technology in the market, our experience, and what the client needs.” The management places a lot of emphasis on technology and innovation; currently they are developing a potash drilling system adapted specifically to the needs of the Brazilian market. At the moment potash is drilled with machinery from the oil and gas sector; Geosol’s intention is to develop more efficient and reliable samples. Within two years, Carvalho sees significant growth in the drilling activities in western Brazil and in the Amazon; Geosol’s investments in R&D will likely pay off significantly.

“We have over 60 years of experience. We can create a bespoke solution for any client: drilling, core samples, and lab analysis. SGS is our partner. The clients give us the site and we give them the samples and the results.”

Geosol, Latin America’s largest drilling company, was founded in 1953 by Victor Dequech. Since inception the company has grown and expanded to become one of the top five drilling firms in the world. Geosol today operates in 16 states in Brazil and across the Atlantic in Guinea, Angola, and Liberia. Of the seven companies in the Geosol group, the largest is its geological drilling focused company, Geosol, with 1,338 employees. In the first months of 2012, drilling totaled over 607,000m; its largest target is copper-gold, accounting for about 40% of drilling, followed by iron ore at about 25%.

MeTS

geosol

The Next Big drill Drilling is by far the largest expense mining companiesâ&#x20AC;&#x2122; face during the exploration stage. Less than 30% of Brazil is geologically mapped so demand for drilling is set to grow as more investment enters the country. In 2009, Brazil was ranked 10th globally in terms of private investment in mineral exploration. The Brazilian Ministry of Mines and Energy anticipates $10.5 billion being channeled into new exploration between 2010 and 2030. With a strain already being felt on the drilling services available in the country, finding the right provider remains a challenge. Not only do juniors have to contend with limited rig availability, but high import taxes on machines coming into the country mean that meters can cost twice as much as they would in Canada. As a result, productivity is limited and costs can soar. However, certain drilling companies have begun to make large investments in upgrading their services. Geosol, for example increased its drill capacity by 76,000m between 2010 and 2011. Likewise, Master Drilling plans on expanding its fleet and operations by more than 25% in the coming years and hopes to introduce blind hole technology to the Brazilian market. Drilling companies are affected by continued skill shortages across the country, forcing many firms to look for personnel in neighboring countries and partner with local universities to push for better training courses. To combat rising costs, many companies are beginning to expand their services throughout Brazil to improve response time. Greater coverage will cut down on costs associated with sending crews to different mining sites. Atlas Copco is expanding its service center capacity in Minas Gerais to better support its customers. This service center will be strategically located 200km or less from 80% of the mines in the region. These service centers will increase speed of services through maintenance and machinery technical support. With huge investments being made in exploration in Brazil in the coming years, drilling companies who make the right adjustments to their business models now are likely to be those who will benefit the most. Mining Leaders

101

COMPANY FOCUS

“We introduced LIDAR technology into South America in 2001. Some regions in Brazil present challenges. We have technology including digital cameras and airborne LASER scanners that allow mining companies to obtain digital terrain models with great accuracy.” Carlos Valério Avais da Rocha CEO Esteio Engenharia e Aerolevantamentos S.A

Esteio Engenharia e Aerolevantamentos S.A (1969) Laser mapping HQ: Curitiba Clients: Vale, Votorantim Metais Nickel, Ferrous Resources

MeTS

ESTEIO In the past, topology and geophysical surveys in Brazil were conducted by large teams of geologists with old maps or by garimpeiros. Not only was this a highly time-consuming activity but it was also imprecise. Companies were able to mine the surface of their findings but weren’t able to accurately calculate the size of their resource base making future exploration, drilling and production planning difficult. Laser mapping ended these difficulties. Though at first the investment might seem high, in the long run this technology reduces costs associated with surveying and labor and makes the project more time efficient. With a single airborne scan, companies can learn all about the terrain they’re exploring

102

2012

allowing them to tackle the geology with the least amount of resources. Esteio Engenharia e Aerolevantamentos offers a wide variety of services related to laser mapping and geophysical surveying. The company, founded in 1969 and based in Curitiba, began in the civil engineering and road construction business but quickly realized how important this mapping technology would be for the Brazilian mining sector. With a fleet of three planes equipped with the latest Digital Image sensors and Airborne LASER Scanning technology, Esteio offers volume calculations, DTMs (digital terrain models) DEMs (digital elevation models),

and erosion monitoring and modeling with high accuracy. Carlos Valério Avais da Rocha, CEO of Esteio, states that “nowadays many companies are not interested in analyzing data to high quality standards and I believe they’re wrong. Brazil is a country with large unexplored and challenging terrains. This technology makes everything simpler and cheaper”. Esteio has worked with major players such as Vale in its Onça Puma project and Votorantim Metais Nickel in its Montes Claros project. For the remainder of 2012 and 2013, the company wants to continue to grow and adapt and continue to offer local knowledge.

Mining Leaders

103

COMPANY FOCUS

SGS (1878) Mineral Sampling Barueri, São Paulo 70,000 employees globally

MeTS

SGS

As a flurry of exploration continues to spread across Brazil, many companies face a similar dilemma: finding a facility to get their core samples analyzed. It’s no secret Brazil is remarkably short on available sampling laboratories; explorers often ship their samples to the U.S. or Peru to be tested. But if CEO of SGS Brazil Marcelo Garcia Stenzel has his way, Brazil will soon be a hub for testing facilities in South America. Already the company has tapped into the enormous void in the country’s analysis market at a rapid pace, investing $3 million in a metallurgical analysis facility in Vespasiano city, Minas Gerais. The lab, which is an ISO9000-certified laboratory, was constructed through a JV with Geosol and has the capacity to analyze up to 80,000 samples per month. SGS’s previous record capacity was 50,000.

But SGS is growing not just in terms of facility size. It is also quickly increasing its number of temporary sites, each placed in close proximity to major operations. In May 2012, SGS had 32 branches and 16 laboratories strategically placed around the country, “we definitely have the capacity to absorb the available market share. We have one of the largest labs in the world.” Far from a high-risk play, SGS’s entry into the testing business was an easy decision for the CEO. A major focus for the company will be on furthering its growth. Stenzel is quick to note SGS’s commitment to gaining market

104

2012

“Our strategy is growth. Brazil is one of the leading countries in the world in terms of future growth, and SGS is riding that wave as well. We want to grow very aggressively.”

Marcelo Garcia Stenzel CEO SGS Brazil

share, and lists off numerous areas of interest for the company. Unlike some service suppliers, SGS has the capital to back up its projections: in 2012 the firm will invest $8.5 million in new mineral analysis facilities.This type of focus on expansion into new territory is nothing new for SGS. The firm now offers supervision services for loading and unloading of commodities and finished goods as well as construction supervision and technical staffing for projects,

commissioning of new plants, technical advice on metallurgical processing and pilot plant studies, among other services. The firm now has operations in 140 countries. It employs 70,000 workers and has over 1,300 offices and plants worldwide. Stenzel expects a subtle shift in the mineral analysis market over the coming years. “We have a lot of gold and iron ore, but there is a shift towards more rare earths and different metals”, he says. What that will mean for the company isn’t yet clear, though SGS’s facilities are equipped to test virtually any sample type. But above all else SGS will be looking for more acquisitions as a future priority. And that will surely include ambitious takeovers. In April of 2012 it bought out Environ Cientifica Ltda., a leader in Health and Industrial Hygiene testing. From there, it’s only a matter of time until SGS makes its next big move.

Passing the test The mining industry has been quick to take advantage of advances in chemical analysis over the last 30 years. The ability to accurately qualify the deposits in a landscape has made producers increasingly more efficient and shrewd in their decision-making processes. And as ores get harder and more expensive to reach because of a lack of “easy deposits”, the ability to determine a site’s worth is becoming a multibillion-dollar question. In Brazil in particular, the market for testing analysis has opened doors for any tech company that shows some foresight. At the moment there is a shortage of facilities outside of the country’s hotspots, but Brazil looks poised to increase its testing facilities significantly. Particularly in the Amazon and the west, where a raft of exploration programs are now underway, the need for testing services is set to hit a boom phase. João Luiz N. Carvalho, the president of Geosol - a leader in testing facilities in Brazil – saw the writing on the wall years ago. The company has heavily invested in its R&D efforts to meet the needs of producers. But these technologies don’t come cheap. Many testing machines now use laser systems, which give the most detailed reading of a mineral sample to date. One of the most expensive of those, the ultraviolet laser ablation system developed by a Canadian university – cost

roughly $170,000 to research and develop. Added to that the cost of manufacturing and manpower, and these machines can easily cost somewhere in the multimillion-dollar range. But the payoff is worth the investment. SGS, who employs 70,000 people worldwide, has also started an aggressive development plan in Brazil. Producers are not strictly interested in the testing either; some are looking for innovation in the process of how samples are analyzed. That means getting samples analyzed faster. Phillip Jennings, the CEO of Brazil Gold, for example, has been pushing for unified pattern processing (UPP) in the industry. UPP looks for chemical similarities in core samples, which in a sense allows scientists to extrapolate the information so producers can have more comprehensive data to consider. “This allows us to gather, organize, fuse, process, and analyze vast amounts of data quickly,” said Jennings.

Mining Leaders

105

q&a

A certain José Pancrácio Ribeiro CEO Gaustec Magnetics

Magnetism

MeTS

Gaustec Magnetics, a supplier of high-intensity magnetic separators, was founded in the spirit of innovation. CEO Jose PancracioRibeiroisconstantlyworkingontheresearchanddevelopmentofthetechnology.OutsideofBrazil,Germany-based allmineral Aufbereitungstechnik GmbH & Co. KG is the exclusive partner for marketing worldwide. The two companies have managed to become the market leader throughout the world and have found their niche in the iron ore industry. What was the initial motivation behind starting Gaustec? I worked for 35 years in the mining industry, and during that time I noticed the technology was, for the most part, outdated. I'm an electrical engineer by trade, and I knew we could be more efficient. So I combined my electrical engineering experience with my history in mining, and came up with a product that is far more specialized than the industry average. My son is an electrical engineer as well, and together we started building the first prototype. Within three years, we made our first sale. After seven years we have sold 77 machines accounting for approximately $100 million in sales.

We make the drawings and designs, and then outsource the manufacturing. We focus on the iron content in particular. Based on this, we are in a position to define the necessary specifications. On very rare occasions, we have to outsource research. An example of that was the design of a special machine here in Brazil which is capable of separating a very unique type of raw material. This required use of a very particular type of hardware and software as well as engineering support we hired from Germany to get the product right. It takes a lot of close and faithful collaboration between all parties involved.

The Brazilian METS sector is highly competitive. What strategies do you undertake to remain the provider of choice? We offer full service to our clients. Typically we start right from the sample - for instance a type of ore - and from that we create a whole process to obtain the required final product. I think Gaustec is one of only a few companies who are capable of building a machine specific for the treatment of just one particular type of iron ore material. If a producer comes to us searching expert advice on a particular mineral composition, we analyze it and design a machine fit for that particular purpose. It's all about deciding on the best way to turn the raw material into a final product. If it stands a good chance of becoming a profitable product, we design our machines accordingly - working with all the companies involved in constructing the plant. Finally, after construction and commissioning have been completed, we leave it as an option for our clients to have our personnel work at their plant for long-term periods. These contracts can sometimes last for 15 years, or until production finishes. We provide manpower to operate the machines, or provide professional advice during maintenance. And, in case the clients do not have a need for our personnel, we can still provide training to their employees for them. This is the case in São Paulo, near the international airport for instance, where our machine was designed to extract a very particular type of sand from iron ore deposits, which is a rare service indeed.

Your main manufacturing partner, Germany-based allmineral, works closely with you in iron ore separation. What other technologies does allmineral offer to its clients? The machines they offer vary widely in their capabilities. The alljig jigging machines separate primary and secondary raw materials as well as waste products based on the differential in densities covering a large range of different grain sizes. The new alljig GR type model offers the opportunity to process grain sizes up to 100 mm without using bucket elevators. With a throughput rate between 5 to 500t/h, they can be used effectively for both wet processing of coal and ore, as well as gravel and sand. allmineral’s technologies are very versatile. For example, the allflux fluidized bed separators offer both large throughputs and high efficiency: cleaning, upgrading, thickening, and blending all happen in just one single machine. Equally, allflux technology is suitable for the production of high quality concrete sand as well as for processing of coal, ore and heavy mineral sands. Their equipment can actually be used in a large variaty of different applications. Another exciting product is their allair jigging machine, which - as the name already suggests - uses air only. Initially, it has been developed for coal producers in particular, being a milestone in productivity and quality, capable of producing marketable fuels from coal at minimum cost. Due to their low ash and sulphur content, the products from this process are both more energy efficient and less harmful to the environment.

How does the design and engineering process at Gaustec work? The key aspect in this regard is science and the technology itself.

What benefits does allmineral’s global reach provide to Gaustec? From working with allmineral, I can say that one of its key aspects of

106

2012

Gaustec

global success is allmineralâ&#x20AC;&#x2122;s local presence in the most important raw material markets worldwide. allmineral has subsidiaries in the US, Poland, South Africa, Australia and India as well as representatives in many other countries worldwide. In my opinion, that is how allmineral adds value to the market, being able to provide customer services centrally as well as locally. Gaustec has a similar mindset; we are working toward branching out and becoming a more global player. Gaustec also pays considerable attention to employing environmentally conscious practices. Is that a main focus for your firm? Gaustec's strategy is deeply rooted in the environmental industry. We are in one of the biggest iron ore deposits in the world, the iron ore quadrilateral. The mining industry is a tradition here. We have over 100 tailings ponds, and this is without any doubt an environmental challenge. As someone who grew up in this region, I feel responsible for properly managing these materials. We take these materials and transform them into products. For this reason, I would say our company is heavily involved in environmental stewardship. We are one of the few companies here which recycle products from waste successfully and environmentally friendly. What are the future plans for your company over the next five years? Over such a short range, it is easy to estimate where we will be. The market has a desperate demand for our machines. We will have a lot of work in front of us. In the next three years alone, we have just one single contract for the delivery of 90 pieces of equipment. Currently we are manufacturing 10 machines at a time. But we are trying to think in the long term. We know that after 10 or 15 years, the market for these machines will eventually fall. At least in Brazil, I expect it to drop. But in my opinion, demand will increase in the world markets; soon our clients will be global ones. But we are not relying on sales of new machines only in the future. Instead we cater to expanding our training outfits and concentrate more on service, because there will be an endless need for good service. Mining Leaders

107

METS · round-up aerial mapping

ENGINEERING & TECHNOLOGY

MatErIal HaNdling

Mario Oscar de Souza President Geoid

Eduardo Kubric Mining Sales Director Metso

Javier Schmal Managing Director Martin Engineering

“Laser mapping allows us to map terrain “Metso has over 1,660 employees in its “We offer conveyor products that increase beneath the tree canopy, removing the need mining, construction and technology productivity through the reduction of to send workers into the field and to acquire section. Services include, processing, shutdowns created by material spillage, environmental licenses. In early 2012 Geoid consulting, screening, conveying, fugitive dust and transfer point blockages. was working on 11 major projects in the feeding, slurry pumping and grinding We plan on doubling our revenue in Brazil Amazon for a variety of clients. We have a solutions. Metso has over 90 years of by 2014 and expanding operations in fleet of five planes and two helicopters and experience in Brazil. In 2011, global net Mexico, Colombia and Peru and through are expanding our operations regionally.” sales were $8.9 billion.” our partners in Argentina and Chile.”

Engineering & Consulting

Pedro Pino Véliz President & CEO P&K

EXPLOSIVES

André Zecchini Mining Account Manager Orica Mining Services

“We provide junior companies a “With proper management of rock complete package of services including fragmentation, operations such as hauling, preliminary geological studies to full crushing and milling are faster and cheaper. EPCM operations. This reduces clients’ We are currently introducing a new efforts in contacting various companies, technology to the Brazilian mining sector, saving time and reducing costs. Currently, Flexigel, a low density bulk emulsion P&K is focused on mineral evaluation, product that is designed for wall control mining projects, plant development and fragmentation in soft rock and vibration construction management.” control in sensitive environments.”

108

colombia 2012 2012

trucking

Christopher Podgorski VP Sales & Marketing Scania

“There is a Scania vehicle for every stage in mining, from drilling to ore hauling and even for mine closure. We also offer engines for crushers and gensets, as well as buses for personnel transport services. Everything is tailor made to fit the customers’ needs. Five main companies account for 93% of Brazilian mining operations and Scania services all of them.”

Metallurgy

SUSTAINABILITY

Heitor Edsom Leonardo Industrial Director Fornac

Rolf Georg Fuchs Director Integratio

“Spare parts are essential in decreasing time “Often before the first geologist goes to the field, we are sent to identify the lost during malfunctions and to reduce stakeholders. Companies don’t need to the need for new machinery. Fornac has hide what they do and as Brazil’s first a catalog of over 12,000 steel pieces, all created in their Belo Horizonte plant. social impact assessment consulting group, Fornac plans on internationalizing its Integratio can aid with the particular local brand, increasing its distribution partners way of doing business in order to run a and working with investment funds in the U.S.” profitable and communicative project.”

Hydraulics

Reginaldo Moreira President Guimmy

“In order to stay abreast of the latest technological developments in high pressure hydraulic solutions, Brazilian company Guimmy, partners with a number of North American companies such as Dynex and Equalizer. Guimmy’s portfolio includes torque wrenches, tensioners and spreaders for the maintenance of equipment, trucks, railroads and mills.”

Water Management

Sergio Cabo Sales VP Oil & Mining Kemira

“Water is absolutely key in mining processing. Since 2008 Kemira has been servicing mining companies with the removal of contaminants from iron ore flotation, improving thickening performance, developing rheology modifiers, managing used and reused water, among other services.” Mining Leaders

109

q&a

CEMENTING a Flávio Barros Technical Director Polysius

Reputation

MeTS

Polysius do Brasil, part of the ThyssenKrupp Group, is a leading provider of machinery to the cement and minerals industry in Brazil. The company has grown to be a top name in the Brazilian sector, providing large scale machinery. The firm is constantly adjusting its strategy towards client service in order to face competition coming from overseas. Polysius celebrated its 150th birthday in 2009. What is the history of the company? Polysius is a German company which was founded in 1859. Up until the 1960s it remained as a family company. The company’s focus was always on mechanical equipment, especially heavy industry - cement was the core focus. In the 1970s Krupp purchased the company and Polysius became part of Krupp Group. The name Polysius, as the strongest brand in the cement business, stayed in the new group. By the end of 1990’s Thyssen and Krupp merged, creating the ThyssenKrupp Group. Polysius started as a cement company supplier. What motivated the entrance into the mining sector? Polysius do Brasil was founded in 1974 when the Brazilian miracle was starting; the focus in the beginning was just cement. From that time up until the 1990s, about 95% of the business was cement. Then we decided to invest more in the minerals business for diversification. The contract that made us one of the main suppliers in the minerals business was signed with Vale in 2001, where we supplied ball and roller mills and high pressure grinding rollers. The high pressure grinding roller is a very special machine which produces iron ore pellets of higher quality using a lower energy consumption. The waste of the pellets is reduced and the productivity boosted; this is a state of the art machine for this application. That contract started our relationship with Vale; the machines run very well and we have grown since then. We have sold more than 20 of these machines since that first date; the main clients for this kind of machine are Vale, Samarco and Anglo Ferrous. In which minerals and in which areas of the country do you see the most growth in mining operations? Iron ore of course! This is the main mining product of Brazil, and it will be forever, mainly in Minas Gerais and Pará States.

110

2012

The copper business is very important also and Vale is very determined to become one of the five largest copper producers in the world. We are working on the Salobo project, supplying machines for two lines. There are a lot of interesting projects in the pipeline for Vale and others important mining companies as well. Other areas of the country will start developing several new materials. What is your strategy towards technological development? We are constantly developing new technologies; we must keep moving. In fact we have a very large R&D center in Germany where we come up with not only new products, but also improvements to existing ones. The competition is also doing this, so we must always compete on two dimensions of each product. One is technology, and the other is price. We have to balance this, because at the end of the day the client is looking for the best equilibrium. You may have better technology than the competitors, but if the price isn’t right, then you may lose the deal. At the moment, we face a price problem. It’s cheaper to buy a machine in China, ship it to Brazil and pay the import tax. After all that work, the machine is still about 20% cheaper than the Brazilian price. We hope that this will change as soon as possible; if not Brazilian industry will be damaged. How does Polysius differ from the competition? Given the difficult price situation we are now trying to put our efforts into service. Because only through service can you keep your clients close to you and in this business the client relationship is as important as price or delivery time. In any case, we have always had this attitude - presenting good solutions for clients, solving technical problems, and helping them to develop a better operation. If we can build on this, clients will be happy to pay the higher price because they will have confidence in us as a trustworthy supplier.

COMPANY FOCUS

Vacon (1993) AC-drives HQ: São Paulo & Lauro de Freitas Clients: Yamana Gold, AngloGold Ashanti, Vale

“Revenue for 2011 was around $500 million, a $65 million growth since 2010. The European crisis has stalled growth slightly, but we are still expecting to become a $657 million company by 2014. We are establishing new partnerships, covering new areas and acquiring new business opportunities.” Claudio Baccarelli Managing Director Vacon

Minas Gerais, São Paulo, Pará, Espirito Santo and the Bahía states are responsible for 50% of the work force in the mining sector. Likewise, there has been a clear shift in research and development to the Goias, Mato Grosso, Paraná and Ceará regions which reinforces the need of a local presence. In 2011, with the knowledge of this shift in both innovation and people, Vacon decided to establish a sales office located in Lauro de Freitas, Bahia, aimed at improving customer support. The company offers a variety of ACdrives that save energy in operations such as pumping and ventilation. Vacon’s products are directly installed on the

mine walls which reduces the need for construction changes or extra excavation as well as providing environmental benefits. The company also provide cost saving solutions in electrical installations. Vacon currently has research and development production facilities in Finland, the U.S, China and Italy. The company is researching the possibility of establishing its own manufacturing plant in Brazil to reduce costs associated with import taxes and to increase efficiency in distribution. Due to the company’s extensive knowledge in engineering, Vacon has been providing assistance in local assembly for certain customers.

MeTS

vacon The company also operates in Chile and Peru and uses local contacts to bring new technologies to Brazilian copper exploration. Vacon has also been involved in many new interesting projects such as Largo Resource’s Currais Novos project and Magnesita Refratario’s latest project. As AC-drives become more popular in the industry, Vacon has been investing in research of new technologies to continuously deliver better, more advanced products. Vacon plans to expand its operations into Latin America and then worldwide. In the shorter term, the next country that the company plans to focus on is Argentina.

vacon enhanced nxp ac drives reliable. robust. proven. With this new NXP update we’re refreshing one of our most popular AC drives in the complete power range from 0.55 kW to 5300 MW. Improvements to our air-cooled and liquid-cooled units include e.g. redesigned control circuit boards, conformal coating for improved protection against dust and moisture, a new cooling concept for exceptional fan efficiency and a powerful new processor to boost calculation power. For more details, visit www.vacon.com Vacon Latin America, Av. Sagitário, 447 - 06473-073, Barueri/SP, Brasil Phone: +55 11 4166-5707 / email info.brazil@vacon.com

Mining Leaders

111

q&a

a solid Walter Gervásio Ladeira Technical Director Engenharia de Recursos Minerais

partner

MeTS

Since 1973 Belo Horizonte based firm ERM has worked side-by-side with foreign and Brazilian companies on exploration projects in Minas Gerais and beyond. The firm provided key exploration services to Prime Minerals on its 10,000ha gold project in Mato Grosso and has various regional limestone projects in other parts of Brazil including Tocantins, Goiás and Paraná. How do you anticipate changes in the Brazilian mining code will affect exploration service firms such as ERM? In Brazil you have two types of companies that deal with exploration. The first type works for a very low price, offers low quality work and is solely concerned with filling the minimum requirements of its contract with the National Department of Mineral Production (DNPM) in order to guarantee that the title is not taken away. Sadly, there are a lot of these companies in Belo Horizonte. A second type of company, of which I would count ERM, wants to work from prospection, through exploration until the mine becomes a reality. We have a long tradition of doing this. I believe the new mining code will lead to the disappearance of the first type of company and benefit real miners. The new code will be very similar to that of Chile, Venezuela or Uruguay. Every area must be explored and developed in a time frame of 30 years, with a possible renewal for another 30 years. This would change the way companies deal with mineral resources in Brazil. Today you can own a mine that is halted, and perform an annual mining report for the DNPM saying that the mine is under production. The new mining code will promote the development of mining titles that are currently lying idle. How has the market for exploration services developed in Brazil in recent years? Although it’s hard to put a figure on the overall growth in the market, I can say that from 2003 we have seen a very steady growth in our business. Mining has always been a good business, but when the price of iron increased, a number of prospects suddenly became viable. Much of the country’s iron resources were held by Vale so exploration stepped out to new areas such as Bahia. In fact, the reserves there were well known but the low grades in the region apparently made people forget about these mines. Now new firms have taken control of these projects and they have proven extremely profitable. Iron started the boom and gold followed. We worked with Prime Minerals on a major gold exploration project in Mato Grosso. We explored a huge area of 10,000ha and we found visible gold in every part of it. There are also great prospects in industrial minerals; today we are mainly working with limestone, argyle and quartz. It

112

2012

is necessary to move away from the Iron Ore Quadrilateral to other areas in Brazil because the IQ is completely taken by exploration permits and other mining titles. However, other areas of the country haven’t been completely explored due to infrastructure shortcomings. In the north of Minas Gerais, for example, there are known major limestone deposits but the distance from major roads and cities means that they are on hold until they become commercially viable. Do you anticipate a change in the source of investment in Brazilian mining projects in the coming years? Brazil will continue to see investment in iron ore because in comparison to Australian iron ore it has lower alumina content. In more general terms, when compared with other iron producers it also tends to have lower phosphorous content. There will be more exploration work done by small to medium sized companies from Canada and Australia. However, given the country’s enormous domestic iron ore potential, Australia’s entrance into Brazil won’t be as large as it could be. We expect to see the entrance of more players from Asia. China’s fast growth means its companies will need to come to Brazil to secure natural resources. How can service firms compete for human resources given the current shortfall of skilled personnel? Between 1985 and 1993 exploration was almost stopped. Graduates focusing on this field had to change careers to work with the environment or other areas. Today, finding an exploration specialist with twenty years’ experience is nearly impossible. Even today universities are not teaching engineers or geologists how to properly manage exploration and many graduates seem reluctant to undertake fieldwork. It’s best to hire someone who has just recently graduated from university and to train them yourself. The team we have right now is made up of very young people. ERM has a sister company, ERG, that is focused on developing industrial minerals. The firm has all the permits to start but is lacking the skilled personnel to do so. Human resources is therefore a major bottleneck for growing companies.

Micromine

market focus

the cutting edge According to consultancy Grant Thornton, the domestic market for IT in Brazil is now the seventh largest in the world. $165.7 billion was spent on information and communication technology in 2010. Despite this, the Brazilian mining sector remains largely cautious of introducing new technology, preferring to invest in more traditional operations. However, technological advances and investment is critical for mining companies and the sector in general in order to better cope with new challenges. Service firms have reacted to new difficulties by introducing cutting edge advances that will not only increase company productivity and improve mine safety, but will also help overcome the problems that could hinder mining development in Brazil, including inadequate transport infrastructure, depleting resources, hardto-access deposits and the pressing need to conserve vital eco-systems such as the Amazon rainforest.

Dr. Guilherme Bastos Alvarenga, CEO Devex Mining

Paulo Da Pieve General Manager Steinert

E. Mauro de Oliveira Regional Director WesTech

“Companies face many challenges in controlling mobile and remote assets in mine sites. One of the main difficulties is maintaining control over various overlapping processes; it is much more than fleet management optimization. Control over mining operations is crucial for increased production, reduced operational delays, and adherence to quality speciﬁcations. It is estimated that the costs involved in the operation of the mine account for more than 50% of the total cost of production. Throughout the past decade huge investment has been made to optimize mining assets, reduce these costs and offer a safer work environment.” “One of the reasons a major customer chose us as a provider is our focus on technology. We have introduced a new type of electromagnetic coil into the Brazilian market, made of anodized aluminum, which requires less electrical insulation than both copper and aluminum. This coil has a longer life time, lower maintenance needs and is environmentally friendly, allowing a lower total cost during the life time of the equipment. The mining sector is naturally conservative, particularly considering the high investment often needed. However, in the end these advances mean higher levels of competitiveness.” “Technology is extremely important. It is vital to maintain competitiveness and reduce operational costs. In Brazil, there are only a few mining companies that control the majority of the operations and most of the technologyfocused companies, such as Westech, already have them as main customers. Regrettably, the majority of players that are currently entering the market are juniors. Don’t get me wrong, this is great for business and for the country but unfortunately, not all of these companies are prepared to purchase new technology due to a lack of financial resources.”

Mining Leaders

113

leader insight Beck Nader Managing Director BNA MICROMINE

BNA MICROMINE’s services and solutions increase efficiency, save time and reduce errors. Being the only software company to provide mining and exploration solutions for the entire mining process, technological innovation remains the company’s core value. 2011 marked the launch of three MICROMINE software releases, each of which features a variety of new user benefits and improved functionality. Beck Nader is the founder of BNA Consultoria and the managing director of the newly consolidated BNA MICROMINE.

MeTS

efficiency pays

The current economic climate combined with below-target production has put significant financial pressure on large and small mining operations both within Brazil and internationally. Managing grade reconciliation, dealing with capacity challenges and coping with growing skills shortages mean that mining companies have increasingly begun to look to software, technology and process improvement to increase productivity and profitability. With 25 years of experience and over 200 staff based in 20 of the world’s major mineral production capitals, MICROMINE is in an excellent position to take advantage of this trend.

operations and provides planning functionality.

powerful

MICROMINE invests 30% of its annual revenue into research and development, thereby ensuring that our technology continues to lead the industry. The innovation and technical strength of our solutions separates the company from BNA Consultoria, the mining consulting company which I have owned and competitors and has been recognized managed for a number of years, had been a MICROMINE agent before becoming by government bodies. In recent years, a fully owned subsidiary in January 2012. All of my BNA staff transferred to MICROMINE has received three MICROMINE, further strengthening grants from the Australian government “Managing grade reconciliation, the company’s position in South totaling over $11 million. Though dealing with capacity challenges America. I think MICROMINE Micromine’s Consulting group (MCS) recognized that Brazil is a land of has experienced considerable growth in and coping with growing skills opportunities but also noted that low recent years, providing geological and shortages mean that mining investment in technology is limiting mining consulting, including resource companies have increasingly begun growth. If Brazilian mining firms estimation, scoping to full bankable to look to software, technology and really want to become global players, a feasibility studies, valuations and process improvement to increase significant investment is required. prospectuses, the company has really productivity and profitability.” grown through its software products, The application of technology to the which encompass the resources sector, mineral sector – including everything computer hardware technologies and improvements in communications from geological databases and technologies and software engineering practices. modeling, to mine design, planning and exploitation is incredibly beneficial The majority of our clients operate on a global level and are demanding their suppliers for companies looking to streamline do too. In response to this demand, successful technology companies have been those their operational systems, cut costs like MICROMINE who have implemented a model that supports these demands and and increase efficiency. For example, operates similarly. Australia remains our most profitable location, contributing 44% of geologists can use data collection global revenue. In terms of percentages, this is followed in decreasing order by Russia, systems in the field to instantly store China, Mongolia and South Africa. MICROMINE’s customer base has been growing core assays and then transfer them to a steadily over the years despite the current financial climate and industry trends. Not geological database reducing the risk of only has revenue been increasing, the global reach of the company has been extended error. Another great example is a realto encompass more offices, in more locations. Our current Latin American operations time mine production control system extend to both Brazil and Chile. These offices manage all of MICROMINE’s clients and which records and manages mine site projects based in countries such as Peru, Argentina, Colombia, Venezuela and Mexico.

114

2012

COMPANY FOCUS

Gemü (1964) Steel & plastic valves, measurement devices, control devices HQ: Curitiba, São Paulo, Recife

“To reduce travel costs and to improve personal response time Gemü has strategically positioned itself in Curitiba, Rio de Janeiro, São Paulo, Goiania and Recife. All these locations are important gateways to emerging mining markets such as Chile, Argentina, Peru and Colombia” Johann Strasser CEO

Gemü

When Gemü founder Fritz Müller decided that his firm had the potential to grow worldwide, his idea was to create a network of companies with a serious commitment to producing in foreign countries. He came to Brazil in the 1980s and set about doing just that. Three decades later, that idea has paid off. Mining valves, which represent 60% of Gemü’s product line, are expensive to transport because of their enormous size. By establishing a local factory, Gemü can move their diaphragm and butterfly valves around the country with greater ease and lower cost than flying them in from another country, avoiding

additional import taxes and transatlantic fees. Gemü has set up a distribution route throughout Brazil and Latin America. The fact that 100% of Gemü’s products are manufactured in Brazil also means they earned membership in BNDES. Gemü is one of the few Brazilian companies exporting its products to China. Currently the Brazilian real is at a high so exports are less competitive. Nevertheless, the company has a solid position in the local market, where it enjoys little competition. Many international companies offering similar services to Gemü have been attracted to the market – but rarely with success. Gemü’s 30 years of experience

MeTS

Gemü means it has built up a solid customer base, one which is difficult to penetrate. Besides producing technologically-advanced valves, the company has been diversifying production using different types of steel and plastic in order to reduce costs. Gemü is focused on modern technology and has begun expanding its operations through iPad applications, making it easier for customers to purchase and track products and allowing Gemü to update delivery and company information more efficiently. Gemü operates all over Brazil and has a presence in Peru, Chile and Bolivia. Expanding regionally, Gemü will continue to bring German precision to local mining.

Mining Leaders

115

q&a

Daniel Angelo Rossetti Marketing Manager Rossetti

dump it up

MeTS

Local company Rossetti has over 45 years of experience working in the Brazilian trucking industry. Providing dumps and dump trailers to mining companies, such as Vale, Anglo Gold, Anglo American and MMX for the last 15 years, the company has established a niche in the market, relying on local production and constant innovation to stay ahead of international competition. What is the history of Rossetti and the company’s connection to the mining industry? The family has been in the business for 45 years, but has been operating under the name Rossetti for the last 15. At the beginning, our main factory was in Belo Horizonte, which was the heart of mining in Brazil at the time. In 1997, we entered the mining business to meet the demand of our clients. We have since become the leader in the market selling our dump trucks to some of the industry’s biggest companies, such as Vale, Anglo Gold, Anglo-American and MMX, as well as specialized transportation contractors and subcontractors. One of our biggest advantages is that we are able to develop new products quicker than our competitors. Our 45 years’ experience of the Brazilian industry plus our 15 years focusing on the mining sector puts us in a great position for the future. We know the industry and understand our clients. What kind of minerals do you work with? Iron ore is a large proportion of the market, and represents the biggest percentage of mining sales for us. However, we have different products depending on the material and volumes that are involved in transportation. We use a special type of steel when transporting iron ore. For bauxite we use liners to release the material from the tipper. For gold mining, we have double floor tippers, specialized to counter abrasion, so the rocks don’t damage the tippers. All of our products are adapted to meet the needs of our clients. Every three to four years our customers change or expand their fleet, so demand is constant. We have to make sure that we have the trucks available for our clients as they need them. Our products include tippers and trailers, aluminum vans, and other specialized equipment. What separates Rossetti from competitors? Our competitors are always local. We don’t have much

116

2012

international competition as it is not common to import a truck with a tipper or even just a tipper, since it can be slow and extremely expensive – far more expensive than manufacturing locally. For the local competitors our products are the reference, because we maintain higher quality and are always introducing new concepts. We have an engineering department which is constantly improving, adding and adapting features of our products in order to meet the needs of specific minerals. We are also developing some special equipment which makes the product more secure. For example, we have developed an electronic device which shows the inclination of the truck in order to reduce the risk of it tipping over. It’s now available in the market with different companies but we were the ones who innovated that. Another example is the on-board scale system we are developing. These types of systems are often damaged by impact when loading, so we are working to make this system more durable. Having a reliable on-board weighing machine allows greater control over the whole production process. It should be available in the middle of 2012. What challenges do Brazilian roads present to transportation companies? Many roads are unpaved, so conditions can be hazardous at times. Unfortunately, it has been like this since the beginning of our operations, so for us it is normal! For that reason we are developing products to work in all types of conditions. Really, it is more of an opportunity for us, because our clients know that we have the solutions they require for these challenging conditions. Are you affected by high import taxes? We do import some raw materials from China and Sweden, but in general our production is local so we are not affected. High import taxes protect us from international competition.

Have you implemented a strategy to maintain your Do you have any expansion plans? We have plants in Belo Horizonte, Minas Gerais and position as market leaders? Our focus is constantly on innovation and customization Guarulhos and Itaquá, São Paulo. In other states, we of our products. Likewise, we emphasize our reliability have dealers. We are developing our dealer networks into – often when you import it is difficult to fulfill delivery some smaller states. We would consider selling in other times, so the fact that we manufacture locally means Latin American countries, but it is difficult because of the companies can execute their plans more difference in the exchange rate.Likewise effectively and more efficiently. We have countries such as Chile and Peru already “Our focus is constantly on a fantastic production capacity so we can have well established dealerships so deliver in 20 to 25 days. Likewise, now innovation and reliability. Often entering these markets would not be a wise when you import it is difficult decision for us. Colombia imports from in Brazil we are upgrading trucks to the to fulfill delivery times, so the Mexico and the US, so it could be a good latest exhaust regulations. We are passing from Euro 3 to Euro 5, which is almost fact that we manufacture locally market for us to enter. It is a country which is means companies can execute constantly increasing its mining operations. emission free. You can practically breath their plans more effectively and Another factor we have to consider is the straight from the exhaust! This is a huge more efficiently.” slowing European demand and subsequent benefit to companies looking to improve entry of European companies into Latin their green status. American markets, which again increases competition. What were your company sales for 2011? That information has not been released yet, but we are What is the company’s focus for the next two years? Our focus is local. We are improving and expanding our looking at a figure of about $230million. factory, in order to increase both quality and quantity, and In what areas of Brazil do you see the greatest demand diversifying our product line into other areas outside of mining. We are looking at opportunities in sugar cane. for your products? Pará, Minas Gerais and São Paulo have been growing steadily Still, there is huge potential in Brazil for international over the last ten years but others states like Bahia and Mato mining companies. The economy is stable and the country Grosso have also been increasing mining operations in the is strong so we expect to take advantage of this coming last five years. Mining is starting to expand all over the investment and hope to become the provider of choice for international companies. country so there are many opportunities. Mining Leaders

117

Financial & legal services

118

2012

lead article

building brics I

nto which funds would savvy investors have funneled their cash back in 2002? Surprisingly, according to data from Citywire Money, the funds that have offered the best returns over the last decade were not focused on China or precious metals, but on Latin America and Brazil. On average, such funds provided returns of nearly 400% over the last ten years, with Brazil acting as the key driver of this growth. In 2009 alone, the Bovespa stock index grew over 132%, making it the best performing bourse worldwide that year. Outside events have since taken their toll on the stock exchange â&#x20AC;&#x201C; it finished down 18% in 2011 â&#x20AC;&#x201C; but the country remains one of the most popular destinations for international investment. At the moment, most junior miners look for finance outside of Brazil, principally on the TSX-V and ASX. The Bovespa lists a number of iron ore giants, including Vale and MMX and its attempts to form a junior exchange for start-up firms, Mining Leaders

119

lead article

$67

billion foreign direct investment in 2011

While Bovespa lists a number of iron ore giants, the Bovespa Mais, the juniors board, has been badly received

But while international finance is still the chosen route for exploration capital, a number of international investment banks have set up in Brazil. Casimir Capital, with an office in São Paulo, has acted as broker for a number of Brazilian natural resources firms, including a $42 million capital raise for Beadell Resources on the ASX. The bank also provides analyst coverage on a number of Brazil based firms rarely featured by the major Canadian banks. The complexity and uniqueness of mining projects mean

120

2012

that very few local banks have the know-how or the appetite to provide project finance to the sector. “This is a very specific niche business,” explains Claudio Pitchon of West LB in reference to mineral project financing, “to be successful you need to have a combination of skills - not just an understanding of project finance tools but also a certain familiarity with technical, market and environmental aspects. Banks need to have a clear understanding of all risk and mitigation aspects. The more certainty that can be given to the mine’s cash flow, the higher its debt carrying capacity. Equity providers, in turn are willing to have risk because they know the upside. Banks are less tolerant with the risks.”

fund sector average total return over 10 years Source: Citywire Money

an exchange known as the Bovespa Mais, has been woefully received. Only a handful of firms have listed on the exchange since its inception five years ago. On other Latin American bourses, most notably the Lima Stock Exchange, junior miners have found that a dual-listing can boost access to local capital and actually increase liquidity on their TSX stock. But Bovespa regulations, which include translations of documents into Portuguese and conversion of financials into Brazilian reals, add extra work that small foreign firms can ill afford. There was positive news for the bourse in May 2012, however, when local firm Manabi, which is developing an iron ore project in Minas Gerais, filed for an IPO on the Bovespa.

However, accessing finance on international stock exchanges has become increasingly difficult and costly over the last twelve months. In May 2012 the TSX-V was down 46% from its peak in March 2011. Firms looking to raise new capital through lower share price are faced with diluting the stakes of existing shareholders. One solution that has been taken up by Luna Gold is to look towards metal streaming companies. Under the firm’s agreement with Sandstorm Gold, a gold streaming company, Luna received a $17.8 million upfront payment and 5.5 million shares in Sandstorm. In return Sandstorm will receive 17% of production from Luna’s Aurizona mine over the course of its mine life at a price of $400/oz. Explorers may increasingly turn to such financing solutions as exploration bills rack up.

lead article

Photo: Yamana

Another potential source of capital for mining firms is the Brazilian National Development Bank (BNDES). Under the BNDES system firms, local or foreign, can access long term loans at low rates provided they meet certain criteria, such as sourcing 60% of their parts and services from local companies. The Bank’s Finame financing program offers loans to firms needing to lease or purchase equipment and machinery domestically and in some cases from overseas. In recent years several Toronto listed firms, including Luna Gold, MBAC Fertilizers and Largo Resources have received major loans through the system. Despite the tough financial markets and slowing economic growth, Brazil remains a remarkably attractive place to invest. A record $67 billion of foreign direct investment entered the country in 2011. But this headline figure should not obscure the fact that Brazil is not an easy place to do business. Despite an inefficient and sometimes unpredictable business environment, the country has experienced strong growth, thanks in most part to its large and growing domestic market and its enormous endowment of agricultural and mineral wealth Known locally as the ‘Brazil cost’, the volume and complexity of certificates, permits and documents

Financing for major projects has gotten more difficult

required for what elsewhere would be considered a routine process can be time consuming and expensive for individuals and businesses alike. In the World Bank’s Doing Business 2012 report, the country ranked 126th out of 183 countries. For paying taxes the country ranked 150th. The tax burden is a source of concern to investors, having risen from 26% of GDP in 1988 to 36% today. Corporate tax is set at 25% for firms earning over $110,000 a year and a 9% social contribution tax is levied on profits. It is the complexity

social contribution tax levied on profits of the tax regime, however, and the heavy penalties accompanying noncompliance that are the source of most worry. It’s not all bad news, however. There are many tax incentives relevant to mining firms. Under the Sudam and Sudene, regional development bodies responsible for the Amazon and Northeastern states respectively, companies can receive tax breaks of

75% of income tax over ten years and reduced tariffs on imports through regional ports. In the Amazonian metropolis of Manaus there is a free trade zone and there are also various incentives for developing research and development projects in Brazil. Brazil is blessed with a host of highquality law firms, both local and international. But while the quality of service is high, the framework in which they operate is not as clear as investors might be entitled to expect. There are grey areas, for example, in the liability of shareholders for corporate debt. Brazil ranks 118th on the Doing Business report for enforcing contracts. Lawsuits, until now the preferred option for dispute resolution are slow by international standards. Arbitration is a more expensive option, but is much faster and as such is becoming an increasingly popular option. The government is making some positive moves towards improving Brazil’s business environment. In 2007 legislation was introduced to make it easier to set up a small business and clearer rules governing newly listed companies on the Bovespa have been welcomed by investors. Not surprisingly, however, progress has been slow and companies still need to factor ‘the Brazil cost’ into their business plans. Mining Leaders

121

q&a

tHe Casimir

Richard Sands CEO Casimir Capital

effect

FINANCIAL & LEGAL SERVICES

Casimir Capital, headquartered in New York, with affiliates and personnel in Canada, Australia, Brazil, and the United Kingdom, is a leading provider of investment capital for natural resource companies. In the last two years, Casimir has been involved in over one hundred transactions, which have raised billions of dollars for junior mining and oil and gas companies on a range of global exchanges. How important is Brazil in Casimir Capital’s global portfolio? Casimir Capital is currently focusing its attention in seven or eight countries around the world. Out of the BRIC countries, we are currently only focused on Brazil. According to IBRAM, in 2011 the U.S, Canada and Australia were spending between 2.4 and 5.4 times more dollars per hectare of land on geo-technical surveying and research than Brazil. Regionally, countries like Chile, Peru and Mexico, are spending between 8.7 to 18.8 times more than Brazil. Shockingly, Brazil despite being the largest country in South America, having the fastest growing GDP, a great working population, a stable government and good rule of law, has been spending the least. This means that there is still a vast amount of opportunities waiting to be discovered.

for this is that you have the potential of adding value through both resource increases and gains in the price of gold whereas in an ETF you only have the price of gold.

What are the challenges of operating in Brazil? The lack of formality is a challenge. Everywhere you go in Brazil, there are garimpeiros, also known as artisanal miners. The best way to find gold is to start looking where the garimperos have been digging for hundreds of years. This dynamic does not exist anywhere else. But the rules in Brazil are different than in developed mining countries such as Canada or Australia, where NI-43-101 or JORC compliant resource rules are a formal subject. The investment community in Brazil doesn’t fully understand mining. Normally, operations are family-based and producing a few ounces. True gold commercial capabilities are under-developed. But these challenges also represent big opportunities for the future.

Which juniors do you believe stand best placed to develop their projects and build shareholder value? Just to list a few junior companies coming to Brazil with a great potential - Crusader Resources in Rio Grande do Norte would be one and I believe that Beadell Resources’ assets are enormously undervalued all over the region. Brazilian Gold, Tristar and Colossus have stand-out management teams and Lago Dourado, Serabi Gold, Magellan and BeloSun are exciting exploration companies. Centaurus Metals and South American Ferro Metals are two exciting plays. The most interesting part is that if we were to ask anybody in São Paulo about these companies, nobody has ever heard about them. This is directly linked to the lack of exposure junior mining companies have in BOVESPA, compared to what you see in the Canadian TSX-V or the Australian ASX. We don’t believe this is defiance, rather it is due to the lack of a junior mining investment culture.

To what extent do gold trends influence Casimir Capital’s strategy? The company believes in the super cycle of the whole commodity space and we have a strong faith in future gold performance. Global currencies, including the US dollar, have been facing problems, so we are very bullish on the price of gold and other commodities also. All the easiest minerals have come out of the ground already. Now it’s a matter of going deeper and spending more money on exploration. Gold mining gives investors choice. Some people want the stream of gold, some want equity and others again want to be lenders. Casimir Capital believes that investment in junior gold miners is far better than buying a gold exchange-traded fund (ETF) for example. The reason

122

2012

How well developed is the local investor base in Brazil for natural resources projects? The marketplace for natural resource investment is growing and there’s no shortage of investors. This is reflected in the huge success we have had in the past two years – 100 deals, which is a substantial volume for the company and the sector. The problem which comes with this success is the lack of skilled analysts to actually paper the quantity of deals that are being done by the company.

What is Casimir Capital strategy for expansion in the next two years? There are many countries with great mineral openings, but due to the current fantastic opportunities here, Brazil will remain our focus. Despite this, Casimir Capital is an opportunistic company and if a good project shows up we’re going to go after it. Some of the most recent projects include companies in Argentina, Papua New Guinea, Solomon Islands and Tanzania.

market focus

Source: Doing Business 2012, World Bank

Brazil and comparative economies’ ranking

Luis M. F. de Azevedo Partner FFA Legal

“In my opinion in order to attract investors to mining projects, the government must use JORC or 43-101 compliant methods when talking about reserves. They must have a mines department run by experienced operators holding a clearly defined mine agenda which avoids political influence over mine title rights, a stable fiscal regime, free capacity to sell, lease or mortgage the title without excessive regulation, better infrastructure and reduced labor costs. I hope that the Brazilian government understands that confusion over legislation is not helpful for companies attempting to be efficient and productive.”

Jean Marc Dreyer Managing Director Citibank

“Brazil has huge resources but the question is how do companies working in the country go from production to exportation. How do you finance infrastructure? The country is going in the right direction - there is support from BNDES, but it is not enough. Funding needs to also come from private financial markets. Firms need to structure their projects to include an off-taker, and from that point you are bankable. Five or ten years ago, projects were less structured – today the whole investment chain is considered.”

not at ease Wedged between Tanzania and Bosnia and Herzegovina, Brazil, at number 126 out of 183 countries surveyed in the World Bank’s 2012 Business Ease is far below Latin America’s regional average placement of 95. The report is compiled using various indicators, including ease of starting a business, electricity availability, efficiency of tax systems, consistency of contracts, investor protection and straightforwardness of property registration. According to the World Bank, it takes 2,600 hours to pay taxes in Brazil, as opposed to 131 hours in Canada, it costs an average of $2,275 to import a container in Brazil compared with $1,660 in Canada. It takes 73 days in Canada to get a construction permit and 469 in Brazil. Even compared to regional neighbors Brazil lags behind – it takes 119 days to register a business in Brazil, 26 days in Peru, 14 in Colombia and just 7 in Chile. Likewise, Brazilian law can be complicated and it can be difficult for foreigners to buy land due to protectionist regulations. According to the São Paulo Industry Federation (Fiesp) in 2010, bureaucracy cost Brazil $22.7billion reals. Some changes are being made – for instance a 2007 law introduced a simplified tax regime for small business. In the meantime, companies hoping to complete business in reasonable timeframes, avoiding bureaucracy where possible are advised to seek appropriate representation.

Francisco Rohan Partner Tauil & Chequer Advogados with Mayer Brown

“Here there are challenges that may intimidate investors. First, foreign land ownership is difficult as foreign investors are only allowed to hold ownership on a small piece of land. Second titles on rural properties are extremely precarious and often they are not legally valid and enforceable. Third, the new mining code is not fully disclosed and fourth, new taxation on mining in some states will be a considerable burden to the industry. While the combination of such events may cause some concern, it simply means investors must seek specialized professionals to mitigate risks and overcome obstacles.”

“The biggest challenges for companies operating here are risk management, environmental management, infrastructure and avoiding bureaucracy in order to increase operational efficiency. Companies need to do a thorough financial, legal, tax and labor due diligence because mining regulation is complicated and differs between states. It is extremely important that junior companies verify the land, the resource and everything about the property that they are E. Mauro de Oliveira buying in order to fully understand the risk. One area PWC Regional Director has been successful in is governance, risk and compliance, PWC in which we explain and help with local legislation.” Mining Leaders

123

q&a

a home Ungad Chadda Senior Vice President Toronto Stock Exchange

for juniors

FINANCIAL & LEGAL SERVICES

With a diverse issuer base and a tradition of strong liquidity for projects at all stages of growth, Toronto Stock Exchange (TSX) has become the exchange of choice for Latin American mining operations. In fact, in 2011, 90% of all global mining equity financings were done on TSX and TSX Venture Exchange (TSX-V). There are 50 companies with projects in Brazil listed on TSX and TSX-V raising a total of $355 million in 2011. What makes the TSX so attractive to junior companies? Our strength is our equity culture and our 160-year tradition of natural resource-focused public markets. If you look at the predecessor exchanges that feed into TSX-V - the Vancouver and Alberta exchanges - they were developed to create an alternative to the eastern markets such as Toronto and New York and its focus on manufacturing and trade with Europe. The founders recognized the need to provide financing for oil, minerals and forestry. Today the bankers, lawyers and investment advisors focusing on TSX companies are specialized in the exploration and development of assets whether hard rock or petroleum. So with TSX, you get the tradition and the current brain trust – it is a center of excellence. What does a company need to do to graduate from TSX-V to TSX and what are some of the advantages of doing this? Both markets are highly regulated, they both run on the same common technology platform and they both employ the same basic principles – transparency, time efficiency and regulation. It’s the best two-tier model in the world. Over the last decade, more than 500 companies graduated from TSX-V to TSX. The listing standards are based on fundamentals like balance sheets, income statements, and technical reports. To qualify for TSX, a company must have an advanced exploration property, a work program of $750,000, working capital of $2 million and net tangible assets of $3 million. Are analysts developing more expertise on emerging Latin American markets or are there still holes in knowledge? Some of the countries often called emerging markets today have been our bread and butter for decades. Knowledge is one of the things that we export very well. There’s so much expertise and fearlessness on our boards – we have confidence in the management teams of Canadian exploration mining companies. We have over 1,100 projects in Latin America and that didn’t just happen overnight. Do you see a division between the ASX’s focus on Asian projects, the AIM being more involved in Africa and the TSX having a Latin American concentration? Is it a goal of

124

2012

the TSX to expand into Asian and African markets? London and Australia are both great markets but I think in terms of the reach and the depth that we have, we are very unique. We are interested in any sized mining project anywhere in the world. The AIM market from our view has more of an institutional placing forte to it and maybe a little less liquidity. The ASX is very strong on the retail side while we are a strong blend of retail and institutional. What products and services do you intend to introduce in the coming two years? We are always looking for new business opportunities from a business development perspective and we do have an active corporate development team. Along with the business of running the individual exchanges that enter TSX we love to have other touch points with all the customers and stakeholders and similar to NASDAQ, we have company services business – investor relations and services, IR analytics and Minesonline. Minesonline is an online multiple listing system for mining properties, so you can see the full portfolio of a company, which by including projects outside of the core assets, investors can gain a more complete idea of the value of a company. It also allows greater interaction within the community of buyers and sellers. Have you seen a trend in terms of risk appetite and project gains? When the markets hit a tough patch such as what we saw in the first months of 2012, there is a trend for risk appetite to diminish and for capital flows to enter safety mode. When this happens, we usually find that the Venture Exchange takes a hit – we’ve seen that the juniors take time to come back. When it’s risk off, the thinner capitalization stock suffer a bit more. What are the key trends regarding Latin American projects? The long term trend in Latin America is very strong. Our clients that operate there raised a total of $1.2 billion in 2011 - that represents a total of 280 companies operating in the region. All business indicators are strong and we plan on putting more business development effort there. It looks positive.

COMPANY FOCUS

West LB (1992) Project and Acquisition Finance 60 employees

“We are looking for good projects. For good projects there is always capital available,” explains Claudio Pitchon, Managing Director of Metals & Mining for West LB, the state owned German bank focused on structured lending through project finance and acquisition finance. West LB specializes in energy, commodities and infrastructure, gaining a niche positioning to develop its Brazilian branch not only as a hub for South America, but also as one of the bank’s most important offices globally. Pitchon has a firm belief in the strong growth of the private sector in Brazil and is excited about the emergence of new companies and the consolidation trend in the sector. He explains that operational companies are generating a lot of cash and the challenge for them is how to invest. Given the low equity valuation of some junior companies Pitchon expects an M&A spree in 2012. Higher metal prices resulting from Chinese demand, coupled with growing availability of equity is driving a sharp increase in exploration spending. According to Pitchon, Latin America accounts for over 30% of global exploration spending - with 50% of this figure being invested in junior companies. Pitchon notes a growing trend toward diversification of the investor base and funding sources through the use of debt, equity products, and hybrids that bridge conventional project finance at the pre-feasibility

“There are very few banks doing mining project finance. This is a very niche business - to be successful you need a familiarity with technical aspects of the mining process.” Claudio Pitchon Head of Americas Metals & Mining West LB

stage, “Each funding source has a unique set of pros and cons. Project finance offers a fixed-return, cheaper, and low-risk financing solution that can maximize cash flow avoiding costly dilution. It leaves all upside benefit in the hands of shareholders.” Despite some investor’s worries about the proposed reforms to the mining code, the biggest challenges the bank

FINANCIAL & LEGAL SERVICES

west lb

expects over the coming five years are related to human resources and infrastructure. Despite this, West LB has continued to grow in Brazil. Pitchon puts this down to the building of trust and relationships amongst clients, explaining, “We are less opportunistic than other investors or banks. We support mining companies in all stages – from project finance to corporate deals for the large operators. What differentiates us is our specialization. We understand the risks.” Pitchon recommends getting your bank involved as early in the financing process as possible, always prior to feasibility stage. The result, he contests, will be a smoother, more efficient execution of the firm’s project financing strategy. The São Paulo office serves as a hub for business across the Americas. The main focuses of the bank besides Brazil are Chile, Mexico, Peru, Colombia and Canada.

Mining Leaders

125

COMPANY FOCUS

Integratio (2005) CSR, stakeholder management, socio-environmental consulting. Belo Horizonte Anglo American, AngloGold Ashanti, CSN, Gerdau, Kinross, MMX, Vale, Votorantim Metais FINANCIAL & LEGAL SERVICES

integratio

Merely having an economic outlook when approaching mining projects is a mistake and one which can have serious long term implications for the viability of a project. In the past seven years, a new way of thinking has emerged which places a strategic environmental and socio-economic approach at the basis of mine planning and operation. Mining companies must engage with the stakeholders from the beginning of their projects. As Integratio’s Director, Rolf Georg Fuchs, states “there are people living in these remote lands, many years before the Brazilian mining boom even started and they will remain there once the mines are non-operational. Because of this, the relationship with these people is of great importance”. By contacting stakeholders, which not only include communities but suppliers, NGOs and the government, among others, companies are creating an important bond and relationship that will help alleviate the potential of future conflict. Integratio was the first company with this main focus to begin offering these services in the Brazilian market. Through a variety of well-planned services, they are collaborating with mining companies to meet, understand and communicate with stakeholders. Through stakeholder management a company follows four important steps which are mapping, analyzing, engaging and then managing all of the people near their operations. Mr. Fuchs insists that “the construction

126

2012

““It is important to create a good impression when you first arrive. This is where problems normally arise for mining companies. We intend to change this.”

Rolf Georg Fuchs CEO Integratio

of alliances and the development of consistent communication strategies, social mediation and sustainability all depend on the quality of information that a company has for each and every one of its stakeholders”. Another important service that Integratio offers is the implementation of programs and actions. Through means of social dialogue, CSR activities, environmental

education and socio-environmental impact management, Integratio aims to convey that even though companies have their own communication strategies it is important to have another external body aiding in the execution of these plans of action. Integratio’s client portfolio is constantly growing. Not only have they reinforced major players’ strategies but has also been working hand in hand with many junior companies such Aura Minerals, Beadell, Belo Sun, Crusader and Colossus. The message behind this is that every company needs to undertake sustainability in a more efficient and responsible manner. In 2012, Integratio wants to become the recognized benchmark in social management in Brazil. In the meantime, the company will continue to develop new solutions to minimize conflict and to improve the image of mining amongst the Brazilian public.

market focus potential Actions against Companies Not Practicing Sustainable Mining ACTOR

NEGATIVE ACTION

Shareholders

Withdrawal, shareholder resolutions

Raters

Watch notice Downgrade

Central bank regulators

Increased supervision, audit conditionality

Int. Financial Institutions

Withdrawal of funds, reduced term

Lenders

Withdrawal of funds

NGOs/Consumers

Boycott of products

Co-financiers

Liabilities for negligence, misrepresentation

Insurers

Reduced coverage, increased cost

Source: World Bank

Analysts

João Paulo Altenfelder Planning & Sustainability Consultant SEI Consultoria

“Mining companies can be sustainable if they have a good comprehension of the environmental issues and the legislative processes involved in projects, as well as a respect for the importance of social licensing. Having good relationships with stakeholders will bring better balance to their business models. The secret for sustainability is your relationship with these stakeholders in order to both protect the company and create value for the project; it is important to understand that if you have more conflict than consensus, you are neither being sustainable nor creating value for society and the sector.”

TAking Interaction The 2000 Mining, Minerals and Sustainable Development Project, coordinated by the International Institute for Environment and the World Business Council for Sustainable Development was a milestone that lead to a greater understanding of the benefits associated with sustainable practices. A paper published jointly by the Harvard and London Schools of Business entitled “The Impact of Corporate Social Responsibility on Investment Recommendations,” notes CSR activites add value to companies operating in public equity markets. The report, which the International Council for Metals and Mining often references, notes that the value of the assets of socially conscious US and EU mutual funds was more than $4.5 trillion in 2009. The ICMM has increasingly become the guiding force behind sustainable mining, encouraging ethical business practices, fair working conditions and environmental responsibility. Increasingly companies are establishing inhouse CSR teams and re-enforcing this with specialist consultants.

“Sustainability in Brazil is a strongly debated issue, even more than in other countries around the world. Here society, politicians and business organizations such as Ethos have been pioneers in promoting sustainable practices by analyzing many strings of data such as stakeholder management and carbon emissions to provide adequate practices. The stock exchange has started to value sustainability and has been very influential in changing Beat Grüninger practices of companies. Different from the United States Partner /Managing Director and Europe, I believe that in Latin America pressure BSD Consulting originates more from the market than from the consumer.” “Mining companies are practicing sustainability but not in an organized way. Companies must establish a long term view and ask themselves what they want to be in 20, 30 or even 50 years. The management system is starting to integrate sustainability into their business practices, but there is still huge space for strategic improvement. Even though Brazil has good practices, companies lack the sufficient data and synergy with the government to prove it on a global scale. If Munir Soares we do not have a government that is strategically planning Sustainability Consultant the future and showing companies how it’s done, we have to Key Associados expect companies to lead the way for sustainability.”

Mining Leaders

127

leader insight Bruno Soares Partner Allen & Overy LLP

Allen & Overy’s São Paulo office is primarily focused on project financing, banking and M&A, though the company is also active in capital markets through both debt and equity, arbitration and other areas. Aiding the London office on Vale’s $4.9 billion sale of their aluminum assets to Norsk Hydro ASA, Europe’s third largest aluminum maker, Allen & Overy Brazil has experience of global markets but also has an understanding of the intricacies of the domestic market. Bruno Soares is a partner at Allen & Overy.

FINANCIAL & LEGAL SERVICES

A taxing situation When entering M&As in Brazil I always warn my clients of the time commitment they are likely to have to make in order to complete the transaction. In New York, even if the counter-party is just across the street, most of the business communication is conducted by phone. Here, the culture is oriented towards face to face interaction. Brazil undoubtedly has its particularities, but it’s completely worth it. It is very unlikely that an investor will not make a profit. Despite everything in Europe and the US, Brazil is still very bullish. We are licensed to practice English and New York law, so we work closely with local Brazilian law firms. However one of the benefits of working with Allen & Overy is the breadth of shared skills we have available. We work closely with the New York, Asian and European offices. Though we do often work with major companies, like Vale, Ferrous Resources and MMX, we are seeing more inbound mining business coming from juniors, particularly Australian juniors. Currently, we are working on two iron ore acquisitions for two junior companies. The biggest “Mining companies are subject challenges juniors face when entering the to Brazilian tax as any other Brazilian market are getting to grips with company, but they can also the legal environment here – mitigating apply for special tax breaks regulatory risks, understanding royalties, or tax incentives to develop a dealing with different types of project mine in a specific region.” licensing and navigating taxation. The Brazilian tax system is not an easy one to navigate. We have over 50 types of taxes and social contributions. But the government’s planned tax reform will be hugely beneficial to all sectors. It should make it easier for companies to operate and will allow them to better understand and assess risks, profitability and investment potential. Mining companies are subject to Brazilian tax as any other company, but they can also apply for special tax breaks or tax incentives to develop a mine in a specific region. There has to be some marked benefit - through employment and development for example – for the relevant

128

2012

region. It is judged on a case by case basis. Until March 1, 2012, we encouraged our clients to consider structuring financing of a mining project as pre-export financing– which would make the loans exempt from Brazilian withholding tax on payments of interest and commissions. The pre-export loans had to be repaid through exports or assignment of proceeds from exports. Companies could make substantial savings because withholding tax could range in most cases from 15% - 25%. However, since March of 2012 the Brazilian government implemented new rules aimed at controlling the appreciation of the Brazilian real against the U.S. dollar that ended the withholding tax benefit for pre-export loans made by financial institutions and also increased the tax on fixed transactions of loans with a tenor of up to five years. We are working with Brazilian law firms to propose alternative solutions to our clients.

We help our clients understand the rights to the concessions. If there is a dispute regarding title ownership, we prefer arbitration. It is evolving and is becoming more common, but historically court litigation has been more popular. Although arbitration tends to be a little more expensive it is much quicker, which is beneficial for all concerned. These challenges are easy to deal with once you have the right procedures and representation. As well as mining, we work in the power generation and transmission sectors and the transportation sector. We see significant growth in project infrastructure sphere in Brazil. It’s a fantastic time for Brazil. We want to see more Brazilian companies become global – Brazilian banks in Latin America, huge Brazilian enterprises such as Vale, the X Group, BRF-Brasil Foods and others develop projects internationally and Brazilian infrastructure companies doing power projects globally. This is all part of our growth. We are a global firm and we follow these companies and offer them support wherever they need it.

market focus

Source: Ministry of Mines and Energy of Brazil

importance of mining for the generation of secondary jobs

Darcio A. R. Crespi Consultant Heidrick & Struggles

TALENT SHOW Brazil’s human resource situation is made difficult by its unique linguistic context, the lack of domestically trained engineers, competition from the oil and gas sector, as well as soaring inflation which makes salary demands higher. In Canada, it is expected that over 50% of the mining workforce will retire by 2020, a situation which will likely be paralleled in Brazil, given the large Canadian influence here. According to Ibram, 165,000 workers were directly employed by the mining industry in 2011 in Brazil. The Ministry of Mines and Energy reports that for every person directly employed in the industry, 13 indirect jobs are created. Brazil’s economic growth means that mining companies will not only see a strain in specialized positions such as geologists, technicians and engineers but will also have difficulty recruiting electricians, laborers, truck drivers and other manual positions. The Mining Industry Human Resources Council (MIHR) has set aside two distinct priorities, which should serve as a guide for mining companies when undertaking human resource planning: The attraction, retention and transition of workers and the development of skills, learning and mobility. Specialized recruitment firms have begun to enter the Brazilian market to help companies find the right people and to aide with succession planning and employee training and retention. With analysts looking intently at management teams, getting the right combination of people can be a decisive factor in the success of a project.

++++++ Ricardo Guedes +++ Executive Director Michael Page

Hamilton Teixeira Managing Partner DRH – Talent Search (IRC Brazil)

“Current lack of personnel dates back to the 70s when there were limited places in engineering programs. In 2005 when Brazil began to see growth in mining, finding people was a problem - those focused on the area were too old, too young or had insufficient knowledge. Today, people are studying mining engineering because they know that companies such as Vale can give them security. We are focused on assisting mining companies with top management positions but I sense the urgency of filling positions on the field - mostly in geology. Companies are investing in their own corporate universities to train new and existing staff to meet demand.”

“The lack “One of theofreasons personnel a major affects customer big players, has chosen mid-tiers us as anda junior providercompanies. is our focusSalaries on technology. have gone We have up, introduced the mininga new sectortype must of electromagnetic compete with the coiloilinto andthe gas Brazilian sector and market, the which government is made hasofbeen anodized implementing aluminum, verywhich rigorous requrires labor less electrical laws on foreign insulation workersthan lessening both copper the search and aluminum. range. To This attract coil engineers, has a longer companies life time, arelower beginning maintenance to reduceneeds their and earning is environmentally margins to hirefriendly, better professionals. allowing a lower Sincetotal mining cost during is a sector thethat life continues time of the to equipment. grow all around The the mining region, sector we is arenaturally currently opening conservative, our first particularly Mining Division considering in Chilethe to high specifically investment focusoften on the needed. sector’However, s needs. We in the willend continue these advances expandingmean the division higher to levels Brazil, of competitiveness. Peru and Colombia. ” ”

“If you target the market with high expectations, such as working in a remote location and managing all the projects in a pipeline while offering a small compensation package, you will have difficulties. One needs to be realistic about market practices. Some companies say that they cannot offer a salary in Brazil for a certain position since it is higher than superiors’ salaries in the headquarters. This is not a correct vision – the cost of living in Brazil is higher, and what has to be considered is net purchasing power, which is affected by taxes and prices. When searching for talent, a key factor is consider the position and the compensation in terms of the compensation package.”

“Investors look at management. A good project in the wrong hands is worthless. That’s why recruitment is essential in the success of a company. Brazil’s industry has been growing at an exponential rate which has been a major drain on the talent pool. Portuguese is a unique language, so it is more difficult to recruit than in Spanish speaking Latin American. The best way to deal with this is for companies to be proactive in bridging the gap between the senior and junior members of the workforce. Andrew Pollard President Proactivity in terms of succession planning, training the The Mining younger workforce and incentivizing senior members to Recruitment Group Ltd actually go out of their way to pass on skills.” Mining Leaders

129

leader insight Nolan Watson President & CEO Sandstorm Gold

Sandstorm Gold’s 2009 entry into the Brazilian market has proved a huge success. Investing $17.8 million in Luna Gold, Sandstorm received the right to purchase 17% of the company’s future gold production at $400 per ounce. Today, Luna Gold is producing 70,000ozs per year and has planned a ramp up to 100,000ozs. Sandstorm Gold expects to have 40% of their investments in South America in the next ten years.

FINANCIAL & LEGAL SERVICES

stream to a river Ian Telfer, the chairman of Goldcorp and the World Gold Council, created the concept of metal streaming companies. The biggest advantage of investing in a metal streaming company, as opposed to a traditional exploration junior, is that you are not exposed to the risks that are often inherent in mining. When costs overrun or machinery breaks down, production is lower, costs are higher and money is lost. But in the metal streaming model we pay a fixed price for every ounce that is delivered to us - so if costs go up, as we are seeing in Brazil, our margins are protected since we negotiate a fixed ongoing purchase price on day one. Generally there is also a completion guarantee clause, which stipulates the necessity of building the mine to certain specifications within a definitive time period.

Three years ago, when we started Sandstorm, our market capitalization was $4 million, so we were doing deals between $10 and $20 million. Today our market capitalization is $600 million, meaning today we are doing deals between $10 and $200 million. We have about $35 million in cash on our balance sheet, we have a $50 million revolving credit line which we can draw on, over $3million in cash flow per month, $70million in warrants to be exercised over the coming years, plus the ability to issue equity if necessary. One of the criticisms of streaming contracts is that they are finite. However we are adapting contracts to suit market conditions – for example, we introduced a concept where people can buy back part of the contract and have almost all of the upside of new exploration.

As cliché as it sounds, our focus when choosing projects is low cash cost producers and good management teams. We also need to know that the company is capable of raising money after our initial investment. We have an internal geologist, who is our first line in the due diligence process. Following that we “Although companies do give up choose from our rotating team of consultants a certain amount of exploration to determine who has the appropriate skill upside to Sandstorm, they would base in order to fully evaluate the project. be giving a much larger amount Since we are paying a large lump sum to new shareholders, essentially upfront, we typically consider investment neglecting their shareholder base.” only at the prefeasibility or feasibility stage. Like all financing firms, we get all types of companies coming to us, everything from In times of strong growth and liquidity, people with good projects who don’t want metal streaming companies tend to remain motionless and accumulate to dilute their equity holders, to people with cash through pre-defined streams. When a crisis comes and financing is tighter, bad projects and bad management teams. our share price will drop but we will have the cash to make smart deals which will Obviously the former is our focus and the prove beneficial when things rebound. Market volatility is good for our type of latter we avoid. Often in these situations, company. There are really only four streaming companies operating at the moment, the equity of the companies we deal with is Franco Nevada, Royal Gold, both of whom depend largely on profits from royalties, extremely depressed, which means issuing and Silver Wheaton, who focuses on silver. So, we are market leaders in the gold more shares can lead to dilution of the market streaming sphere. capitalization at staggeringly high figures. Although companies do give up a certain Despite the fact that we our fairly flexible about where we invest, our head office is amount of exploration upside to Sandstorm, in Vancouver so we get most deals done in North and South America. Brazil has a they would be giving a much larger amount lot of untapped resources; it is fairly unexplored in comparison to other countries to new shareholders, essentially neglecting out there that have reasonable political risk. We like that it is an up and coming, their shareholder base. stable country with a great deal of exploration upside.

130

2012

q&a

a Sterling Performance

Robert Ellison & Cynthia Urda Kassis Partners Shearman & Sterling LLP

What are the main challenges in the Brazilian mining sector? The need to address transport infrastructure, power and other operational logistical support systems is a significant challenge to the mining sector here in Brazil. The companies that have been successful are those which have integrated infrastructure projects into their companies. Another challenge to the mining sector in Brazil, which is a common challenge globally, is the need to address environmental and social issues. This kind of approach is particularly important in Brazil, with its diverse ecosystems, special habitats, environmentally protected areas and of course the Amazon. Has there been an increase in demand for M&A in the Brazilian mining sector? There hasn’t been a great increase in M&A as such, but we have seen a number of startup operations entering the market. At the same time, there has been a sustained expansion in mining of every type of commodity. International demand remains strong but infrastructure – especially the capacity of facilities to transport and export the minerals – are a bottleneck. Once the prerequisite infrastructure is in place, companies can develop new properties and expand existing mining operations. For example Eike Batista’s MMX mining subsidiary recently announced the expansion of its Serra Azul iron ore mine, which had previously been held back only by access to port facilities. After opening its own port in Itaguaí, MMX can now expand the production at the mine. We are also seeing an increase in vertical integration, with companies focusing not just on mining but also on downstream products, both locally and internationally. Recently, for example, three key Brazilian players were involved in a three-way battle to acquire a Portuguese cement production company. Do you believe the Brazilian administrative and legislative processes are clear to mining companies? Most of companies that act in Brazil have been here for a long time. Brazil has a long experience of mining – one of its states is called “General Mines” and has been built around the extractive industry since the country was founded. The national licensing process and

FINANCIAL & LEGAL SERVICES

With over 80 years’ experience and 10 years of permanent presence in Brazil, & Sterling, headquartered in New York, has a strong global presence and a concrete local history, active in national and regional project financing, bank lending, debt restructuring mergers and acquisitions and capital markets. The company has contributed to some of the most important NYSE listings of Brazilian companies, including Aracruz, Embraer and Banco Itaú. the municipal permitting process in Brazil are fairly clear. Companies generally understand the scope of their obligations including to the local municipality . Environmental and local community issues are becoming ever more important and sensitive, of course – not only for the mining industry but also for major energy and infrastructure projects. Players must prove that they are present in the country not only to mine and make money, but to do so respecting local communities and in an environmentally responsible manner. This is something the most successful companies monitor continuously. What are the preferred dispute resolution channels in Brazil? This depends on the type of dispute and on the counter-party. It is fairly rare to see legal disputes between mining companies result in a formal dispute resolution procedure. These disputes typically have negotiated solutions. To the extent they do result in a formal procedure, where there is a mutual desire to maintain confidentiality regarding the dispute, arbitration would be the preferred procedure. More often disputes in the sector relate to new developments – problems connected with construction and performance of equipment. International arbitration is generally the preferred channel for disputes of this nature. Foreign players often have a desire to avoid national courts of their counterparties, and many choose ICC, LCIA or AAA . Two of the main advantages of international arbitration are the ability to nominate experts in mining to the panel and, as noted above, the ability to maintain confidentiality.. There is also a local arbitration forum called the Brazil-Canada Chamber that focuses on local Brazilian arbitration. How does the Brazilian mining sector differ from those of other Latin American countries? One way in which the Brazilian mining sector differs somewhat from that of some of the other Latin American countries is the dominance of the sector in Brazil by several large companies. Although there are clearly a number of junior mining companies quite active in Brazil, the sector seems much more heavily weighted towards a relatively small number of large players than in other Latin American countries. Mining Leaders

131

article

ml recommends The white sand beaches, the Sugar Loaf Mountain and the Cristo Redentor statue of Rio de Janeiro are globally recognized tourist attractions. Unless you have a meeting with Vale, however, business trips to the Cidade Maravilhosa are likely to be limited. While Rio is home to the country’s burgeoning oil and gas industry, most mining business is centered around São Paulo and Belo Horizonte, the country’s largest and third largest cities respectively. Without Rio’s sweeping coastline and prominent mountains for reference, navigating both cities can be tricky for the newcomer, but with experience and a bit of effort, one can find excellent restaurants, bars and cultural activities.

major up-and-coming business district is Itaim Bibi, south of Avenida Paulista, which is home to major international hotel chains including the Grand Hyatt, Radisson as well as the eye-catching boat-shaped Hotel Unique. Itaim Bibi is also striking distance from the restaurants and bars in Vila Madalena, one of the city’s night life hot spots. Getting around the city is not easy. São Paulo has an excellent metro, but it has limited coverage. Taxis are abundant, but with the city’s heavy traffic, fares can mount up. The city’s rapid growth, without formal planning makes transport difficult and São Paulo has the largest number of privately owned helicopters anywhere in the world.

São Paulo, with over 21 million inhabitants, is one of the world’s great metropolises. Entering Congonhas airport and seeing the high rise buildings sprawling out for miles in all directions can be daunting to those unaccustomed to megacity-life. The beating heart of the city is Avenida Paulista, a three kilometer, eightlane avenue flanked by skyscrapers topped with long radio and television antennae. This is the city’s financial district, the prestigious address for local and international banks. Land prices on the strip are amongst the highest in the country. The other

For many visitors, Belo Horizonte comes as a pleasant surprise. Little more than a hundred years old and flanked by mountains, the planned city has none of the transportation issues associated with São Paulo. Elevated at 850m above sea level, the city has a sub-tropical climate and temperatures range from 9 to 35’ Celsius. Belo Horizonte is a mining city and the state in which it is located, Minas Gerais, is home to some of the biggest iron ore and gold projects in the country. The major local and international mining firms have offices here and the city boasts a plethora of service and

132

2012

construction companies focused on providing support to their operations. Despite its large size, Belo Horizonte is surprisingly absent of big name hotel chains, but the area of Savassi, close to the center, is home to a number of high-end boutique and independent hotels and also hosts a large number of excellent restaurants and bars. Although direct international flights to Confins airport - 38km from the city - are limited, it is well connected to other major Brazilian cities a number of no-frills airlines such as Gol and Azul make frequent flights to the city. Brazilians are renowned for their warmth. Business meetings, especially in São Paulo often begin as formal affairs but then become far more informal over the course of meeting or at subsequent meetings. Shaking hands with all those present is the norm at the start of the meeting, followed by coffee and often lengthy small talk. Do not be surprised if the agenda is not adhered to or if the meeting runs over its allotted time, this is just a manifestation of the Brazilian tradition of jeito, the flexible approach to business and social interactions that allows locals to circumvent laws or conventions. Cordiality is a far more valued trait than punctuality and its not uncommon for the hand-shakes to evolve into hearty embraces after the first meeting.

HOTEL LISTING

Home Paulista

san Diego Suites

Hilton Morumbi

Convenience with the comfort of your home. Apartments to suit your exact needs with exclusive services in a prime location.

In a fantastic location, San Diego Suites offers its guests a special service with helpful and efficient staff and 115 very comfortable suites.

Hilton Morumbi offers exceptional service, sophisticated accommodation, varied gastronomy options and a heated swimming pool and spa.

Rua Carlos Sampaio, 201- Bela Vista - São Paulo : (55-11) 8995 2441 www.homepaulista.com.br

Rua Álvares Cabral 1181 Lourdes - Belo Horizonte (55-31) 3335 3311 www.hoteisarco.com.br

Av. das Naçóes Unidas 12901 - São Paulo (55-11) 2845 0000 www.saopaulomorumbi.hilton.com

ibis Guarulhos Hotel

hotel RADISSON

Hotel JW Marriott

Friendly staff available 24 hours. Enjoy the comfort of its rooms in leisure or business travel.

Conveniently located at the best address in the new business and entertainment heart of our city.

A unique experience, whether for business or pleasure. It looks onto three of the city’s main landmarks.

Avenida Cidade Jardim 625 - Itaim Bibi - São Paulo (55-11) 2133 5960 www.radisson.com

Avenida Atlântica - 2600 Copacabana - Rio de Janeiro (55-21) 2545 6500 www.marriott.com.br/riomc

R. General Osorio - 19 Centro Guarulhos - São Paulo (55-11) 2159 5950 www.ibishotel.com

Mining Leaders

133

directory Shopping Malls

· Daslu Shopping Mall (São Paulo) Av. Chedid Jafet 131, Vila Olimpia · Ipanema Boutiques (Rio de Janeiro) Rua Visconde de Pirajá and side streets · BHZ Fashion Mall (Belo Horizonte) Rua Paraíba 1132, Savassi

advertisers index Casimir Capital

Inside Cover

Cambridge House

Mines & Money

Fleming Gulf

SAFM 29 Bemisa 33 Centaurus Metals

Luxury Brands:

· Marc Jacobs (São Paulo) Brigadeiro Faria Lima 2232 · Salvatore Ferragamo (São Paulo) Brigadeiro Faria Lima 2232 · Cartier (São Paulo) Rua Haddock Lobo 1567, Cerqueira César

car rental

· Hertz: Rua da Consolaçao 431 (55 11) 3258 9384 (São Paulo) · Budget: Avenida Washington Luís, 6831 (55 11) 3587 7166 (São Paulo) · Avis: Av. Princesa Isabel, 350, Copacabana (55 21) 2543 8481 / 8488 (Rio de Janeiro)

WMR 39 Colossus 43 Lago Dourado

Belo Sun

Amarillo Gold

Rio Novo

Serabi Gold

Cosigo 59 Horizonte Minerals

Atlas Copco

Brazilian RockHounds 84 Ausenco 87 BVP Engenharia

EMBASSIES

Australia Canada China United Kingdom United States

(55 61) 3226 3111 (Brasilia) (55 61) 3424 5400 (Brasilia) (55 61) 2195 8200 (Brasilia) (55 61) 3329 2300 (Brasilia) (55 61) 3312 7000 (Brasilia)

Cemi 91 Pimenta de Ávila

Devex 95 BNA Micromine

Aerzen do Brazil

Geosol 101

Airlines

·TAM: (55) 4002 5700 (From any capital city) 0800 570 5700 (From other locations) · Gol: 0300 115 2121 (Sales) · Webjet: 0300 210 1234 (Sales)

Esteio 102 SGS 105 Gaustec 107 Polysius 109 Vacon 111

AIRPORTS

· Guarulhos Airport (São Paulo) (55 11) 6445 2945 · Congonhas Airport (São Paulo) (55 11) 5090 9000 · Pampulha Airport (B. Horizonte) (55 31) 3490 2001 · Tancredo Neves Int. Airport (B. Horizonte) (55 31) 3689 2700 · Galeão Airport (Rio de Janeiro) (55 21) 3398 4526 · Santos Dumont Airport (Rio de Janeiro) (55 21) 3814 7070

134

2012

ERM Engenharia

113

Gemü 115 Rossetti 117 Integratio 127 HB Ninety

Inside Back Cover

IBRAM Back Cover

Mining Leaders

135

EXPOSIBRAM AMAZÔNIA 2012 November, 5th – 8th, Belém ( Pará – Brazil) Enjoy this great event The Amazon is recognized as the next Brazilian mineral frontier. Miners are investing billions of dollars on projects and looking for new trading partners. Come to know these opportunities participating in the EXPOSIBRAM Amazônia 2012 and the 3rd Mining Congress of Amazon.

Complete information about booking stands and registrations available at www.exposibram.org.br

At the Congress you’ll participate in the debates with Brazilian and foreign experts about what is new on the sector.

www.exposibram.org.br

www.ibram.org.br 136

2012