Mining Leaders: Brazil 2012 (preview) by Mining Leaders

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

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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

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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.

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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 mining industry’s competitiveness. its capacity by 2014. 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

2012