By Diana Kinch
SAO PAULO--Brazilian mining company Vale SA's (VALE, VALE5.BR VALE5.FR VALE3.BR) gaining of a preliminary license this week to develop its massive Serra Sul mine project in Carajas, in the Brazilian Amazon, was considered positive by market analysts, who expect it could improve prospects for the company's shares.
Analysts noted the preliminary permit, which does not yet allow the start of construction at Serra Sul, paves the way for a new period of growth at Vale, amid increasing environmental and tax-related obstacles for mining companies worldwide in developing new mine projects.
"Delays and complications in securing the main licenses for iron ore projects have been a major hurdle for miners in the country (Brazil), which has been considered by several a less attractive mining jurisdiction," Leonardo Correa of Barclays Capital said.
Serra Sul, Vale's and the world's biggest iron ore project, is designed to produce 90 million metric tons a year of high-quality iron ore with an average iron content of 66.5%, Vale said in a statement.
Start-up of the mine, also known as S11D, is seen in the second half 2016 in an $8 billion investment, Vale said. The company also will invest around $11.4 billion in expanding transport capacity to accommodate the new project, which will near-double the capacity of Vale's iron ore mines at Carajas and the associated transport system to around 230 million tons a year, Vale said.
Vale's current total iron ore production levels are around 310 million to 320 million tons a year from both its south and southeast Brazil systems and Carajas.
The preliminary license for Serra Sul was granted by Brazilian federal environmental body Ibama.
S11D is "our major lever for production capacity growth and for maintaining Vale's undisputed leadership in the global market in terms of volume, cost and quality," the company said.
Renato de Azevedo Antunes of Flow Research described the granting of the permit as "a milestone for Carajas' environmental de-risking...marking Vale's more disciplined approach toward environmental licensing."
"This license provides a key starting point for Vale to re-enter volume-growth mode over the next years. Carajas is Vale's ticket to perpetuity," Mr. Antunes said. "After an extended period of negative news headlines, we believe sentiment may be close to the trough," the analyst said, indicating the news of the permit's granting may be favorably reflected in Vale's share prices.
Vale said the Carajas area, including Serra Sul where S11D is located, has proven and probable reserves of 7.83 billion tons of iron ore, of Vale's total proven and probable reserves of 17.16 billion tons.
The preliminary license is considered the most critical as it tends to be the most difficult to obtain, said Espirito Santo Investment Bank in a report. The license was granted within the company's expected time frame of first-half 2012.
Vale will also require an installation license, expected to be granted in 12 months, which will allow the start of construction work, and an operational license, which will allow production to commence.
"The market has been awaiting the environmental license for several months and we see this announcement as positive for the company as we think it increases the likelihood that the project will start up on schedule (2nd half of 2016)" the bank said.
According to Vale's executive director, ferrous and strategies, Jose Carlos Martins, Serra Sul will have the lowest production costs of all of Vale's mines, a positive point amid continuing prospects for a decline in iron ore market prices.
"As soon as the project comes on line, we expect a reduction in Vale's consolidated iron ore cash cost, owing to the new mining technologies to be applied (e.g., truckless iron ore transportation and the production of iron ore on a dry basis)," Espirito Santo Investment Bank said.
"With S11D, Vale will boost its high value-added iron ore output from Carajas, consequently enhancing the sales mix and decreasing the average cash cost. As a result, we expect Vale to post better operational margins as soon as S11D ramps up."
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