Vale (NYSE:VALE) has begun copper production at its Lubambe mine in Zambia. Production began on October 4 and it is expected that the mine will have an annual output of 45,000 metric tonnes of copper concentrate. Copper concentrate serves as the raw material for smelters which refine it to produce commercial-grade copper.
The company has, of late, been investing in mining of metals and minerals other than iron ore. Iron ore prices have been very low for quite sometime now, and investing in copper mining is a part of the broader diversification strategy being pursued to reduce exposure to iron ore, which still accounts for about 90% of Vale’s profits and nearly 75% of its revenues. 
The Lubambe mine is a part of Vale’s Konkola North Project, that also includes a plant and related infrastructure. Vale has a 50-50 joint venture with African Rainbow Minerals Limited. African Rainbow Minerals Limited has an 80% stake in the operation, while the remaining 20% stake is held by Zambia Consolidated Copper Mines Limited. At end of Q2 2012, Vale was expecting to incur a total capital expenditure of $235 million on the project. 
The Diversification Strategy
Apart from copper, Vale in recent years has forayed into coal, nickel and fertilizer production. As a result of sustained efforts, the company this year expects to overtake Russia’s Norilsk Nickel as the world’s biggest producer of nickel. It has nickel mines located at Long Harbor and Sudbury in Canada. ((Performance of Vale in 2Q 2012, Vale Investors Website))
The diversification in recent years is being seen as a strategy to insure against excessive risk exposure to iron ore, whose fortunes fluctuate quite a lot due to macroeconomic factors. Iron ore has been trading at low prices for sometime now, relative to prices just a year back. The prevailing macroeconomic sentiment is rather pessimistic in nature. Many European countries are facing a downturn, recovery in the U.S. still hasn’t gained momentum, and now even China’s growth has slowed. China being the world’s largest consumer of iron ore, has a disproportionate impact on iron mining companies’ fortunes. Thus, revenues from sales of other metals can help cushion the impact of iron ore price and demand volatility on profits.
This is essential in a capital-intensive industry like mining where the management has to commit substantial investment amounts for a number of years in the future. Projects take a long time to develop before production can start, and insufficient cash flow could lead to substantial delays. Companies may opt for debt-funded capital expenditure if they have insufficient internal accruals, but high leverage brings along problems of its own which are best avoided.
Right now, copper and other base metals constitute just 7% of the Trefis price estimate for Vale.
We recently revised the Trefis price estimate for Vale to $19 which is in line with its market price.Notes:
- Brazil’s Vale starts copper production at Zambia mine, Reuters [↩]
- Vale starts copper production in Zambia, 4-traders [↩]