Vale (NYSE:VALE) saw some significant activity last week. While it had to cut its output and export target from its Mozambique coal business, it also received some good news. The federal environment authority in Brazil granted permission to Vale to expand production at its Salobo mine. 
In August Vale said that it planned to produce 4.6 million tonnes of coal from its Moatize mine in Mozambique but now the target has been reduced to 2.6 million tonnes. The company said that limited capacity on the railway line connecting the mine with the Beira port was responsible for its decision. 
Salobo is the second greenfield project being developed by Vale in Brazil and has a nominal production capacity of 100,000 tonnes of copper concentrate a year. Vale has been looking to diversify away from iron ore for sometime now. The majority of its revenues come from iron ore whose price has been very volatile in the last few years. The Salobo project is an important step in that direction.
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Infrastructure Issues In Mozambique
Infrastructure bottlenecks are the topmost concern for coal miners operating in Mozambique. Both the government and the private sector have been executing various projects to expand and build new railway lines and ports but infrastructure will take time to reach satisfactory levels.
The Sena railway line links coal mines located in the central Tete province to the Beira port from where coal is exported to other countries. Production of coal has outstripped the carrying capacity of this line and it needs to be upgraded. The upgrade has been delayed for years now and is expected to be completed next year. Once complete, the line will be able to carry 6.5 million tonnes of coal per year from its present capacity of 2 million tonnes. Vale will then upgrade its production and export levels to 4.9 million tonnes in 2013. Further capacity addition will have to take place in future years because Vale plans to invest heavily to increase the Moatize mine’s annual production capacity to 11 million tonnes. It will expand capacity beyond this only after the completion of the Nacala railway and port project in northern Mozambique which will allow it to export greater quantities of coal.
Vale plans to start large-scale production of premium hard coking coal by 2015 which is expected to provide higher margins. However, the company first needs an efficient mine-rail-port system to make this happen. Right now, revenues from Vale’s coal business are only a fraction of the total. At end of Q3 2012, operating revenues from coal were $285 million out of a total of $12.76 billion. 
Plans For Salobo
Vale plans a total investment of $2.5 billion at Salobo. The expansion will be complete in the first half of 2014 at an expected expenditure of $1.7 billion and increase the total production capacity of copper concentrate to 200,000 tons a year. Salobo has 1.1 billion tons of proven and probable reserves, with an average grade of 0.69% of copper and 0.43 grams of gold per tonne.
Copper revenues in 2012 by end of Q3 were $646 million out of total base metal revenues of $2.3 billion. We expect this share to go up in 2014 once additional production begins from Salobo.
We recently revised the Trefis price estimate for Vale to $19, which is in-line with its market price.Notes:
- Vale cuts 2012 Mozambique coal output, export target, Reuters [↩]
- Brazil’s Vale: Got Environment Authority Nod for Salobo Mine Expansion, Fox Business [↩]
- Q3 2012 Earnings Release, Vale Investor Relations [↩]