Vale (NYSE:VALE) has obtained a key environmental license from Brazil’s Environmental Protection Agency which will allow it go ahead with the development of the Carajas S11D project. It is expected to be the lowest cost iron ore project in the world and will produce the highest grade of ore. At an estimated capital cost of $19.7 billion, it will also be the costliest ever project in the iron ore industry. 
Following the receipt of the license, Vale’s board has approved the entire S11D project, which includes investments in the mine, processing plant, railway capacity and port. The S11D project is important to Vale’s future growth and will enable it to compete with other mining majors like Rio Tinto and BHP Billiton. Rio and BHP have most of their major mines in Australia while Vale’s mines are in Brazil. Hence, the former enjoy a cost advantage over Vale because shipping distances between Australia and China are shorter than those between Brazil and China.
The S11D Project
The S11D project is located in the Brazilian state of Para. It has an estimated nominal capacity of 90 million tonnes of iron ore per year and proven iron ore reserves of 4.2 billion tonnes so far. To put the production figure in perspective, Vale produced 258 million tonnes of iron ore and about 45 million tonnes of iron ore pellets in 2012. Thus, the S11D project will augment production capacity considerably once it starts up in the second half of 2016 and achieves full capacity in 2018. Also, the iron ore produced from this mine will have an average ferrous content of 66.7%, low impurities and an estimated cash cost (mine, plant, railway and port after royalties) of $15 per metric tonne.
The high quality iron ore from S11D will be of high value to the steel industry, because it implies higher productivity, lower fuel consumption and thus lower carbon emissions. Consumers typically tend to use a blend of different grades of iron ore. Since the quality of iron ore around the world has been diminishing in general, the demand for high grade ore is expected to rise in order to maintain blend quality. This will make demand for iron ore from S11D less sensitive to the vagaries of economic cycles.
Despite its large scale, the project will have a low environmental footprint. Once the S11D mine and plant become operational, water and fuel consumption will reduce drastically, allowing for a steep cut in greenhouse gases emissions, when compared to conventional methods. The processing method to be employed will not only reduce electricity consumption, but also eliminate the generation of tailings which harm the environment. This aspect of the project is crucial because it will allow the company to avoid fines and potential disputes with environmental authorities.
Progress So Far
By the end of 2012, Vale had already finished constructing the access road and was in the process of off-site assembling of mining equipment. The project was 44% complete by the end of May this year, with total realized expenditures of $2.7 billion. The reason that it would take almost three more years to commence production is the construction of supporting infrastructure under a separate project called CLN S11D. Vale needs to carry out the construction of a rail spur, the expansion of the Northern System railway, the acquisition of wagons and locomotives and onshore and offshore expansions at the Ponta da Madeira maritime terminal. Most of the company’s ore is exported via the sea route and China is the largest customer. 
The CLN S11D project is expected to increase the Northern System logistics capacity to 230 million tonnes per year and has an estimated total capital expenditure of $11.4 billion. By the end of May, 8% of the project had been completed.
The success of S11D is crucial to Vale because it has cut down on spending in other projects to focus on it. The mine is also expected to replace the company’s depleted projects and help make up for the decline in ore quality at some other mines.
We have a Trefis price estimate for Vale of $20.Notes: