Vale (NYSE:VALE) plans to invest $6 billion in the expansion of its Moatize coal project in Mozambique in a bid to increase the output to 22 million tons from the initially planned 11 million tons. The Moatize project is currently under development and it’s expected that the mine will start production by 2014.  Vale is the world’s largest iron-ore mining company and receives 18 percent of its value from the nickel business. It competes internationally with other mining giants like Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP).
We have a $34 price estimate for Vale, which is around 30% ahead of the market price.
The company sees potential demand for coal shipped overseas via the sea (seaborne market). The project is situated at a strategic location which will drive volumes. Close to 70 percent output from the mine is expected to be coking coal, which is a primary raw material used for producing steel and the remaining output will be thermal coal.
However, to make this project successful, support has to come from the infrastructure setup in the country. As of now, Mozambique’s infrastructure for shipping coal is woeful where miners have to use trucks to transport produce to the ports. The company plans to invest $4.4 billion in construction of a deep-water port at Nacala alongwith a 570 mile railway line that will connect the port to the mine. The port will have an initial capacity of handling 18 million tons, designed specifically to ramp up the capacity with the estimated growth in exports. The company is even considering constructing a 600 MW power plant to supply electricity for the mining operations along with a coal-to-liquid unit at the site.
Vale currently derives more than 50 percent of its value from ferrous minerals that include iron ore, manganese, and pig iron. Iron ore is on the verge of becoming an over supplied mineral as China, which the single largest consumer of iron-ore, plans to build its own iron ore resources, which in turn could hurt the company’s margins going forward. Therefore it makes sense for the company to diversify its mining portfolio even more in order to safeguard its profits and revenues. In a previous note on the company, we highlighted how Vale is moving forward in building its own potash and phosphate rock mining operations to diversify its investment portfolio.Notes: