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Vale's Simandou Project Shelved

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Vale S.A. (VALE - Free Report) expressed its inability to continue working on the much sought after Simandou project, citing the Guinea government’s inordinate delay as a reason. Although the company still remains interested in working on the site of the world's largest untapped deposit of iron ore, uncertainty associated with the delay from the government to review the mining contract has given rise to serious misgivings regarding the future of the project.  

The company stopped working on the project since last spring; and continued with halting operations on the Zogota project months later. Vale is developing both the projects along with BSGR, the mining arm of Israeli entrepreneur Beny Steinmetz's business conglomerate. The Guinea government is expecting the review to be complete by the first quarter of 2013, which will decide the fate of both the shelved projects.

Initially, the company had proposed to export iron ore through Liberia, a much shorter route, in lieu of building a 700KMs rail line. Unlike its competitor, Rio Tinto plc (RIO - Free Report) , which is exporting iron ore through Guinea, the shorter route would have helped the company to reduce the project costs. However, the proposal has been rejected by the government and the operations will be carried on through Guinea, thus increasing the project costs which are already estimated around $10 billion.

The project was awarded to Vale after it was withdrawn from Rio Tinto on the grounds of slow movement in 2008. The delay in operations for the Simandou project will pose a certain threat to the company in the highly competitive demand and weaker iron ore price scenario.

Also, the company has plans of dissociating itself from its non-core assets and lowering its spending in the year 2013 by almost a quarter. The first non-core asset to be divested is the oil and gas division, bought to hedge when the energy prices were rising. The company is expected to soon divest it since it no longer serves the purpose of purchase.

Vale also plans to boost its production by 20-25 million tons after it reaches 400 million metric tons in 2017. However, the company projects a decline in the output for the third consecutive year in 2013. Vale is cutting down its investments in non-performing assets and suspending projects not deemed viable for the company’s growth.

The company is also in discussion with the Chinese government over a port ban on its gigantic 400,000 deadweight tonne Valemax ships, which is expected to come to an agreement in 2013. The use of these vessels will save the company $6 per tonne in shipping costs, compared to the existing ones with a capacity of 180,000 to 200,000 tonnes.

Vale S.A. is one of the world’s largest producers and exporters of iron ore and pellets. Vale holds a Zacks #3 Rank, which translates into a short-term (1-3 months) 'Hold' rating. The company keeps improving its competitiveness against rival companies, such as Rio Tinto, holding a Zacks #3 Rank and BHP Billiton Ltd. (BHP - Free Report) holding a Zacks #4 Rank implying a 'Sell' rating.

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