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19 november 2012

Anglo American's Minas Rio project is set to become the world's most expensive iron ore mine, and looks likely to have played a far bigger role in the resignation of CEO Cynthia Carroll than all other factors, David McKay writes on

The independent, external study commissioned by Anglo's board certainly translates into an indictment of Carroll's project management. Capital expenditure on the project, which is in Brazil, has run from an estimated $3.6bn in 2009 to $5.8bn earlier this year, to a minimum of $8bn today.

SBG Securities estimates $8.8bn will be the total capex figure, equal to $350 per tonne of iron ore. Another analyst has a similar expectation. This would be the most expensively mined iron ore in the world when it is finally delivered, now anticipated to be in 2015 compared to initial forecasts of 2012.

Total investment, including the $6bn purchase price, now tops $14bn and if the independent study sees further headwinds - such as the fact the project is now competing for raw materials with the Fifa World Cup and the Olympic Games that Brazil is hosting between 2014 and 2016 - the project could turn out to be a marathon of expense.

The knock-on effect of the project overrun is hazardous indeed.

Anglo's progressive dividend policy would be under threat certainly as pressure is exerted on cash flow elsewhere in the group. Earlier this week [Nov. 12-13], Kumba Iron Ore, which comprised 44% of Anglo's pretax profits in the last financial year, said earnings would be at least a fifth lower.

In addition, Anglo now has had to sell a stake in its copper assets in Chile held through Anglo American Sur, (although it was paid some cash up front from Codelco), while the Jwaneng slope failure in June has compounded its operational problems. Anglo's net debt was $10bn at the half-year but it's most likely to be higher at the full-year point.

Will this mean other projects will be sidelined while Anglo takes the strain of finally bringing Minas Rio into production? Most possibly.

Another scenario is that the external, independent study recommends Anglo recoup some of its investment in Minas Rio by selling portions of it. This would mean Anglo would lose some of the project's scale and expansion modularity, the initial attraction of the project, but this may provide some relief to shareholders.

"I don't think they'll ever get their money back," says an analyst. "The project looks like it will only come on stream in 2015 so Anglo has missed its window and will find its competing with other low-cost iron ore projects by that time," he says.

Liberum Capital has Anglo on a sell. "While a blow-out was anticipated, the market will still take [today's] news badly given the order of magnitude of the capex increase and limited clarity on just how far above $8bn it will go," it said.