Miner [Anglo-American], Billions Over Budget, Slogs Ahead in Rural Brazil – by John W. Miller and Paul Kiernan (Wall Street Journal – June 9, 2013)

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CONCEIÇÃO do MATO DENTRO, Brazil—The hills surrounding this isolated rural town contain a rich lode of iron ore and the seeds of one of the biggest cost overruns in mining history.

Anglo American AAL.LN -3.52% PLC is spending $8.8 billion on a massive mine project here—more than three times what it initially projected, and not a single ton of iron ore has been mined. The project, conceived by some of the best geologists and engineers in the world and currently employing 12,000, is three years behind schedule.

“I think all the time about what we could have done differently,” Cynthia Carroll said in an interview. Mrs. Carroll, who still believes the mine will be profitable, stepped down as CEO in April after shareholders complained about cost overruns, especially at this mine, baptized Minas Rio.

Anglo American knew mining iron ore under cattle farms crisscrossed by strips of red dirt roads—then processing and shipping it—would be a logistical challenge. And it isn’t the only one under pressure. With coastal areas tapped out, global mining companies are having to dig in increasingly remote areas, often in countries with unstable currencies, volatile economies, and uncertain legal systems.

The main reason for their big bets: Strong global demand from China. Swift urbanization has propelled the country’s increasingly voracious demand for steel, and its main ingredient, iron ore. In 2012, China imported 745.5 million tons—almost six times more than it imported a decade ago. That has caused prices to more than triple since Anglo American bought Minas Rio. However, China’s economy has cooled a bit, and economists now expect steel demand to grow 2% to 3% in 2013, compared to around 10% annually between 2006 and 2011. That’s impacting iron ore prices, which have fallen to around $111 a ton from a high this year of $159 in February.

Anglo American has doubled down and vowed to plow ahead at every bump in the road. “We still believe in a world where iron ore [mining] can be profitable at a cost of 50 dollars per ton,” says Chief Executive Officer Mark Cutifani, who took over Anglo American in April.

The project journey has been a tough learning curve. Among other things, Anglo American didn’t fully anticipate the extent of negotiations with dozens of Brazilian agencies, mayors, and local prosecutors, and close to 1,600 landowners in 32 small towns. Nor did it expect to do battle over a blind albino spider. Last year alone, three legal challenges including the spider battle, cost the company $1 billion in delays, legal fees and research.

Brazilian secretary of mining Carlos Nogueira da Costa, the country’s third-ranked mining official, says he could have provided some warning. “Anglo American never checked with us before it made the first investment to understand how the permitting process would work,” says Mr. Costa, who recalls learning about the acquisition in the newspapers while working for the ministry in 2007.

Mrs. Carroll said Brazil’s policies and regulations have been constantly evolving and that she isn’t sure she could have anticipated some of the problems.

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