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Brazil Mining Report Q1 2012 Published: February 2012

No. of Pages: 74

Price:US$530

Domestic and foreign demand for mineral resources will spur a period of rapid growth in Brazil's mining sector, as investment exploits substantial untapped reserves. Iron ore will remain by far the primary driver of Brazilian mining growth, although base metals and gold will provide additional opportunities for sector development. Infrastructure investments in the run up to the World Cup and Olympics will allow more efficient and cost effective extraction and transport of mineral resources. We forecast that Brazil's mining industry will contract in 2012, primarily on the back of moderated iron ore prices. We expect the industry value to reach US$66.6bn in 2015, up from US$55.4bn in 2011. Driven by strong global demand for iron ore at home and abroad, we forecast average annual industry growth of 9.0% between 2011 and 2015. Continued Growth In Iron Ore Production Brazilian iron ore miner Vale will continue to dominate the industry. The company's performance in 2011 supports our view that the iron ore is driving sector growth. While concerns remain over slowing Chinese economic growth, we expect China will be the largest importer of Brazilian iron ore for the foreseeable future. We forecast total iron ore output will reach 638.5mnt (mn tonnes) by 2015, as companies bring multiple large projects online. Average growth over our 2011-2015 forecast period is expected to be an impressive 11.6% year-on-year (y-o-y). Vale's H111 iron ore production was 151.8mnt, a y-o-y increase of 4.7%, as it increased output from the Carajás mines in Brazil. As production at Carajás continues to ramp up, we expect Vale to produce 322mnt in 2011, 4.3% higher than 2010 levels. Iron ore will be the mainstay of the company's growth, with the Carajás Serra Sul mine in Brazil expected to reach 90mntpa (mn tonnes per annum) in 2014. Regulatory Environment While the administration of President Dilma Rousseff is committed to continuing her predecessor's probusiness policies, discussions of reforming Brazil's mining tax laws continue. The government is in the process of approving revisions to the mining tax and industry regulatory bodies, although details and a timeline for final approval remain unknown. Government intervention in the mining sector remains a threat, especially in light of the government's ownership stake in Vale and its recent pressure to change company management. As we have seen rising mining taxes in Brazil's regional competitors, Peru and Chile, we expect higher taxes to be a theme in Brazil in 2012. We believe the new structure currently being considered will increase taxes from 2% to 4% of company revenues. This compares with revised tax schemes in Peru and Chile where mining companies are taxed on operating profits in order to remain competitive. However, we do not expect this would make Brazil significantly less competitive relative to its regional peers, as the 4% rate is not overly burdensome. Government efforts to increase contributions from the mining sector are in line with a recurring global theme we have seen of late, as countries attempt to benefit from elevated metal prices and attractive long-term market fundamentals. Key Players Several domestic Brazilian companies dominate the mining sector. Most notable is global diversified miner Vale, which operates in 14 Brazilian states and is expanding its presence internationally. Vale is also Brazil's largest logistics operator with an extensive network of railroad and ports. Other significant Brazilian companies include Votorantim Group, Mineração Rio do Norte and Companhia Siderúrgica Nacional. Although large diversified global miners such as BHP Billiton and Rio Tinto operate in Brazil, they are not major players in the sector. That said Anglo American is developing several nickel mine projects that will substantially boost its market share. Key international firms include US-based


Jaguar Mining, which explores and extracts gold in Minas Gerais state and Australian company, Mirabela Nickel which operates the Santa Rita nickel sulphide mine in Bahia state. Brazil Mining Industry Table of Content Executive Summary . 5 SWOT Analysis 7 Brazil Political SWOT . 7 Brazil Economic SWOT ... 7 Brazil Business Environment SWOT 8 Global Mining Outlook .. 9 Table: Recent Tax Increases 12 Table: Largest Coal Projects 13 Table: Frontier Mining Projects 14 Industry Trends and Developments 15 Table: Key Mining Investments . 17 Table: Brazil's Mining Industry, 2008-2015 . 18 Business Environment 19 Mining Business Environment Ratings 19 Table: Americas Mining Business Environment Ratings ... 19 Chile . 20 United States 20 Mexico ... 20 Canada .. 21 Brazil 21 Peru .. 22 Argentina 22 Brazil’s Business Environment . 23 Table: BMI’s Business And Operation Risk Ratings 23 Table: BMI’s Legal Framework Rating ... 24 Table: Labour Force Quality 27 Table: Foreign Direct Investment Inflows Into Selected Latin American Countries, 2006-2008 ... 28 Table: BMI’s Trade And Investment Ratings 29 Table: Brazil’s Top Export Destinations, 2003-2009 (US$mn) ... 30 Political Outlook 33 Domestic Politics .. 33 Long-Term Political Outlook 35 Industry Forecast Scenario ... 39 Iron Ore . 39 Table: Key Iron Ore Mining Investments . 40 Table: Brazil's Iron Ore Output, 2008-2015 . 41 Zinc ... 41 Table: Potential Expansion Site 42 Table: Brazil’s Zinc Production, 2008-2015 . 43 Nickel 43 Table: Brazil’s Key Nickel Projects 44 Table: Brazil’s Nickel Production, 2008-2015 ... 44


Bauxite ... 45 Brazil Mining Report Q1 2012 Š Business Monitor International Ltd Page 4 Table: Main Bauxite Expansion Plans 46 Table: Brazil's Bauxite Production, 2008-2015 . 47 Tin 47 Table: Brazil's Tin Production, 2008-2015 ... 49 Competitive Landscape ... 50 Table: Key Players In Brazil's Mining Industry . 51 Company Profiles ... 52 Alcoa Inc 52 Jaguar Mining . 54 Mirabela Nickel 56 Vale ... 58 Commodities Forecast 60 Copper ... 60 Aluminium ... 61 Lead .. 62 Nickel 63 Tin 64 Zinc ... 65 Global Assumptions ... 66 Table: Global Assumptions, 2009-2015 ... 66 Table: Global And Regional Real GDP Growth, 2010-2013 (% y-o-y) . 67 Table: Selected Developed Market Exchange Rates, 2010-2013 (average) 67 Table: Selected Emerging Market Exchange Rates, 2010-2013 (average) . 67 Developed States ... 68 Table: Developed States Real GDP Growth Forecasts, 2010-2013 (% y-o-y) . 69 Table: Emerging Markets Real GDP Growth Forecasts, 2010-2013 (% y-o-y) 70 Consensus ... 71 Table: Real GDP Growth Consensus Forecasts, 2011-2012 (%chg y-o-y) . 71 Business Environment Ratings Methodology ... 72 Table: Mining Business Environment Indicators 73 Table: Weighting Of Components .. 74


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