May 18, 2012 / 8:33 PM / 6 years ago

UPDATE 2-Vale sees iron ore price rising in 2nd half of 2012

* Long-term iron-ore prices seen between $120-$180 tonne

* Vale reviewing Guinea iron ore, Argentine potash mines

* Tight credit, political demands forcing project reviews

By Jeb Blount

RIO DE JANEIRO, May 18 (Reuters) - Brazilian mining company Vale SA remains confident the price of iron-ore, its main product, will rise in the second half of 2012, relieving environmental and economic pressures on the company which have hurt growth and delayed new projects.

Iron ore fell to its lowest level in nearly six months on Friday, slipping 1.7 percent to $131.30 a tonne. The medium- to long-term price, though, should be in the range of $120 to $180 a tonne, Jose Carlos Martins, Vale’s head of ferrous metals and strategy, said at a lunchtime gathering with reporters in Rio de Janeiro.

Demand for steel remains strong in China, thanks to housing, Vale Chief Financial Officer Tito Martins added. At the same time, declines in prices push higher-cost Chinese producers out of the market, putting a floor under price declines.

Higher prices would help Martins’ boss, Chief Executive Murilo Ferreira, who completes his first year as the company’s leader this month.

“The world is living through one of its most difficult periods for credit, and projects have to be considered carefully,” Ferreira said. “Banks are much more conservative in the way they assess lending.”

Tight credit, sluggish world growth and government demands for a bigger cut of Vale’s iron-ore, copper, nickel, coal and other minerals have forced tighter fiscal discipline on the company, Ferreira said.

Such factors could lead to Vale abandoning the $5 billion Simandou iron-ore project in Guinea, and they have prompted Vale to reevaluate its $5.9 billion Rio Colorado potash project in Argentina, he added. Coal projects in Colombia have not worked out as planned and Vale may sell them.

The Guinea government’s request for a 50 percent stake in all transportation assets, a royalty based on steel rather than iron-ore prices, and a bigger share of the mine itself could make the project “inviable,” Chief Financial Officer Tito Martins said.

“We have to understand that governments all over the world are doing things like this, in Brazil too,” Martins said. “While we respect governments’ right to act, we have to say that their actions may make it impossible for us to make investments.”

Tight credit and a desire to focus on mining activities related to the steel industry have led Vale to put its Colombia coal assets up for sale, said Roger Downey, Vale’s coal chief.

The company is also selling its oil exploration rights in Brazil and banks interested in managing the sale say they already have buyers for the blocks, Jose Carlos Martins said.

Vale faces problems at home similar to those abroad, Tito Martins said. Delays in winning environment licenses have helped Australia pull ahead of Brazil as the world’s largest iron-ore producer.

The government’s effort to collect 30.5 billon reais ($15.25 billion) in back taxes also threatens Vale’s investments abroad. Vale says it already paid the taxes to foreign countries and the attempt by the government to get Vale to pay those taxes amounts to illegal and unfair double taxation.

Vale, along with other companies and industry associations, is disputing the back taxes in Brazil’s highest court.

The company has so-far avoided making any payment because a court injunction says it does not have to until the court rules on whether the tax assessment is legal.

“We’re absolutely confident that the Supreme Court understands the situation and the dimension of our investments,” Ferreira said.

Ferreira added that Vale’s lawyers had assured him the company does not need to post a financial bond with the court, a measure akin to a check the government could cash for the taxes should the company lose the dispute.

Vale would be forced to reduce or cancel investments if it had to pay the bond, he said. Similar problems face all Brazilian companies with operations abroad, he added.

In China, Vale continues to have its giant “Valemax” ships barred from Chinese ports. The ships, some of the biggest afloat, can carry nearly 400,000 tonnes of iron ore and are double or more the size of conventional ore carriers.

While China’s main shipping association see the ships as a threat to their business, Vale sees them as essential to competing against Australian producers who are closer to China, the world’s largest iron ore market.

Vale is working with Chinese steelmakers and port associations to win approval for the Valemaxes to dock at Chinese ports, Jose Carlos Martins said.

The ban on the ships, announced in January, is based on unspecified safety concerns, a situation Ferreira called strange considering that most of the 35 vessels are being built in Chinese shipyards.

Vale also commented on ThyssenKrupp’s decision to sell its two-year-old, 5.2-billion-euro steel mill in Rio de Janeiro. Vale owns 27 percent of the mill but is not involved in its day-to-day operations.

“The company does not want to become a steelmaker but we will protect our fiduciary duties,” Ferreira said, adding that they had no preference over who might buy the mill, whose potential sale was announced on Tuesday.

Vale preferred shares, the company’s most-traded class of stock, rose 2.65 percent to 35.79 reais in Sao Paulo. The Bovespa index of the most-traded Sao Paulo stocks rose 0.88 percent.

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