If it weren’t obvious previously why Cynthia Carroll lost her job as chief executive of Anglo American it became so overnight when Anglo announced a $US4 billion after-tax writedown of the value of its troubled Minas-Rio iron ore project in Brazil.
Like Rio Tinto’s Tom Albanese who resigned under pressure earlier this month it was ultimately a single project that caused the Anglo board to lose faith in Carroll.
For Albanese it was the $US3 billion write-off of the $US4 billion Rio paid for Riversdale Mining and its Mozambique coal project, rather than the $US29 billion of accumulated writedowns in the value of Alcan, that proved the last straw for the Rio board.
For Anglo, it was the cost blowouts and delays in the Minas-Rio project that finally undermined Carroll.
Anglo paid $US5.5 billion in 2008 to acquire the project from Brazilian billionaire Eike Batista and planned to spend another $US3.5 billion developing it. Last night Anglo said it had completed a detailed cost and schedule review of Minas-Rio, whose cost was now projected to increase to $US8.8 billion. The project, which was originally scheduled to produce ore by 2009, is now expected to ship its first ore in 2014.
The project has been plagued by land access problems and a series of injunctions that have frustrated its building of a power transmission line to its beneficiation plant and a 525km slurry pipeline to transport the ore to a port on the Brazilian coast.
The delays meant that it was caught up in the massive wave of cost escalation in the resources sector over the past several years but, unlike the Pilbara iron ore miners and Brazil’s Vale, gained nothing from the spike in the iron ore price to record levels before it tumbled back last year.
The blowouts in cost and time at Minas-Rio loaded Anglo up with debt without generating any return.
The project is a very large one, with a resource of about 5.8 billion tonnes of ore, and Anglo says it will be cost-competitive, within the first quartile of the FOB cash cost curve. It estimates cash costs (excluding any allowance for capital and funding) will average $US30 a tonne over the life of the project.
The failure to execute the massive development as envisaged, largely because, like Rio, Anglo underestimated the cost and time and difficulty of developing the project infrastructure (and, in Rio’s case, the difficulty of convincing the Mozambique government to allow it to barge coal down the Zambezi), forced the Anglo board to act.
Carroll will be replaced by Australian-born Mark Cutifani in April, an appointment that has been widely hailed. Carroll has made it easier for Cutifani by clearing the decks and getting the write-off out of the way before he takes over.
An Anglo echo to Albanese's fall
Much like what happened at Rio Tinto, Anglo American miscalculated the challenges of developing a project in a foreign land. And exactly as at Rio, the chief executive has paid the price.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free