Minefield: The boys to Brazil

PORTFOLIO POINT: A growing list of Australian mining companies are heading to Brazil. Good geology, easier regulation and lower costs are proving very attractive.

Brazil has never been a significant investment destination for Australian companies, until now. What started as a trickle has become a rush as an increasing number of small miners make the move, lured by easier government regulation and attractive geology.

Gold and iron ore are the primary focus for ASX-listed stocks, but nickel, copper and phosphate are also on the menu.

First clue that something interesting was happening in Brazil came last year when Beadell Resources (BDR) featured in a report here (Twin turbo mining, February 7, 2011).

Lacking even a modest profile at home, Beadell struck it rich in Brazil through the discovery of a unique orebody that yielded both gold and iron ore. Back then, the Tucano prospect was a novelty, but heading towards development, lifting Beadell’s shares from 25c to 76c in just six months, with the last price valuing the stock at $475 million.

Today, Beadell is trading at 97c, a price which values the company (after an increase in the number of issued shares) at $702 million, on its way for a place in the ASX top 200 but still without many Australian investors aware of its success.

Mirabela Nickel (MBN) is another Australian company making its name in Brazil, though it has not had such a smooth ride, burdened by a low nickel price and difficulties in achieving production targets at its Santa Rica nickel mine.

However, over the past few weeks the rising nickel price, falling costs and higher output, has lifted Mirabela from 25c in early September to 44c – a 76% rise in little more than a month.

A combination of factors are conspiring to lift the profile of Brazil in the Australian mining community, including:

• Substantially lower tax and royalty rates compared with Australia.
• Mining-friendly state and federal governments.
• Labour costs that are 50% lower than in Australia, plus cheaper power and water.
• A strong domestic economy growing at about the same pace as Australia, 3% a year.
• Much bigger population (191 million) and ranking Brazil as the world’s fifth-biggest economy.
• A lower-risk profile compared with many African countries that have been the traditional destination for many small Australian miners.
• Easier access to railway and port services as well as domestic steel mills for iron ore.
• Direct access to North American and European capital markets.

Some of these points also apply to other South American countries, which have proved attractive to Australian miners – especially those along the spine of the intensely-mineralised Andes mountains which are home to the world’s biggest copper mines.

Chile, Peru, and southern Argentina have been the focus of Australians working in South America, with Brazil largely overlooked.

The elevation of Brazil to the ranking of a prime investment destination has been best explained by one man who has directed a portion of his company’s spare capital into a Brazilian iron ore joint venture.

Mike Young, chief executive of BC Iron (BCI), one of the small iron ore miners in WA’s Pilbara region, has paid $6 million for an initial 5% stake in another ASX-listed company, Cleveland Mining (CDG), which has a small Brazilian gold mine nearing production and a bigger iron ore prospect.

Until BC made the investment in Cleveland it had been focused solely on Australia, particularly on a 50:50 joint venture it has with Fortescue Metals Group, a deal that provided all-important access to rail and port services.

Late last week, Young explained why he had decided to invest in Brazil, telling a newspaper that: “Once you step outside of the joint venture with Fortescue, I personally don’t see a lot of opportunity in Australia for iron ore.

“It’s very hard to get infrastructure and the future infrastructure which is being planned is going to be difficult and it’s going to be expensive.

“The way they are currently mining in Brazil, particularly small operations ... is very similar to the way we used to mine here in Australia in the 1980s.”

Because it is virgin territory for most Australian investors, Brazil-focused mining companies should be approached with care. But as an introduction here is a selection of stocks with diverse interests, which should be interesting to watch.

There are no specific investment recommendations, just an observation that a trend appears to be developing which is attracting Australian miners to Brazil. A trend, if spotted early, can be an investor’s best friend.

• Beadell (BDR). It has successfully sold the iron ore in the Tucano mine to a domestic Brazilian steel mill and this month starts processing gold ore with news of the first “bar” expected in a matter of days. Over the past 12 months the stock has traded between 52c and $1.02, with that peak reached last Friday. At its latest price of 97c the stock is valued at $702 million.
• Mirabela Nickel (MBN). It has survived a difficult start with management forecasting annual production of between 19,000 and 21,000 tonnes of nickel at a cash cost of less than US$6 a pound, a reasonably comfortable level now that the nickel price has climbed back over US$8/lb. Over the past 12 months, Mirabela has traded between 21.5c and $1.64 with the latest price of 44c valuing the stock at $381 million.
• Crusader Resources (CAS). It plans to start its life in Brazil as a small iron ore producer from its Posse project, which will deliver material into the domestic market. This will be followed by its flagship Borborema gold project, which is planned to produce around 180,000 ounces of gold a year over an initial nine years at a cost of US$558 an ounce. Over the past 12 months, Crusader shares have traded between 35c and $1.32 with most recent trades at 52.5c, valuing the company at $66 million.
• Centaurus (CTM). It is another ASX-listed stock with a Brazilian iron ore project and new-found support from an existing Australian iron ore miner. The primary focus of Centaurus is the Jambreiro project, which is planned to start producing at a rate of 2 million tonnes of iron ore a year, sold to local steel mills, and followed by an export phase. Backing Centaurus is Atlas Iron, which outlaid $18.7 million for a 20% stake in the Brazilian as part of a policy to diversify away from Australia. Over the past 12 months, Centaurus has traded between 25c and 75c, with recent trades at 26c, close the low point and valuing the stock at $50 million.
• Avanco (AVB). It has acquired the Pedra Branca copper and gold project in Brazil from the mining major, Xstrata. The company already has a substantial resource of both metal, 550,000 tonnes of copper and 445,000 ounces of gold, close to the targets it has set to proceed with development. Over the past 12 months, Avanco shares have traded between 4.8c and 12.5c with latest trades at 9c, valuing the stock at $100 million.

Other interesting Australian companies calling Brazil home include: South American Ferro Metals (SFZ), which has a small iron ore mine in production. Aguia (AGR) which is exploring for potash and phosphate, and Strickland Resources (STK), which recently acquired a gold-project developer Orinoco (OGX), which is also ASX-listed.