Iron in the heart of Brazil

There was only one rickety bridge into the village in the Amazon, and Mozart Litwinski rigged it with enough explosives to blow it sky high.

He was badly outnumbered and was preparing for the worst. He lashed a highpressure hose to a giant tank to create an improvised water cannon. Tractors were used as roadblocks.

On the other side thousands of gold prospectors gathered, angry after being turfed out of the area by Vale, the Brazilian mining giant. They had already taken an army major hostage and were threatening to overrun the town.

“I was only 24 years old, but I was superintendent of the mine,” said Litwinski. “We had 2,000 people there. They were scared, coming to me crying. I told the governor, ‘I’m going to blow the bridge if they cross.’ We had the detonator ready. It was a very tense 10 days.”

That was 32 years ago. Recounting the story in a spartan office in central Belo Horizonte, a city of 5m far from his daring exploits in the Amazon, he can afford to laugh. Litwinski built Carajas, the scene of the showdown, into the biggest iron-ore mine in the world. He became head of mining at Vale before adding a string of other top industry jobs, including adviser to Rio Tinto, the London-listed mining group. “I had made all my mistakes by then,” he said. “What we are doing now is easy by comparison.”

At 56, Litwinski is trying to repeat his glories at Ferrous Resources, an iron-ore newcomer where he is chief executive.

You may not have heard of Ferrous, but you will. Created three years ago by Gordon Toll, the London-based mining impresario and former chairman of Fortescue Metals, the company is sizing up a float that is likely to value it at several billion pounds and give it a place in the FTSE 100. How much it is worth is hard to say as today it produces nothing.

What it does have is the rights to vast swathes of verdant hills in Brazil’s iron quadrangle, a region of extraordinary mineral wealth where the Portuguese first found gold in the 17th century. Diamonds followed, then less precious metals such as manganese.

Today, however, it is iron country. The region, 2,100km south of Carajas, produces more ore, the basic ingredient of steel, than anywhere except for western Australia. There’s a good chance that your car door or your bicycle frame started life as a shovelful of earth there.

Most of the land is in the hands of the likes of Vale, Rio Tinto and CSN, the state steel group, but Litwinski thinks there is room for a new juggernaut on the block. He has a prediction: “We will be one of the top five iron-ore producers within six or seven years.”

It’s a remarkable claim. If nothing else, Ferrous’s timing is fortuitous. China has surprised even its biggest cheerleaders with the way it has shrugged off the global recession and resumed its breakneck growth. Industry is humming, the middle class is growing, villagers are moving to the cities. They all want cars and fridges — and that means steel.

Today China is responsible for half the world’s steel output — 568m tonnes — but relies on foreign miners for three-quarters of the iron ore to produce it.

Suppliers are raking it in. Indeed, Vale is leading an effort to force through an 80% increase in ore prices and end the 40-year-old regime under which the big steelmakers negotiate a benchmark price once a year. Suppliers want the market to determine the price, which they think is going in only one direction: up.

“We’re talking to the Chinese steel mills, the Japanese, Koreans, Middle East investors. A company with our fundamentals is interesting to them because toward the end of this year and into next year, they see the [ore] shortage coming,” said Litwinski said. “But China is the main market.”

BOB GRAHAM surveys a towering hill with a giant red gash down its face. “All of that will come down,” said Graham, a Ferrous director and former head of Rio Tinto Brazil, pointing at the peak. “That hill will become a hole. There’s enough production there for about 10 to 15 years.”

The hill in question is Esperanca, left idle a few years ago after its owner went bankrupt. A local family snapped it up and waited for someone with the cash, and the inclination, to take it off their hands.

Toll came knocking in the summer of 2007. Esperanca was the first of four properties the nascent group bought over four months.

“We put everyone [the sellers] in a room, and said, ‘This is what we’re offering’,” said Andre Simao, finance chief. “Not long before we were still a Powerpoint company, a sheet of paper and an Isle of Man registration.”

Ferrous paid cash and had to give shares to some selling families to consolidate its holdings but it got what it wanted. The spree came amid a wider land grab in the Brazilian hills. Asian steelmakers, worried about a supply crunch, have rushed in and, in some cases, paid over the odds. “There’s not much ground left,” said Graham. “It’s pretty much all spoken for.”

What Ferrous didn’t know, though, was how much iron was locked inside its new property, so it started drilling. Three years and 75 km of drill cores later, the company can claim more than 4.5 billion tonnes of verified reserves. This is the basis for Litwinski’s confidence.

Even so, it is hard to envisage how Ferrous will turn its portfolio of hills into, well, dust. You do not have to look far for an example. Viga, a stretch of untouched ridgeline that is the company’s prize asset, sits next to Casa de Pedra, an enormous bowl that produces 20m tonnes of iron ore a year, nearly twice Britain’s annual intake.

Miners started hollowing out the mountain in the 1940s but CSN, its current owner, said it has decades more of ore to give. Looking out from Viga’s peak, Graham said: “That’s what we want to do.”

Ferrous’s plan is ambitious. It needs $2.7 billion (£1.8 billion) for its first phase of growth, which includes starting production at Viga and building a 400km pipeline to send a slurry of finely ground ore to a port that today is nothing more than a stretch of sand.

By 2013, the company expects to be producing 25m tonnes a year, and 50m by 2017.

Hence the need for cash. Ferrous insists it is under no pressure to go public. It may also bring in a strategic investor. JP Morgan Cazenove has been hired to lead the effort.

“We tried to go public in the first quarter of 2008 but then the recession happened,” Simao said. “We’ve been waiting for the market to return. But we have $500m in cash and no debt.”

He added: “We’re in a good position and would rather raise the money now, when we don’t desperately need it. A [stock-market float] is only one option.”

Whether its backers, who have to date handed the firm $1.3 billion, agree is another matter. Harbinger Capital, the hedge fund run by Philip Falcone, who made millions betting that Britain’s housing market would crash, is the biggest with 26%.

TPG, the buyout giant, has 8%, as does Sentient Group, a Cayman Islands investment fund. Two families that sold land to Ferrous hold 9% and 8%. The top dozen managers, including Toll and Litwinski, share 6% between them.

There has been speculation that the company could be worth $4 billion when it floats. Simao said that number was “inappropriate”. It seems Ferrous has a higher number in mind. When it last raised cash in the summer of 2008, it was given a value of $3.5 billion. But Simao declined to elaborate.

THE most pressing concern now is getting the sign-off from Brazil’s stringent environment ministry.

Mining is not a pretty business, and the area round Belo Horizonte bears the scars of centuries of prospecting and production.

Slate grey sections of rock stand out amid the overgrown hillsides. It seems that everything from road signs to rooftops is stained red from the clay stirred up by the activity. The tailings ponds, where the waste water from the separation process is drained, are particularly unlovely. The one for Casa de Pedra is a vast lake of grey-red stagnant water that abuts the town.

Litwinski is confident that Ferrous’s plans will go through. “There are 24,000km of pipelines in Brazil. Ours is 400km,” he said.

“We have been working closely with the ministry and we have a lot of guys here from CSN, from Vale. They have white hair, they have done it all before. The governor has made our project a top priority for the state.”

After all, he has done harder things before. “When we started at Carajas they said, ‘The jungle is going to swallow you and Vale.’ That didn’t happen.”