Usiminas Bid for Brazilian Port Seen Quadrupling Iron Ore: Freight Markets

Usinas Siderurgicas de Minas Gerais SA (USIM5), the Brazilian steelmaker aiming to quadruple its iron-ore production, stands to gain the most from an auction for a $1 billion port terminal to be built in Rio de Janeiro state.

The state government will take bids later this year for a lease on the so-called Area do Meio, an area equal to about 30 soccer fields, from companies that want to ship the ore, Brazil’s top export. Usiminas, as the company is known, has confirmed it will participate and has the most ambitious plans to boost ore output of any publicly traded company that doesn’t have a dedicated iron-ore port built or under construction.

Other bidders may include Cia. Siderurgica Nacional SA, the third-biggest Brazilian steelmaker by output, and MMX Mineracao & Metalicos SA, the iron-ore producer controlled by Brazilian billionaire Eike Batista. If Usiminas loses, it may have to rely on the Sudeste port MMX is building, which would hurt the outlook for the Belo Horizonte-based company, said Daniella Maia Gomes, an analyst in Rio de Janeiro at brokerage Ativa SA CTV.

“If they don’t get a lasting solution for the long term, there could be a negative revision from us,” said Gomes, who has a neutral rating on the company’s preferred shares, the most commonly traded stock. “This topic is very important for Usiminas. They have a program to increase production and they still don’t have an export port.”

Usiminas shares have fallen 42 percent in the past year as rising raw-material costs, a stronger real and lower prices hurt profits, leading investors to sell Brazilian steel stocks. Gerdau SA (GGBR4), Latin America’s biggest steelmaker, dropped 43 percent, while the Brazilian benchmark Bovespa index lost 18 percent in the same period.
Rules for Bidding

Cia. Docas do Rio de Janeiro, Rio’s port authority, aims to announce the bidding rules in September, Docas President Jorge Luiz de Mello told reporters on Aug. 19. Determining a winner will take four to six months, he said. The area of 245,400 square meters in the Port of Itaguai will be leased to a private dry-bulk operator to move 25 million metric tons a year, with capacity to expand to 44 million.

The lease, for 25 years with an option to renew for 25 more, will go to the highest bidder that also demonstrates the technical and financial capacity to build and operate the port terminal, Mello said.

Four or five companies already have expressed interest, Mello said, adding that the auction is “anxiously awaited” and he expects it to be “hotly disputed.”
Rising Ore Prices

Companies with mines in the southeastern state of Minas Gerais likely will lead the bidding, Jonathan Brandt, an HSBC Holdings Plc equity analyst in New York, said in a telephone interview. Ore prices on global markets have almost doubled in the past two years on growing demand from China, the biggest consumer of the steel-making ingredient.

The price of ore with 62 percent iron content delivered to China rose 0.1 percent to $177.9 a metric ton yesterday, according to the Steel Index.

Brazil, the second-largest exporter after Australia, will boost its output to 771.5 million metric tons in 2015 from 372 million in 2010, according to estimates from the Brazilian Mining Institute, an industry group. Last year, about 84 percent of Brazil’s ore output was exported for a total of $29 billion, with China buying 45 percent of the shipments, according to figures from the institute.

Winning the lease could be a “game changer” for Usiminas because they need the access the most, Brandt said, adding that not having a port is “a key hurdle they have to overcome.”
Boost Production

The company, Brazil’s second-largest steel producer by output, is spending 4.1 billion reais ($2.57 billion) to boost ore production to 29 million metric tons by 2015, it said in a statement Nov 13. That would more than quadruple the 6.84 million metric tons produced last year.

Usiminas’s mining unit, Mineracao Usiminas, controls four mines in the Serra Azul region of Minas Gerais. Tokyo-based Sumitomo Corp. bought 30 percent of the unit for $1.93 billion last year. Usiminas exported 526,000 metric tons of ore in 2010, less than 8 percent of its total production, through a terminal in Itaguai operated by Cia. Siderurgica Nacional next to the Area do Meio.

“I can guarantee that we are going to be part of this auction, certainly with partners, because our level of export of iron ore is going to be above 20 million tons,” Usiminas Chief Executive Officer Wilson Brumer said on an Aug. 2 conference call with analysts. He mentioned ArcelorMittal (MT) as a possible partner. The Luxembourg-based steelmaker declined to comment through an external public relations firm working for it in Brazil.
‘Backup Area’

Usiminas also owns a tract of land on the same peninsula as the Area do Meio that isn’t usable as a port but could serve as a “backup area,” Brumer said.

The company is boosting ore production at a time when selling the raw material is more profitable than steelmaking. Margins for the company’s steel business fell to an average of 6 percent in the first half of the year, compared with 18 percent a year ago. Profit margins for its mining business were 66 percent in the first half of 2011, company filings show.

The company’s iron-ore project, along with a “good port solution,” could be worth $5 billion to $6 billion, Raphael Biderman, an equity analyst at Banco Bradesco BBI SA in Sao Paulo, said in a note to clients yesterday. “The market cap of Usiminas is $7.8 billion, so this signifies relevant value creation for the stock,” he wrote.
Less Lucrative

Without enough export capacity, the company will have to sell domestically, a limited and less-lucrative market because some steelmakers already are mining their own ore, said Rafael Weber, an equity analyst at brokerage Geracao Futuro Corretora.

“Iron ore is worth much less if you don’t have a port these days,” Weber said in a phone interview from Porto Alegre.

Mello estimates a new harbor will take three to four years to build, so Usiminas has found a temporary solution. The company said Feb. 14 it signed a deal with Rio de Janeiro-based MMX to export iron ore through its Sudeste port for five years, beginning with 3 million metric tons in 2012 and reaching 12 million by 2015. Mineracao Usiminas can extend the deal for as many as five more years and will pay $12.63 per metric ton shipped, MMX said.
Cut Costs

Access to a dedicated terminal would cut costs. MMX will have operating expenses at Sudeste of about $2 per loaded iron ore ton, JPMorgan Chase & Co. said in a July 26 report.

Sao Paulo-based Cia. Siderurgica Nacional may consider bidding for the lease once the port authority releases the rules, Davi Emery Cade, CSN’s ports director, said in an Aug. 3 analyst call. CSN has plans to expand output to 89 million metric tons, according to the company’s website.

MMX also will evaluate whether to bid once it has seen the rules, Chief Executive Officer Roger Downey said in an Aug. 10 interview. “We will look at the terms, but naturally we’re interested,” he said.

Another possible bidder is privately held Ferrous Resources Ltd., said an official at the Belo Horizonte, Brazil-based company, who declined to be named, citing corporate policy.

Rio de Janeiro-based Vale SA (VALE5), the world’s largest iron-ore producer, won’t take part in the auction because it is focusing on expanding existing ports, Eduardo Bartolomeo, the company’s head of integrated bulk operations, said in an e-mailed statement on Aug. 18.

The bidding for the Area do Meio “will be a fight, and that’s positive because it will spur efficiency and more- appropriate prices,” Adriano Pires, head of the Rio-based research group Brazilian Center for Infrastructure, said in a phone interview. “Apart from unblocking the system and allowing more exports, it will boost competition among the miners.”