Rigid environmental and licensing regulations in Brazil could limit Vale's (VALE) ability to expand production and develop new mines in its homeland. This will definitely hurt Vale's stock along with its rivals such as BHP Billiton (BHP), Freeport McMoRan (FCX), Rio Tinto (RIO), and Newmont Mining (NEM), though they are not heavily exposed to Brazil.
The new regulations strike right at the heart of Vale's core business of iron mining, but they could definitely hurt its other operations in Brazil, such as copper and rare earth mining. Bloomberg reported that Vale has had to cut its projections for 2015 in iron ore shipments from Brazil by 10%. The company has also had to delay the $8 billion expansion of the Carajas Serr Sul mine.
The biggest problem for Vale is having is getting permits to expand its mines. The company's Chief Financial Officer, Tito Martins, told reporters that Vale has only been able to get one permit to expand operations in the mineral-rich Carajas region in the last ten years.
Lawsuits Make it Almost Impossible to Expand Mining in Brazil
At least one other major mining company, Anglo American (AAUKY.PK), has had a project hobbled by Brazilian regulators. Anglo was ordered to suspend construction at its Minas Rio iron mine by bureaucrats six times because of allegations it had violated laws designed to protect the region's artistic and cultural inheritance. Anglo has also had trouble getting permits for basic infrastructure, such as power lines at the mine. The costs at Minas Rio have nearly doubled because of the delays.
Part of the reason why the delays are so costly is that Brazilian prosecutors routinely sue miners in local courts. The courts have the power to halt projects and impose strict terms on operations. If a miner agrees to a settlement to end such a lawsuit, the prosecutor has the ability to file a claim that it is violating the settlement terms at any time. This can lead to further delays and higher costs.
It goes without saying that this bureaucratic process puts local politicians and officials in a perfect position to shake down miners. If mining executives don't fork over the bribe money, they get sued for violating the regulations and are forced to shut down.
What this means is that nobody can profitability mine in Brazil anymore. Stock value for companies with a lot of operations in Brazil will probably fall because of this new environment. The only thing that would help Brazilian mining would be the election of a new mining- friendly government. If such a government ever gets elected, expect Anglo and Vale's stocks value to rise.
Faced with such red tape at home, Vale will probably look elsewhere and expand its operations in other nations. That probably means the company will increase its investment in Australia and Africa where the political climate towards miners is friendlier. Vale may also expand its nickel business, which is not dependent on Brazilian production.
The worst case scenario in Brazil would be that Vale or another big operator would be forced to write off a big project that it had made a major investment in because bureaucrats would not let them mine. That would definitely impact a company's cash flow and earnings per share.
Newmont Delays Minas Conga to 2017
So far, this has not happened yet in Brazil, but it could happen soon in Peru, where Newmont is reevaluating its $4.8 billion Minas Conga gold and copper project. Minas Conga has been delayed because of protests about water quality. On May 25, 2012, Newmont sent out a press release that announced the start at Conga has been pushed back to 2017 because of the water delays. Newmont and its partner, Compania de Minas Buenaventura SA (BVN), had hoped to start mining there in 2014 or 2015.
This delay will definitely affect Newmont and Buenaventura's stock value because they made a major investment in Minas Conga. So far, they haven't had to write it off yet, but they could. If Newmont has to write off Minas Conga, expect a big drop in its stock.
There is a silver lining in this cloud for miners with large operations outside Brazil, such as Billiton and Rio Tinto. In the long run, limitations on Brazilian development could cause mineral prices to go up, which would increase mining stock value. Unfortunately, that is not likely to happen any time soon because of falling Chinese demand and the growing glut of some metals, such as copper, in the market.
Regulations and Politics Could be Smokescreen to Cover Up Lower Demand for Metals
It should be noted here that companies like Newmont and Vale could be using bureaucratic regulation and political opposition as a smokescreen to hide the real reason they are cutting production -: the lousy global economy. The global economic downturn caused by the European debt crisis has hit China. The miners may not want to admit that demand for their minerals is falling, so they're going to have to cut production.
By claiming that they are delaying projects because of regulations or opposition, the miners could be trying to protect their stock value. It remains to be seen if the markets would accept this ruse or not. If they see through it, the result would be a collapse in mining stock values.
The level of manufacturing production in China, the world's biggest user of minerals and metals, has been falling for seven months straight. The purchasing manager's index, compiled by HSBC Holdings Plc and Markit Economics, indicates that manufacturing in China will could decline by .6% in May. The index has been falling since November 2011.
The situation in China is now so bad that the government there is planning a "stimulus package." Forbes reported that China's highest governing body, the State Council, could take such measures as cutting state taxes in an attempt to stimulate the economy.
Several large infrastructure projects, including new railroad lines and "IT-related projects" which would probably be fiber optic cables or phone lines, are planned. If it is implemented, this could be good news for copper miners because it could increase the demand for copper.
The problem is that the increased demand may not make up for the drop in demand from private sector customers. Other economic indicators in China point to falling production. Export companies are cutting back on borrowing, which means they're limiting expansion and production because they expect less demand. There is also no indication that Chinese consumer spending will make up for the lack of exports.
If this is the beginning of a Chinese economic slump, it spells very bad news for mining stocks. It was China's almost insatiable demand for minerals that drove those stocks and prices for commodities such as commodities to new heights in recent years. Without Chinese demand, miners such as Freeport McMoRan, Newmont, Anglo-American, Southern Copper (SCCO), and Billiton, will not be able to pay for all the expansion they have undertaken in recent years.
A major cutback in Chinese production would force them to start shutting down mines and writing off expansion projects. If that happens, there would be major losses and collapses in stock value. Freeport, which has committed itself to major expansion at its Grasberg Mine and its molybdenum operations, would be extremely vulnerable here.
It is also hard to see how this stimulus would help long-term demand for minerals. China's economy is based on the export of manufactured products, and for that to grow, it needs robust demand in global markets. That does not seem to be happening because of the debt crisis in Europe.
Expect the Chinese economy and manufacturing to keep contracting for the foreseeable future. Expect mining company stock values, earnings per share, and dividends to keep contracting for the foreseeable future as well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
