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Is Vale Falling Behind Rio Tinto and BHP Billiton?

There has already been much said about how the big three iron ore producers – Rio Tinto (NYSE: RIO  ) , BHP Billiton (NYSE: BHP  ) and Vale (NYSE: VALE  )  -- flooded the market with cheap production and pressured prices. However, there is an important difference between these companies. Rio Tinto and BHP Billiton have already accomplished most of their current projects, but Vale's major iron ore project is still in the development stage. Meanwhile, Rio Tinto and, possibly, BHP Billiton are preparing for the next round of expansions.

Vale has yet to complete its major iron ore project
BHP Billiton successfully completed its iron ore projects and expects to produce 197 million tons of iron ore in the 2014 financial year. In the longer term, the company believes it has a low-cost option to expand its Jimblebar operations in Australia, which will grow its capacity to 260-270 million tons per year.

In turn, Rio Tinto expects to produce 295 million tons of iron ore this year. At the same time, the company is working to expand port, rail, and power infrastructure capacity at Pilbara in Australia to 360 million per year, preparing for the next round of expansion there.

Vale stated that its major iron ore project, S11D in Brazil, was 48% complete at the moment of annual report publishing. The start-up of this project is expected in the second half of 2016. This mine will give a major boost to Vale's production capacity, as it could produce 90 million tons of iron ore per year. Until then, Vale cannot expect major improvements on the production front.

Simandou escapes Vale
While Vale is contributing cash and effort into constructing S11D, other big miners hunt for the Simandou project in Guinea. Rio Tinto has already won the right to develop the southern part of the gigantic mine. The cost to develop blocks 3 and 4 of the project is estimated at $20 billion, but the game is worth the candle. The southern part of this high-grade iron ore mine is capable of producing 100 million tons per year and could bring ore for more than 40 years.

Meanwhile, BHP Billiton seems to be interested in the northern part of the project. The move is logical, as BHP Billiton wants to secure its dominance on the iron ore front for the years ahead. Interestingly, Vale is involved in this issue as well. 

Vale owns a 51% interest in BSG Resources, which holds iron ore exploration permits in blocks 1 and 2 in Simandou North, as well as iron ore concession rights in Zogota of Simandou South. However, the government of Guinea accused VBG of corruption and could revoke all rights that it holds. While Vale is currently not accused of any wrongdoing, the company states it could lose its entire investment in the Simandou project. What's more, Rio Tinto is suing Vale and BSG Resources, accusing them of conspiring to steal Rio Tinto's rights on Simandou. Currently, it seems Vale will not win the Simandou battle even if it wins the lawsuit.

Bottom line
Vale could find itself behind in the longer term as it is losing the battle for the huge, undeveloped iron ore deposit. However, first ore from Simandou is not expected in this decade, and Vale has time to respond. 

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Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

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