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Mining & Resources

Transport issues kill Rio’s Mozambique dream

6 Aug 2014, by Informa Insights

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Rio Tinto has fessed up, acknowledging for the first time yesterday it is selling its Mozambican coal assets for the bargain-basement price of $50m.

Rio’s planned exit from Mozambique was first flagged by Inside Coal in December so the only real surprise was the price. As one industry observer remarked: “$50m is less than salvage value of plant.”

Earlier in the year it was thought Rio had been asking around $200m for the assets they paid ASX-listed Riversdale $4bn for in 2011. But last year Rio was forced to write off about $3.5bn of the purchase price and axed senior executives Tom Albanese and Doug Ritchie in the process.

The buyer of the assets is International Coal Ventures Private Limited (ICVL), the Indian government-owned investment vehicle tasked with procuring coal assets abroad. Included in the sale to ICVL is Rio’s 65% stake in the operating Benga coal mine, the Zambezi mining agreement and various exploration licences.

Rio is holding on to the Zululand Anthracite Colliery in South Africa and a mineral sands project in Mozambique.

There are several reasons Rio Tinto has been forced into this embarrassing position, a lack of infrastructure being the major issue. The refusal by the Mozambican government to allow Rio to develop its preferred transport route of barging down the Zambezi River to a transshipment area left the company with access to 2mt/yr of capacity on the shared Sena rail line and Beira port, rated at a capacity of 6mt/yr. This it was forced to share with Brazilian major Vale but problems with the Sena line have capped exports and without another viable export option ramping up to the economies of scale required to put any of these projects in the green has not been possible.

Rio’s announcements at the time of the 2011 sale envisaged exports hitting around 10mt/yr by 2013 rather than the 600,000t actually exported by Rio last year.

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Incidentally, those same documents were very clear about risks related to a lack of infrastructure but the barging option was always seen as the magic bullet.

Then there’s been the problem of low yield and the resultant high volumes of thermal coal by-product produced by washing. As a developing country with no major industrial production, Mozambique has no real way of either converting thermal coal into power or using that energy.

As a result, both major producers have built very substantial volumes of thermal coal stockpiles at site.

This has become a serious issue when high oxidation and spontaneous combustion of stockpiles became a risk. To manage this both Rio and Vale are forced to bury, compact and seal some of their thermal coal stocks.

Rio even considered exporting some of the thermal coal to use their take or pay rail capacity to Beira.

This implosion of the economic justification for being in Mozambique in the first place happened to coincide with a nasty decline in the price environment as coking coal prices fell to levels where few global producers were making any profit, let alone an emerging province.

But the Mozambican government should share some of the blame for what has happened to Rio. According to sources, Rio was facing a capital gains tax related to the Riversdale purchase of around $200m, which further soured Rio’s views.

Speaking at last week’s Informa Mozambique Coal conference in Maputo, mineral resources minister Esperanca Bias acknowledged her government needed to do more to assist the developing coal sector. She said the current mining legislation was under review with the aim of making it less ambiguous, particularly around royalties. Reducing infrastructure costs was also highlighted though nothing definitive was outlined as to how this might be achieved.

At present, government-owned CFM gets $18 for every tonne of coal transported on the Sena line, a significant burden on FOB costs.

At the same conference, Eduardo Alexandre, national director of mines, said the planned production for Mozambique coal was forecast to ramp up from 7mt in 2013 (3mt coking, 4mt thermal) to 14.4mt in 2014 (13.6mt coking, 7.8mt thermal) from existing mines. By 2025 on current plans this will top 80mt.

Interestingly, what is unclear is whether or not the reported thermal coal volumes of 4mt reported to the government include the thermal coal that’s being buried.

Certainly, there’s no way production will reach anything like 14mt this year as Rio virtually stopped producing while it progressed the sale. Next year may be a different story, as the new 900km-long Nacala rail line and port being developed by Vale comes on stream.

Developing a coking coal export business in Mozambique hasn’t been a walk in the park for Vale either, reporting accumulated losses of $44m for Mozambique in Q1.

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Vale has invested billions of dollars on rail and port infrastructure, and views the Nacala rail/port network as its long-term logistics solution to reach export volumes of 22mt by 2017.

The company has pushed hard to get first coal onto the line by the end of 2014 and according to Pedro Gutemberg, Vale’s country manager in Mozambique, is on track to achieve that.

Gutemberg said the first full train would be run down the line to the port this year to be followed by a demonstration of the port in January/February.

Only once the port has been fully commissioned can Vale begin to ramp up exports but Gutemberg was unwilling to say how much coal Vale planned to export through Nacala next year, saying the company would not simply put coal into the market for no return.

It’s likely Vale will export around 5mt via the Nacala infrastructure in 2015, according to IHS estimates, but that will depend on a number of variables, as Gutemberg is fully aware.

– Article by Marian Hookham,




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