Mozambican coal struggles

AMID a slump in global coal prices, infrastructure and logistics continued to be the major headache in Mozambique in 2014 as the country’s coal miners battled to sustain growth momentum built during the recent mining boom. By Mining Journal’s Ruth Green
Mozambican coal struggles Mozambican coal struggles Mozambican coal struggles Mozambican coal struggles Mozambican coal struggles

Rio Tinto Coal Mozambique.

Staff Reporter

Beset by problems, it clearly all became too much for Rio Tinto in July when it announced it was selling its coal assets in the country, bringing to an end another of the company’s ill-fated recent corporate adventures.

Rio acquired its assets in Mozambique – comprising the Benga coal mine, Zambeze and Tete East projects in Tete Province – in 2011 following a staged $US3.7 billion ($A4.21 billion) acquisition of shares in Riversdale Mining. The prospects for Rio’s coal assets in the country, or Rio Tinto Coal Mozambique (RTCM) as it became known, seemed good on paper, but soon it was apparent that things were not going to go Rio’s way.

Ambitious plans to develop infrastructure in the country were thwarted by the Mozambican government, which refused on environmental grounds to allow Rio to transport coal by barge along the Zambezi River.

Things went from bad to worse in January last year as the company disclosed a post-tax impairment charge of $470 million related to its Mozambique assets, bringing the total impairments relating to RTCM to US$3.3 billion – or to put it another way, just US$400 million shy of the original acquisition price.

Almost as soon as the impairment was announced Rio’s then chief executive, Tom Albanese, and Doug Ritchie, who led the acquisition of RTCM as head of strategy, both stepped down.

The company launched a review of its Mozambique coal business in 2013 and laid off 60 of its employees – equivalent to 10% of its workforce – in May last year.

Despite successfully reducing operating costs by US$20/t, boosting coal production to 1.6Mt and reducing overall headcount more than 25% by the end of 2013, the writing was on the wall for Rio. In July it announced it was selling RTCM to Indian joint-venture company International Coal Ventures Private Ltd (ICVL) for a measly $US50 million.

The move, which marks not only ICVL’s first foray into Africa but its first acquisition since it was established in 2009, will see the company acquire all RTCM’s Mozambique assets, including its 65% stake in the Benga mining project.

Given the other 35% stake is already owned by Indian steelmaker Tata Steel, ICVL’s chairman C S Verma was keen to hail the deal as key to securing India “a strong foothold in this sought-after coal basin”

And with other companies such as Jindal Steel and Power already present in the country, recent efforts by Indian companies to gain traction in Mozambique have not gone unnoticed.

“Since May 2012, it was forecast that Asian, especially Indian, investors would be favoured in Mozambique’s extractive sectors including coal mining,” South Africa-based lawyers at ENSafrica said in a recent briefing.

Investment needed

Although Rio’s decision to offload its coal business in the African country (it is worth noting the only asset Rio retains from the Riversdale acquisition – the Zululand anthracite colliery in South Africa – has nothing to do with Mozambique) was in the context of the company’s overall drive to restructure its coal portfolio, the timing is significant.

After a poor March quarter hampered by rail and port constraints and security issues, production figures were much improved in the June quarter this year, with hard metallurgical coal production rising 200% and thermal coal production increasing 80%. But this did little to offset the problems created by what has arguably become the Mozambique mining industry’s Achilles heel: inadequate infrastructure.

The 575km-long Sena rail passage is the only railway line connecting the coal fields in Tete Province – which is also home to Vale’s Moatize mine – to the port of Beira in the south of the country. Heavy flooding in March last year caused both Rio and Vale to declare force majeure at their Benga and Moatize mines.

However, a recently announced railway investment project might help turn things around, noted Sarah Collier, a senior Africa analyst at Maplecroft.

“On August 13, 2014, the Sena Line Reconstruction Brigade (SLRB) announced a $US200 million upgrade of the Sena and Machipanda railway lines,” she told Mining Journal. “The investment is expected to increase capacity to 20Mtpa by February 2015, up from 6.5Mtpa.”

The SLRB is part of publicly owned ports and rail company, Caminhos de Ferro de Mozambique (CFM). Although the investment is significant, Collier warned it would not be a quick fix for the country’s infrastructure problems. “Despite this improvement, infrastructure constraints and associated costs will remain major concerns for mining companies.”

As for Vale, as well as surging ahead with its plans to beef up production capacity at its Moatize mine to reach 22Mtpa by the second half of 2015, the Brazilian miner is also looking to address logistical challenges in the area by constructing the Integrated Nacala Logistics Corridor (CLN), a new 912km-long rail line through southern Malawi with a coal transport capacity of around 18Mtpa.

Three times larger than the existing Sena railroad, the project will transport coal from Moatize to a new deep water maritime terminal in Nacala-à-Velha, built on the opposite side of Nacala Bay from the existing port of Nacala.

Construction on the railroad began towards the end of 2012 and is on course to transport its first train by the end of this year. The first coal shipment via the new port is slated for 2015.

Vale owns an 80% stake in CLN, with CFM owning the remaining 20% stake in the project.

In its 2013 annual report the company said it had budgeted for a total $2.6 billion towards the overall construction and ramp-up of its coal operations in Mozambique in 2014. To put that in perspective, that is the same amount of money it has forked out so far to develop the mine and processing plant for its massive S11D iron project in Brazil.

Perhaps that goes far in explaining why – and this is mentioned in passing in the annual report – that Vale is already looking for partners to develop its costly CLN venture. This seems all the more imperative after its Mozambique coal business posted operating losses of $US147.5 million for the first half of 2014.

Are we likely to see Indian investors also coming to Vale’s aid then? It is certainly a possibility, according to ENSafrica: “These companies mostly supply their own steel-production business lines in India and will be more willing to commit to costly investments to expand infrastructure capacity, such as the rehabilitation of the Sena railway and the construction of the Macuse line.

“These investors are also more likely to accept participation and partial ownership of projects by state-owned Mozambique Ports and Railways (Portos e Caminhos de Ferro de Mozambique, or CFM). Consequently, these mostly Indian investors will face lower risk of politically motivated contract frustration.”

ICVL has already shown it is willing to part with cash to help develop infrastructure in the country, having pledged $300 million towards expanding the Benga coal mine.

Although ENSafrica warned it would not all be plain sailing for Indian investors in the short-term, no matter how much money they’re willing to throw at projects. “However, they will remain liable for capital gains tax and face frustration and delays in licensing processes following the October 15 elections, as political influencers in the sector are changed by a new government.”

Security concerns resurface

Logistical challenges have not been the only thing raining on coal miners’ parades in Mozambique.

In June last year, Rio Tinto suspended coal exports from its Benga mine over security concerns following threats by Mozambique’s former rebel group Renamo to disrupt rail traffic.

Then in April this year, Vale was forced to suspend coal transport from its mines in the country when a train conductor was injured in an attack and 32 of its train wagons transporting coal were derailed. Again, Renamo was implicated in the attack.

However, a recent landmark peace agreement signed between Renamo and President Armando Guebuza came as welcome news to the miner, in the short term at least, said Sarah Collier, a senior Africa analyst at Maplecroft.

“The peace agreement signed between the government and former rebel group Renamo in August 2014 is likely to lower risks of attacks on cargo in the immediate term,” she said. “Nonetheless, the possibility that Renamo will resume its insurgency in the aftermath of the October 15 elections cannot be ruled out.”

Snapshot: Mozambique

  • Population: 25.83 million (2013)
  • Life expectancy at birth: 50
  • Adult literacy: 51%
  • GDP: $US15.32 billion
  • GDP growth: 7.1%
  • Inflation, consumer: 4.2%
  • Total reserves (includes gold): US$3.35 billion
  • Access to electricity (% of population): 20.2% (2011)
  • Internet users (per 100 people): 5.4
  • Mobile phone subscriptions (per 100 people): 48