Regional Report - Mozambique: getting there too slowly

Barry Baxter, Africa Correspondent, World Coal.

Mozambique has the opportunity to join the top 10 of world’s coal producers and exporters but, as the government continues to drag its heels on the provision of adequate infrastructure, both major and minor players and investors are starting to rethink the effort they can continue to fund in support of that aim.

A 20 year civil war is over – although, at times, the ensuing peace has been uneasy. Now, this is largely forgotten in the face of growing euphoria generated by a wave of new nation building. The key to opening the door to a new era hailed by the World Bank, the International Monetary Fund (IMF) and international investors alike, was – and still is – coal.

As Mozambique was increasingly billed as an energy-hungry world’s biggest untapped resource of coal, an international industry eager for more sources to satisfy that hunger began to take notice. In their enthusiasm, even some of the more experienced mining firms played down some of the obvious pitfalls. Mozambique had to develop: the World Bank and the IMF would be aboard. China and India – not overly concerned about global warming and climate change – needed energy from coal to continue their accelerated development.

Suddenly, times have changed. The investment climate has cooled and coal prices continue to slide. In 4Q14, Vale had to sell significant slices of its assets to balance its books. Meanwhile, in January 2015, as shareholder support waned, junior miner, Beacon Hill Resources, announced that it would run out of cash before the end of the month. With its shares suspended and owing billions of dollars, it has since been placed in administration.

Clearly, the rules have to change before there can be any lasting winners in the Mozambique coal stakes. The IMF warned in November 2014 that the decline in commodity prices – especially for coal – was a risk to its overall positive outlook for Mozambique. “Efforts are needed to put in place adequate institutional arrangements to address the new challenges associated with this sector,” the report stressed.

Winners and losers

In 2011, the then-ASX listed miner Riversdale sold its Mozambique properties. The buyer was Rio Tinto; the price, US$4 billion. Riversdale could not have known it, but it had reserved a place in the Mozambique coal stakes winners’ enclosure.

Rio Tinto was to sell out three years later to International Coal Ventures Ltd (ICVL) for US$50 million – or, as one analyst put it: “less than the salvage value of the plant”. ICVL followed Riversdale to join the winners; Rio Tinto became the number one loser.

Rio Tinto continues to lay the blame for the failure of Riversdale – under its management at any rate – squarely on the Mozambique government for not developing adequate infrastructure to transport coal both around the country and to export it. It also remains sore about the government’s refusal to allow it to barge coal from Riversdale down the Zambezi River and tranship it at river-mouth onto ocean-going vessels. The proposal had been strongly criticised by maritime sources as unworkable: the Zambezi was an unpredictable river that could not be tamed sufficiently to allow such traffic to successfully navigate its waters, nor would it be possible to tranship the loads at the mouth of one of Africa’s most wild waterways.

Vale, had the same idea, but came to the same conclusions as the maritime experts. It then put forward a project – now close to completion – to build a coal terminal at the northern port of Nacala and a railway to link it to the Tete basin – the location of Mozambique’s major coal resource and Vale’s Moatize mine.

First in line

The Brazilian miner appears to be, so far, best positioned as the big winner in the efforts to develop Mozambique’s coal industry. To get that far, the company has had to finance infrastructure way beyond what it – or any other company for that matter – could have expected. This infrastructure includes a 912 km railway: 228 km of new track in neighbouring Malawi and another 684 km refurbished in Mozambique. There is also a port and loading terminal. And a bill of US$1.5 billion.

In line with Mozambique law, the facilities will have to be open to all – though those using them will have to pay – but 75% of the capacity will be reserved for owner of the project.

Moatize is the flagship of the Mozambique coal sector. By developing it, Vale opened up the entire industry. Yet, perhaps, if comparable logistics had been in place as and when Vale believed they would be, the company may not have had to shore up an ailing balance sheet by selling half of its holding in the logistics projects and 15% of its 95% holding in the Moatize mine to Japan’s Mitsui Group.

Export dreams

Vale’s well-publicised export target has always been 22 million tpy of exports by 2017, but this was made at a time of much higher coal prices. The only estimate Vale will make for initial exports via Nacala once it is fully commissioned – most likely over 2015 – is 5 million tpy. This is ultimately dependent on what the coal can be sold for.

Considering the “Mitsui factor”, it is probable that at least some of Vale’s production will now be shipped to Japan at prices that might not be as critical. Actual shipments of coal may, therefore, change.

At the 2014 Informa Mining Conference in Maputo, the government’s Director of Mining, Eduardo Alexandre, insisted that coal production in Mozambique would ramp up to 14.4 million t over 2014 from the 7.7 million t produced in 2013. By 2025, production would top 80 million tpy. Previously published estimates have been 100 million and 120 million tpy.

Few – if any – analysts accept these figures. They argue that production and exports over 2015 will only show improvement over 2014 if Nacala does become operational – and then they point to Vale’s own estimate.

Conclusion

Mozambique undoubtedly remains a land of opportunity for the development of a major coal industry. However, to echo the IMF, this will only be possible after the logistical situation is resolved.

Encouragement can be found in that none of the Indian overtures – not even the ICVL purchase of Riversdale – nor Mitsui’s investment in Vale, can be seen as investment for immediate return. Rather, these moves are bets on the development of potential production. More such moves are needed, but they require support. Despite the government’s perceived lack of support for the coal industry, it must change direction and allow Mozambique to pull off what, at this time, seems impossible.

Will Alexandre see his targeted production at 80 million tpy materialise, even if he does not see 100 million or 120 million tpy? Given the political will it could happen. Only time will tell.

Written by Barry Baxter. Edited by Jonathan Rowland. This is a summary of an article that first appeared in the February 2015 issue of World Coal. Subscribers can view the full article by logging in and downloading the issue here.

Read the article online at: https://www.worldcoal.com/special-reports/09022015/getting-there-too-slowly-mozambique-regional-report-coal1861/