Rio’s $3 Billion Mozambique Coal Bid Held Up by Transport

Rio Tinto Group’s foray into Mozambique, which cost the world’s No. 2 mining company $3 billion, has highlighted a lack of rail and port capacity that threatens to check a coal boom in the southeast African nation.

Rio bought coal producer Riversdale Mining Ltd. for A$3.9 billion ($4 billion) in 2011 to access some of the world’s best untapped coking coal, in the Moatize basin in Mozambique’s northwest Tete province. Now Rio is writing the value down by 70 percent and a person familiar with the matter says the London-based company is considering selling them.

While finding coal in Mozambique has been a cinch, exporting it hasn’t. Rio’s plans have been stymied by the government’s refusal to allow it to barge coal down the Zambezi River and by the cost of accessing or building rail lines to a port on the east coast. The bottlenecks may scupper Mozambique’s bid to become one of the world’s top five coking coal producers and expand a mining industry that currently accounts for less than 5 percent of gross domestic product.

“We see a lot of problems now with the big players who are putting big money into Mozambique,” Peter Major, head of mining at Cape Town-based Cadiz Corporate Solutions, said in a Feb. 6 interview. “There are stockpiles of coal and they can’t get it onto trains. Even if the trains get the coal to the port, the port can’t handle it.”

Mozambique, which began commercial coal production in 2010, boosted output to about 5 million metric tons last year from 600,000 tons in 2011, according to the International Monetary Fund. About 280 million tons of coking coal, used in steelmaking, are traded annually on the seaborne market.

Top Exporter

The price of the fuel has dropped 30 percent since the start of last year to trade at $165 a ton Feb. 18. Mozambique mostly produces coking coal, while thermal coal is used in power plants.

“If they don’t resolve their transport problems and the new supply is delayed, that could be supportive of prices,” Bloomberg Industries analyst Andrew Cosgrove said in a phone interview from Princeton, New Jersey. Mozambique has the potential to become the world’s fifth-biggest exporter if it can boost output to more than 20 million tons, he said.

Mozambique, which is bigger in size than France, has a 2,470-kilometer (1,535-mile) coastline, three major ports -- Nacala, Beira and Maputo -- and 4,787 kilometers of rail lines, according to the CIA World Factbook. Much of the transport system is in disrepair, a legacy of a 15-year-civil war that ended in 1992.

Infrastructure Constraint

“Our main constraint is infrastructure,” Mineral Resources Minister Esperanca Bias told a conference in Cape Town on Feb. 6. “We have the resources but my problem is how to put these resources into the market.” Mozambique has issued about 100 exploration licenses and is targeting coal output of 100 million tons by 2020, she said.

Rio started exports from its Benga mine in June using the Sena rail line and Beira port, which currently limits its shipments to 2 million tons annually. It planned to boost supply to about 12 million tons by barging coal down the Zambezi and transferring it to larger vessels offshore, while considering a new rail line for larger-scale exports. The government rejected the barging proposal in March last year.

Rio declined 1.6 percent to A$69.39 at the close of trading in Sydney today. The key S&P/ASX 200 Index rose 0.3 percent.

Bias said the government had refused Rio permission because the river wasn’t navigable. In a Jan. 17 stock-exchange filing, Rio said the development of a transport system to export coal had proved “more challenging” than anticipated and it is working with the government to resolve the issue.

Not Navigable?

“Various studies have been done about the navigability of the Zambezi river,” Bias told reporters. “The studies done don’t recommend that the river be navigated. There are other alternatives that should be explored. The alternative that’s most efficient is rail.”

The impasse and a reduction in estimates of recoverable coking coal prompted Rio to write down its assets and contributed to the departures of Chief Executive Officer Tom Albanese and strategy chief Doug Ritchie, who led the acquisition.

“Our priority now is to find a suitable infrastructure solution through discussions with the government so that we can move forward with the development of this asset,” Alan Davies, CEO of Rio’s diamonds and minerals unit, told the Cape Town conference on Feb. 5.

Rio hasn’t set a timetable for the review of its assets and may sell all or part of them, according to the person familiar with the matter, who declined to be identified because the information is private.

Vale Spending

Rival Vale SA is spending $4.4 billion on rail and port facilities in Mozambique to export coal from its Moatize mine, having exhausted existing capacity.

The government wants Rio to partner with Vale in extending and upgrading a 912-kilometer rail line from Tete through Malawi to the Nacala port. The line could add 11 million tons to coal shipping capacity by mid-2016 and is expected to reach full capacity of 18 million tons by 2017, according to the IMF.

Rio de Janeiro-based Vale, which has been operating in Mozambique since 2004, currently exports 4.5 million tons of coal a year using the Sena line and the Beira port, Rafael Benke, head of corporate affairs, told the conference. It’s spending $2 billion on a second phase of its Moatize mine that will double capacity.

The IMF expects transport bottlenecks to ease as new rail capacity comes on line, and projects coal production will reach 9 million tons this year. That should help boost economic growth in Mozambique to 8.4 percent from about 7.5 percent last year, the Washington-based lender said in a Jan. 3 report.

“Mozambique is rich in coal and they don’t need too many of those projects to come on line to really benefit the country,” Cadiz’s Major said. The big coal mines will ramp up production “but it’s probably going to be at half the rate and take double the time that we were all thinking three years ago.”

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