Nothing’s Easy

News broke in early 2015 that an Indian public-owned consortium, International Coal Ventures Limited (ICVL) had invested $2 billion in Mozambique’s mining sector. Months earlier, Mitsui had agreed to invest almost $1 billion in Vale’s coal projects in Mozambique—a sign of Japan’s growing interest in the country’s natural resources. The news confirmed a prior KPMG assessment that demand from India and China would put the country’s extraction levels among the top ten global producers of coal, at an estimated output of 41.8 million tons by 2017. By this metric, the sector is expected to reach an annual value of $735 million within two years. The country has concurrently systematized its regulations, and in doing so earned the reputation as one of the top two mining investment friendly countries in Africa—a designation it shares with South Africa. And while this news has industry shareholders champing at the bit, macro economic factors, infrastructure deficits, and social impediments must not be overlooked. This reality is perfectly clear to industry bosses, who are taking the lead in developing the country’s decrepit transportation infrastructure.

Of more immediate concern, major mining companies are feeling the pinch as commodity prices slump in the wake of slowing growth in major markets. As Chinese firms curb their enthusiasm, mines must anticipate and respond to market conditions. In global terms, mining is the canary in the coal shaft. Ultimately, mining brings in some of the world’s biggest firms, and underpins the global economy. Coal from Mozambique fuels power generation thousands of miles away, and plays a critical link in other countries’ production and development strategies.

BIG CHANGES

The 2014 Deloite African Construction Trends publication reported that investment in megaprojects in Africa was up by 46% in 2014. This trend was especially apparent in Mozambique, which attracted $14 billion for three megaprojects, as well as millions more for smaller undertakings. All three of these projects will have direct implications for the country’s mining sector.

According to Deloite, Mozambique has at least 18 large infrastructure development projects valued at over $24 billion under way. The nature of these projects rejects a shift towards new economic areas. Only 5.5% of the funding is allocated to the country’s current economic backbone, agriculture. Meanwhile, 50% is destined for energy and power and 45% for transport related projects. Both of these areas are critical to the success of mining ventures.

One such investment in the Nacala Integrated Logistics Corridor will transform the way that coal, and other raw materials are transported to international markets. Tracks now run from Moatize, where Vale operates coal mines, to the coal terminal at Nacala-a-Velha, built on the opposite side of Nacala Bay from the old port of Nacala, which will export around 18 millions tons of coal annually.

The project is 80% owned by Vale, with the remaining 20% owned by Mozambique’s publicly owned port and rail company, CFM. The railway runs for over 900km, with the expectation of moving 20 coal trains a day. This will require a fleet of 100 locomotives and 2,700 wagons, to service the 12 ships a month that are expected to call at the coal terminal.

One of these projects, the $3 billion Mphanda Nkuwa Hydropower Plant Project is one of multiple planned and ongoing corrections to the country’s power deficit. Mozambique’s current electricity-generating capacity peaks at 2,200MW, supplied for the most part by the HCB dam—65% of which is exported to South Africa. Locally, only 18% of Mozambicans have access to electricity. Further exacerbating this paucity, the country’s power requirements, currently at 1,600MW, are rising by 15% annually. Power-intensive mining operations are therefore especially susceptible to power outages, and the high costs generated by supply-demand imbalances in the market. By some estimates, demand for electricity from mining companies is rising by 20% per year, warranting immediate, and costly investment.

To power their projects, coal miners such as Vale plan to build plants to generate electricity using waste coal. This generation might even contribute to the national grid in the future. In addition, significant gas discoveries are expected to spur development of more power projects over the coming decade, most of which would occur near the offshore Rovuma basin in the north of the country. In addition, 2014 saw nearly 300MW of gas-fired power plants come online, which helped to address the country’s supply gap.

TOUGH TIMES

Downward pressure on commodity prices has mining companies on the back foot, but firms are not ceding ground—and still writing checks—and their counterpunch should send the economy lurching in the right direction. Vale’s Moatize produced a record 4.91 million tons of coal in 2014, 3.124 million tons of met coal and 1.784 million tons of thermal coal. In 4Q2014, Moatize saw a quarterly record of 1.433 million tons, 10.6% higher than 3Q2014. Once the railway upgrade is completed, increased flow to and from the mines will allow for successive record breaking years.

Vale finds itself facing the same dilemma as its counterparts in the liquid energy sector—a glut in production and diminished demand. Vale’s 2014 numbers showed that the group has taken a hit as coal prices tumbled on the international market, forcing it to reduce ongoing investments in Mozambique. Vale Moçambique’s losses rose to a stunning $507 million, in the wake of a $397 million loss the previous year. They were not alone. In 2011, Rio Tinto purchased Australian firm Riversdale Mining’s Mozambique coal coking venture for $3.7 billion as part of a massive deal that signaled immense confidence in the financial viability of coal production in the country. However last year, Rio Tinto took an asset impairment charge of $3 billion on the venture, citing challenges in building the infrastructure required to bring the project on stream. In late 2014, Rio Tinto finally unloaded the disastrous investment onto to India’s International Coal Venture Private Ltd (ICVL) for a paltry $50 million. At the time of sale, Rio Tinto’s executives insisted that the incident was isolated, and that the firm’s other multi-billion dollar investments were going ahead at full steam.

COAL TALKS

Coal is the fastest growing segment of the economy according to Frost & Sullivan. This news is substantiated by a recent discovery of significant reserves of coking coal in the Tete province and the Zambezi area.
Vale has been producing coal from the Moatize mine since July 2011. The company has invested in developing two railroad projects—the Sena railroad project and the Nacala corridor project. Upon completion, both projects will contribute a combined 1,547km of high capacity rail connectivity, and 24 million tons of coal transport ability to the national infrastructure. Vale is also expanding production at the Moatize mine, which is expected to double capacity to 22 million tons per annum. These projects represent a significant investment for Mozambique, with a major part of future coal production expected to come from the Moatize project.
With Vale leading the charge, the country is set to produce a record 29.5 million tons of coal, according to BMI. The same report anticipates year-on-year increases that will boost output to 41.8 million tons by 2017.