Iron Solutions

You recently completed the pre-feasibility study for the Tete pig iron project. How would you characterize the results of the study?

The results outlined a compelling commercial case for the development of a vertically integrated, mine-mouth operation, smelting 1 million tons per annum of pig iron with associated ferro-vanadium. In doing so, we are able to unlock significant project value through the beneficiation of raw materials in country. Pig iron, incidentally, is used along side scrap iron in electric arc furnaces [EAFs] to produce steel products. EAFs account for roughly 30% of global steel production; in areas such as the Middle East, they account for 100% of production. The pre-feasibility study modelled a 37-year mine life that exploited just 15% of our 727 million ton iron ore resource, clearly demonstrating project longevity as well as scope for ramping up production. As part of the study, we ran the numbers at 2 million tons per annum, which further improved the underlying fundamentals and demonstrated the scalability of the project. The project is located in one of the most exciting emerging mining and industrial jurisdictions of southern Africa with unique access to power, water, and abundant coal reserves—all the key commodities for iron and steel making. The technology the company plans to use requires, along with iron ore, a significant amount of thermal coal; thermal coal that is being produced as a wash by-product in the immediate vicinity and, due to infrastructure and market constraints, is being re-buried as waste at considerable cost. Access to our captive iron ore, with mining strip ratios averaging just 0.4 over the first 20 years of operation, and very low-cost coal, will result in low quartile production costs of around $225 per ton of pig iron free on board (FOB). This compares particularly favourably to an FOB cost of production of around $385 in Brazil, one of the world’s largest suppliers of merchant pig iron. At our cost of production, we are able to deliver a ton of pig iron to a north China port for around $250, whereas domestic operating costs are estimated at close to $400 per ton. This margin will enable Tete pig iron to compete across the global sea-borne pig iron market and, if push came to shove, with scrap iron prices. It will also open up new markets where merchant pig iron has simply not been competitive in the past—neighboring regions like the Middle East for example. Baobab has embarked on a bankable feasibility study, which should be concluded during 3Q2014. Areas of key perceived risk have been prioritised for completion, including measured resource drilling, pilot scale test work, environmental and community studies, as well as submitting various licence applications and opening discussions on tax treatment. We are also in the process of formalizing the project’s port, rail, and power requirements, the last of which we are working along side Mozambique’s energy utility, EDM, on an option study. We are also working closely with our joint venture partners, the International Finance Corporation (IFC), on community and enterprise development initiatives—an operation of this scale will have a profound local and regional impact. During the BFS, we will be looking at the potential of unlocking additional value by taking the project that last step down stream to steel production. We are strategically poised to play a central role in the nascent development of this part of Africa, supplying the region’s unrelenting demand for steel.

How do you confront the logistical challenges that come with operating in Mozambique?

The question is whether or not we will have access to 1 million tons per annum of rail capacity by the end of 2016. The expansion on the Sena Line to 18 million tons and the Nacala Corridor to 22 million tons per annum will go a long way toward addressing regional capacity issues. I have seen first hand the refurbishment and expansion works on both corridors and I am confident that the development timelines and our requirements will be met. We are in discussions with both the government and the private sector on formalizing contracts. Pricing is sensitive, but our op-ex margins are such that we can afford to carry more in transport costs. We could use trucks (some of the coal operators do), but logistically that means having 70 trucks a day on the road, which is not a particularly ­attractive scenario.

The Tete pig iron project is one of five assets in Baobab’s portfolio. Do you plan to develop your other projects through joint ventures?

Yes and no. As a publicly listed company, our investors are investing in Baobab for the Tete pig iron project; Tete is our most advanced asset and takes about 95% of our time and investment. However, Baobab has other great assets and the company has to find ways of systematically advancing them; we are in joint venture with Metals of Africa, which is developing our greenfield Changara base metals project; we are entering into a joint venture with Auroch on our copper, gold, and nickel project in Manica. At the same time, we are also on the lookout for opportunities that will add value and are currently looking into a magnetite/phosphate licence immediately adjacent to our Tete project. Ultimately, we are in Mozambique to develop mineral resources and joint venture partnerships are often the best way to share the technical and capital load. We are well established in the country, having built up a staff of over 50 industry professionals and field operatives since our beginning in 2007. During this time the company has invested upward of $40 million, over 80% of which is directly attributable to exploration and development. We take a very hands-on approach to our work with the bulk of Baobab’s management team, including myself, resident in Mozambique.

How would you characterize Mozambique as a mining jurisdiction?

Politically, Mozambique is facing its most challenging decade ahead, owing largely to the imminent development of its resources. The wealth that will be created must be fed into the national economy equitably. The government recognises the importance of the mineral resource and oil and gas sectors as cornerstones to the new economy and is proactive in encouraging foreign investment. The support is there from the top down—the ministers we have the privilege of working with are very talented and committed to developing the project. Mining has not been a significant part of the Mozambican economy until recently and there is still much to be learned. The country has revised its licensing system and mining legislation, and is consulting the private sector. It seems to be cautious about introducing change, and does not want to repeat the mistake of the copper tax in Zambia, or the 50% state ownership situation in Zimbabwe.