17 January 2013

Mozambique: Rio Tinto Struggles With Mozambique Costs


Rio Tinto boss steps down, in part due to unexpectedly high production costs in Mozambique

Mozambique's coal resources are supporting the country's 7 percent GDP growth rate. With major offshore gas finds to boot, the country is part of the much-sought after 'M3' emerging markets trio, along with Myanmar and Mongolia.

But converting the assets into development will be crucial. This remains one of Africa's lowest income countries, with a life expectancy of 50 and a 54 percent poverty headcount ratio at the national poverty, virtually unchanged since 2003. Major investment inflows and state revenues could provide much-needed financial resources to underpin the government's development strategy.

While the country has around 2 billion tonnes of coal, the infrastructure needed to support export is starting from scratch. Some companies underestimated the costs this would incur. Thursday's resignation of Rio Tinto boss Tom Albanese is in part due to the higher than expected build-related costs of Rio Tinto Coal Mozambique, the company's local division which contributed $3 billion to the $14 overall company write-down that forced Albanese to step down.

As of today, Vale and Rio Tinto, active in the Tete province, endure a 600 kilometre truck and rail journey to get coal to Beira, a shallow port in the country's central region. The coal is then loaded up on small vessels and sent offshore, where it is reloaded to a floating, loading terminal - a pricey trip. Rio Tinto's hope - sending barges of coal down the Zambezi river - was blocked by the government, likely for environmental reasons.

Plans are afoot to tackle the deficit. The state-owned rail and ports company, CFM, recently laid out a five year strategy to raise export capacity to 120 million tonnes a year, at a cost of $12bn; equivalent to the country's entire GDP. International bids are out for a $2bn railway and port development, with a goal of constructing a 525 km line from Tete province to Macuse, in the Zambezia province.

Majors in Mozambique are having to build their own export infrastructure, in partnership with each other and the government. Vale is spending $4.4bn to revamp a railway from Tete to the deepwater port of Nacala, via Malawi.

This private-built infrastructure is expected to be multi-use. "We expect a small number of companies such as Vale and Rio Tinto to fund rail and port infrastructure on an open access basis," says Ben Willacy, lead analyst for coal supply research at Wood Mackenzie.

But a low coal price, and tight capital markets, is denting the economics of such investments. And multi-use provisions mean any slowdown in project development - now that costs of export are becoming clearer - could have a knock-on effect. Mr Willacy said: "If Vale and Rio Tinto decide not to fund such large infrastructure plans, juniors in the current environment won't develop it themselves, and that leaves them stranded."

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