Insight

In February 2016, Brazilian mining giant VALE wrote off $2.4 billion off the value of its coal assets in Moatize, Mozambique over the previous year, valuing its project in the country at the time at about $1.73 billion. The operation was losing the company half a billion dollars a year and was struggling to agree a sale of 15% of its operation to Mitsui of Japan, that would have valued the operation at about $3 billion.

The Moatize mine in the north-western Tete province is said to hold one of the world’s largest untapped coal reserves, especially for coking coal which is used in steel production.  VALE’s write-down of its assets was in part due to lower global coal prices and an increase in the cost of logistics last year.

Over the course of the last year VALE share price has been relatively turbulent (Reuters)

It ended 2016 with a loss of $105m, a marked improvement on the previous year’s close of -$508m. This improvement came after a reduction in costs and expenses and an increase in the global prices in the fourth quarter of the year after higher demand from China. Interestingly, coal exported through the port of Nacala along the railway out of Moatize provided revenue of US$110 million while the coal transported along the Sena railway and loaded at the port of Beira posted a loss of US$215 million. The Sena line was subject to a number of attacks by gunmen, and was shut down, only re-opening for operation in November 2016.

Jindal Africa, a subsidiary of Indian company, Jindal Steel & Power operates the Chirodzi mine, the second largest in Tete, with a production capacity of 10Mt/y. Even though the company has its own 8Km railway siding, locomotives and wagons, it has suffered and been unable to increase planned production capacity by twice the amount due to the limitations and political risk issues with the Sena rail line.

Indian International Coal Ventures (ICVL) operates the third Tete site in Benga with a capacity of 5.3 Mt/y. The SPV created by the Indian Ministry of Steel has also suffered in 2016, only able to produce up to 3.6 Mt/y

Global Upturn

October 2016 saw a rally in the global prices of coal and other key exports such as iron ore. This came following a surprise cut in production in China and India, the world’s two biggest importers. China cut domestic coal production in April in an effort to improve the profitability of the country’s heavily indebted coal industry. It did so at the same time as hydro production fell by 13%, pushing up the reliance on coal and increasing its imports of the resource by 18% from January to August 2016. Goldman Sachs sharply raised its price forecast for coking coal for the coming two years following the uptick caused by the shortage in China. Chinese policies will continue to impact the market long after production volumes have recovered.

Premium Hard Coking Coal Australia FOB – US$/tonne

A resurgence in China’s manufacturing and real estate construction sectors supported by an increase in fiscal stimulus from Beijing has further supported the increase in prices globally.

Since the start of 2016, thermal coal (burnt in power stations to produce electricity) prices had more than doubled by November 2016. South African coal moved from $50/mt to $99.7/mt. Meanwhile, Australia was the best performer with forecasts for 2017 standing at 64% higher than the previous year at $135/mt and $125/mt for 2018.

Meanwhile, coking coal, at its peak in the 2016 rally, saw a 240% price surge premium to $245/mt in October 2016 after unexpected operational issues at Anglo American’s mine in Queensland. November of the same year saw the prices top $300/mt for the first time since 2011. This represented a remarkable turnaround for the coal that has been shunned by investors over recent years due to its poor performance and reputation.

Vale’s production costs in Mozambique are predicted to keep falling, with the total cost for 9-months of 2016 coming in at $122m, while the forecast for the whole of 2017 is set at $70-75m and between $55-60m in 2018. From then onwards, the production cost is estimated to be around $50-55m a year. It expects to sell 13m tonnes in 2017 from the 17m tonnes expected to be produced, significantly higher than the 6m tonnes produced in 2016.

What this means for Mozambique

VALE’s Phase 2 Coal handling and processing plant became operational in August 2016, coinciding with the price increase and a 4% rise in production from Moatize year on year, and an even more impressive 40% increase in the third quarter compared to at the half way point of 2016.

After exiting its development in the country briefly, ICVL re-entered Mozambique in September 2016 to work on a more viable high-grade coal block thanks to the rising global prices. February 2016 saw it acquire a 65% stake in the Benga mine as well as two other greenfield coal assets that formerly belonged to Rio Tinto. On top of this, ICVL are also exploring the possibility of exporting thermal coal from Mozambique.

By February 2017, coking coal prices had steadied after peaking in late 2016 before 12 consecutive weeks of decline followed. The upturn had put an end to the slump that saw new projects and further investments shelved as operators attempted to re-balance what was an oversupplied market. Mozambique’s vast coal resources have in reality produced very little given market conditions and inadequate infrastructure to access export markets.

However, with significant investments already committed to Mozambique, and positive news coming out of other sectors such as Exxon’s acquisition of 50% ENI’s Area 4 holding, may provide an opportunity to address some of these concerns and push ahead with much needed developments, expansions and improvements.

March 2017 finally saw VALE agree a deal with Mitsui where by it will receive an initial payment of $733m for a 15% equity stake in the Moatize project. This represents a breakthrough in nearly three years of negotiations between the two giants and represents further commitment by the Japanese firm in the country where it is also acquiring 50% of Vale’s 70-percent stake in the Nacala logistics corridor, a railway system connecting production at the mine to the Nacala port in Mozambique.

 


About the author

Nicholas Zanette

Nick is responsible for developing Edgebold Capital’s financial service products tailored to the southern African market. Nick is also a Research Analyst for the Edgebold Group. Nick grew up in Kenya, and retains a strong network there having conducted field-based research on Tullow Oil’s East Africa Oil & Gas project. Prior to his work at Edgebold, Nick spent time with Invest In Africa, working on a market entry strategy into Kenya to consult on building the capacity of SMEs in the country. Nick holds an MSc in African Politics from SOAS, University of London, with a focus on eastern and southern Africa and the role of the private sector in increasing trade across the continent. Nick is fluent in Italian, Spanish and Portuguese and has basic proficiency in French and Swahili.