Resource Majors Circling Mozambique's Moatize Coal Project as BHP Targets 100 Million Tons Coking Coal by 2010

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). King Coal has seen plenty of action from the resource majors in the past few weeks, with major mining deals finalized and proposed. Demand from China for higher quality product continues to be a driving force in the scramble for coal mining assets worldwide.

The Moatize coal mine project in Mozambique's central Tete province came into the spotlight at the beginning of September, with a government official suggesting that the original list of ten interested companies had been cut to four. The four were not specified on an exclusive basis, but it is known that Anglo American (LSE:AAL) (London, UK), BHP Billiton (AX,LSE:BHP) (Melbourne, Australia), CVRD (NYSE:RIO) Sao Paulo, Brazil), and Rio Tinto (NYSE:RTP) (London, UK) have all made contact and had talks at government level in the previous month.

Although not confirmed, it would appear that steel maker LNM's Iscor-Ispat (South Africa) has dropped out as a principal front-runner, after being one of the early front-runners from 2002 onwards.

The interest has been quickened by the fact that work will start this month on the rehabilitation of 600 kilometers of rail line linking Moatize with Mozambique's Indian Ocean port of Beira. A consortium of the Indian state railway companies, Rites and Ircon International, was awarded the contract for the $175 million World Bank-backed project that includes management of the upgraded line.

The lack of a good rail link and a poor road network have prevented major industry investors from making a move on the resource rich region. The Moatize mine project is estimated by the government to hold between 2.5 to 3 billion tons of coal deposits, which put it in the top league for coal on the African continent.

A government source said that the four companies named above "are very keen," and that a decision on awarding the contract for the project should be made by the first quarter of 2005. The winner will have noted the government's expectation for the project to spawn a general upgrade in the regional infrastructure. It is reported that a new coal-fired power station project will be packaged as part of the deal. Business Report, Johannesburg, reports that Mozambique has been giving priority to improving infrastructure around its ports of Maputo, Beira, and Ncala, in order to allow for the increase in exports and imports from neighboring South Africa, Zimbabwe, Malawi, and Zambia.

At the beginning of August, CVRD's chairperson, Roger Agnelli, had a meeting with Mozambique President, Joaquim Chissano, and expressed his company's interest in the Moatize project and in other possibilities related to energy and aluminum. CVRD is also reported to be looking at a manganese mining project in the country. Manganese forms part of CVRD's strategic plan to diversify its product portfolio. Currently, it is the world's largest iron ore miner. Down the coast at the newly developed export zone and Panam container harbor, outside Port Elizabeth, the South Africans have been hoping to attract CVRD into the aluminum smelter project, which stalled when Alcan absorbed Pechiney. A custom-built, low-cost Eskom power feed to the site is one of the carrots being dangled before developers.

The other candidates have complementary interests in the region, with BHP running the major Mosal aluminum smelter outside the capital Maputo, and Sasol, with its black empowerment partner, Eyesizwe Coal, a possible contender, along with Carbomoc, the Maputo coal company. Sasol uses coal as its synthetic fuel feedstock and also recently opened its $1.2 billion natural gas plant in Mozambique recently.

The possibilities of cross holdings in the Moatize project are possible, as demonstrated by the MoU signed in May between BHP's Ingwe Collieries and Anglo to investigate a proposed expansion of adjacent coal resources in the Western Complex in South Africa, which would incorporate BHP's proposed $280 million Klipspruit project. Included in the current feasibility study will be the introduction of BEE (Black Economic Empowerment) partners. If the project goes ahead, it could provide long-term coal supplies to Eskom, South Africa's power utility, and feed the export market.

Cross holdings, as always, depend on how the parties view the cost congruencies, competitive advantages, project lifespan, and profit opportunities on each project. This is as true for them in major resource projects in Australia as it is in Africa.

Added to this mix is the announcement by BHP on September 1, that it intends to increase its metallurgical coal production capacity to 100 million tons per annum by 2010. The major part of this growth in output will come from Australian mines. In the year 2003/4, BHP controlled mines produced 58 million tons of coking coal, of which its direct share was 35.65 million tons. The planned expansion would take its share to 60 million tons. Citigroup has predicted that benchmark prices may rise by 17% in 2005, after a rise of 23% this year. The other majors in the field are all planning expansions in production.

BHP predicts that global trade in blast furnace coking coal could climb 50% by 2010, pushed by demand from China, the U.S., Brazil, Korea, and India for steel used in vehicle manufacture and construction.

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