Coal in
Moatize
Gambo Audu
Julio Ribeiro
Oliver Scott
Hajime Taniguchi
Finance 456/February 2006
Introduction
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Estimated 2.4 billion ton reserve of coal in Moatize,
Mozambique
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Projected extraction cost of US$1 Billion
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Open bid process under supervision of IFC and
Mozambican Government
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Limited geological information of the region
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Poor infrastructure (rail, power, port)
Companhia Vale do Rio Doce (CVRD)
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Brazilian company
Formed in 1942 with 80% government ownership
Privatized in 1997
Market Cap of US$48 Billion
Expertise in large-scale mineral projects
Own high volume mine-railroad integrated systems
Major global supplier of pelletized iron
World’s largest producer and exporter of iron ore
World’s second largest producer of manganese
CVRD Strategy
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Diversify mineral activity further
 Widen spectrum of products offered
 First investment in the coal industry
Become a global player in the mining industry
 Attempting to acquire assets abroad
 Recently lost bid for copper mines of Noranda (Canada)
and Las Bambas (Peru)
Vertical integration
 Owns significant interests in companies in the Brazilian
steel industry
 Positioning for projected growth of steel industry in Brazil
Current Product Line Breakdown
2003 Sales Breakdown
$ mil.
Iron ore & pellets
% of
total
3,500
65
Aluminum
852
16
Logistics
604
11
349
6
Kaolin
96
1
Potash
94
1
Gold
21
-
Other
29
-
Adjustments
-195
-
Total
5,350
100
Manganese ore & ferroalloys
History of Mozambique
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1975- Independence from Portugal
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1992- First peace in three decades
1994/1999- Democratic elections
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10-year guerrilla war
Marxist Frelimo party emerges victorious
Renamo challenges and begins civil war
Frelimo wins them handily
Renamo remains key opposition party
2004- Elections in December
Positive Macros
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Human Development Index increase
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Mozal aluminum smelter
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1993 to 2003 from .261 to .379
Accounts for 50% of MZ GDP
Created 5000 additional jobs
Major jump in FDI
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1997 to 1999 from $64mil to $382mil
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
Positive Macros
Net FDI (mils $)
450
400
350
300
250
200
150
100
50
0
Limited Progress
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One of the poorest countries in world
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GDP per capita of $255
Total debt 103% of GDP
168 Human Development Index rank

Life expectancy 40 years
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Literacy rates are 40%
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Heavily Indebted Poor Countries granted $4.3bill in debt
relief
Congo (Zaire)
Burundi
Malawi
Madagascar
Rwanda
Mozambique
Uganda
Tanzania
Kenya
Zambia
Lesotho
Angola
Swaziland
Namibia
South Africa
Botswana
Gabon
Limited Progress
2003 GDP per capita (US$)
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Coal Industry
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Essential energy resource
Energy consumption: Coal:26%, Oil: 37%, Natural Gas: 24%
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Dominates electricity and industrial fuel markets,
especially in emergent Asia
Two types of coal in Moatize
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Thermal- electricity generation
Metallurgical (Coking)- steel and aluminum production
Environmental issues
Historical Coal Prices
World Coal Consumption By Region
(Source: EIA)
4500
4000
3500
3000
1980
2500
2002
2000
2015
2025
1500
1000
500
0
Region
Mature Market
Economies
Transitional
Economies
China and
India
Other
Emerging
Economies
Coal Consumption in China by Sector
(Source: EIA)
70
60
Quadrillion
50
2002
40
2015
30
2025
20
10
0
Electricity
Industrial
Other Sectors
Total
The Coal Industry in Moatize
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Largest unexplored coal deposits in the world
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Sporadic development since the 1940’s
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Activities suspended in 1983 due to civil war
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Transportation still a major problem- destruction of railway line during
the civil war
Current State of The Coal Industry in Moatize
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Estimates between 2.4 Billion mt to 6 Billion mt of coal
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Anticipated Annual Production ~10 Million Tons/Year
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Export estimates
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3-4 million tons/year to Far East, Europe and Brazil
2 million tons/year to Nigeria
Remainder feeds future coal-fired power station
Reconstruction of railway line
Competitive Landscape
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Bidders down from 10 to 4
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4 Bidders selected were:
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High financial and technical standards
BHP Billiton
Rio Tinto
Anglo American
Companhia Vale do Rio Doce (CVRD)
Scoring system to evaluate bids
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Commitment during exploration phase
Strategy, Business Plan, and Long-term commitment
Company experience
Financial offer
Competitive Landscape
COMPANY
PREVIOUS COAL
PREVIOUS
MINING
EXPERIENCE IN
EXPERIENCE?
MOZAMBIQUE?
ADDITIONAL
NOTES
BHP
BILLITON
Yes
Yes – Principal
sponsor of Mozal
Aluminium Smelter
Project
In talks to acquire
WMC, lead sponsor
of Corral Sands
project in Chibuto
RIO TINTO
Yes
Yes – Ilmenite
exploration
Exp. w/coal & in
Mozambique
ANGLOAMERICAN
Yes –Responsible
for most coal
mining in Africa
Yes
Also exp. w/coal &
in Mozambique
Multilateral Agency
Interest and Involvement
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IFC selection process allowed for competitive bids
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Interest in financing?
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South Africa’s IDC interest in project financing
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Possible funding from African Development Bank (AfDB)
Moatize Project Uncertainty
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Bidding process obstacles
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Limited geological information
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Infrastructure risks
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Rail: Indian Consortium (RITES and IRCON) will rebuild
and operate the Sena rail line
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Power: Moatize isolation requires US$2B investment in
energy generation and transmission
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Port: New facilities to the North of Beira Port
Moatize Project Terms
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License to explore the Moatize Coal Reserves
2 year feasibility study
Feasibility risks assumed by bid winner
Bid winner granted a mining concession after 2 years if:
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At least 5 million tons per year of saleable coal found
Proven technical and economic viability of the project
Mozambique government involves bid winner in all
infrastructure related projects
Government failure to comply: Contract termination and
compensation for bid payment and all feasibility costs
Moatize Project/CVRD bid
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Bid offer of US$122.8 M
Consortium with American Metals & Coal Inc.
Feasibility study cost US$34 M
3% production tax once mine is operational
5% carried interest for the Mozambique
government
10% of shareholding reserved for Mozambique
nationals
Community and social development programs
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During exploration period US$6.5 M
During production phase US$50 M
Discussion Questions
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Should Companhia Vale do Rio Doce (CVRD) bid for
the rights to explore the Moatize coal mine?
Is such investment aligned with CVRD’s strategy?
What is the impact of the current political
environment on the timing of bid?
How would a change in coal prices affect the viability
of the project?
Conclusion
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NPV Valuation:
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Expectations of Coal Prices (Worst Case NPV ~ US $400)
Real Option Considerations
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Cost of Capital Calculations
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Product Mix
CVRD Potential Withdrawal
What risks does CVRD face?
Financing Options/PPP Considerations