Agnieszka Flak and Clara Ferreira-Marques Johannesburg and London
RIO TINTO has begun a review of its Mozambican coal mining operations, which cost the company a $3 billion (R26.6bn) write-down, as it reconsiders development plans, partners and its options for getting the coal from pit to port.
Rio Tinto’s troubles in Mozambique offer a cautionary tale on big projects in new areas, which have become increasingly unattractive for mining firms under pressure from shareholders to control spending and improve returns.
A source familiar with the project said this week that the review was under way.
“The reality is that Rio has to look at what it has, and at what options there are,” the source said. The focus was not on a sale, although a new project partner could help the company to share the infrastructure and development costs.
Rio Tinto sacked chief executive Tom Albanese last week when it wrote off $14bn on the value of its aluminium arm and the Mozambique coal assets it bought in 2011. Mozambique’s infrastructure had proved more challenging than expected, Rio Tinto said, and estimates of recoverable coking coal were lower than expected.
Benga mine, in which India’s Tata Steel owns a minority stake, began exporting the steel ingredient last year but the amounts remain a small fraction of the eventual estimated capacity of Rio Tinto’s total Mozambique coal assets.
The coal write-down and review come less than two years after Rio Tinto took control of the assets by buying Riversdale Mining for $4.2bn. This embarrassment is likely to deepen mining firms’ reluctance to tackle big projects from scratch.
Rivals Vale and BHP Billiton have already begun pulling back from big African bulk commodity projects, where overcoming infrastructure problems is vital for success.
However, Rio Tinto still has Simandou, a major iron ore project in Guinea.
Brazil’s Vale remains a major player in Mozambique, where a common language has helped it to build close ties with the government. However, Vale has retreated from its portion of Simandou in Guinea, where it is facing uncertainty over the right to develop the asset.
Anglo-Australian giant BHP Billiton has also largely retreated from west Africa.
“This is a… cautionary tale,” Sanford Bernstein analyst Paul Gait said. “There is a real question mark there: the ability of the majors to successfully operate in these frontier countries has yet to be demonstrated.”
Rio Tinto bagged Riversdale during a brief flurry of activity as commodities recovered from lows hit around 2008. Industry sources said it was under pressure at the time to strike a deal in Mozambique, seen as the new coking coal frontier, and concerns about infrastructure in Africa became secondary.
A surge in China’s steel demand then also backed the case for a Mozambican purchase.
“Back then, the market was recovering, the China story was sound and coking coal was constrained. Mozambique sounded easy, more stable than other African states or even other coking coal producers,” one industry source said.
Mozambique holds some of the largest untapped coking coal deposits. Some industry sources suggested Rio Tinto did not do sufficient due diligence on the Riversdale assets and related infrastructure plans.
Before the takeover, Riversdale forecast its Benga project would start producing this year at a rate of 2 million tons, rising to 10 million tons next year. Actual output in Mozambique last year was 272 000 tons of thermal coal, and 188 000 tons of the higher-value coking coal.
Last year, Maputo vetoed a plan to ship coal by barge on environmental grounds. Rio Tinto has decided not to resubmit the proposal and is pursuing a rail solution instead.