coal in moatize gambo audu julio ribeiro oliver scott hajime taniguchi finance 456/february 2006
DESCRIPTION
Coal in Moatize Gambo Audu Julio Ribeiro Oliver Scott Hajime Taniguchi Finance 456/February 2006. Introduction. Estimated 2.4 billion ton reserve of coal in Moatize, Mozambique Projected extraction cost of US$1 Billion Open bid process under supervision of IFC and Mozambican Government - PowerPoint PPT PresentationTRANSCRIPT
Coal inMoatize
Gambo AuduJulio RibeiroOliver Scott
Hajime Taniguchi
Finance 456/February 2006
Introduction Estimated 2.4 billion ton reserve of coal in Moatize, Mozambique
Projected extraction cost of US$1 Billion
Open bid process under supervision of IFC and Mozambican Government
Limited geological information of the region
Poor infrastructure (rail, power, port)
Companhia Vale do Rio Doce (CVRD)
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
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 Breakdown2003 Sales Breakdown
$ mil. % of total
I ron ore & pellets 3,500 65 Aluminum 852 16 Logistics 604 11 Manganese ore & ferroalloys 349 6 Kaolin 96 1 Potash 94 1 Gold 21 - Other 29 - Adjustments -195 - Total 5,350 100
History of Mozambique
1975- Independence from Portugal 10-year guerrilla war Marxist Frelimo party emerges victorious Renamo challenges and begins civil war
1992- First peace in three decades 1994/1999- Democratic elections
Frelimo wins them handily Renamo remains key opposition party
2004- Elections in December
Positive Macros
Human Development Index increase 1993 to 2003 from .261 to .379
Mozal aluminum smelter Accounts for 50% of MZ GDP Created 5000 additional jobs
Major jump in FDI 1997 to 1999 from $64mil to $382mil
Positive MacrosNet FDI (mils $)
0
50
100
150
200
250
300
350
400
450
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Limited Progress
One of the poorest countries in world GDP per capita of $255 Total debt 103% of GDP 168 Human Development Index rank
Life expectancy 40 years
Literacy rates are 40%
Heavily Indebted Poor Countries granted $4.3bill in debt relief
Limited Progress2003 GDP per capita (US$)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Gab
on
Bots
wana
Sout
h Af
rica
Nam
ibia
Swaz
iland
Ango
la
Leso
tho
Zam
bia
Keny
a
Tanz
ania
Ugan
da
Moz
ambi
que
Rwan
da
Mad
agas
car
Mal
awi
Buru
ndi
Cong
o (Z
aire
)
Coal Industry
Essential energy resource Energy consumption: Coal:26%, Oil: 37%, Natural Gas: 24%
Dominates electricity and industrial fuel markets, especially in emergent Asia
Two types of coal in Moatize Thermal- electricity generation Metallurgical (Coking)- steel and aluminum production
Environmental issues
Historical Coal Prices
World Coal Consumption By Region (Source: EIA)
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Region Mature MarketEconomies
TransitionalEconomies
China andIndia
OtherEmerging
Economies
1980
2002
2015
2025
Coal Consumption in China by Sector
(Source: EIA)
0
10
20
30
40
50
60
70
Electricity Industrial Other Sectors Total
Qua
drill
ion 2002
2015
2025
The Coal Industry in Moatize
Largest unexplored coal deposits in the world
Sporadic development since the 1940’s
Activities suspended in 1983 due to civil war
Transportation still a major problem- destruction of railway line during the civil war
Current State of The Coal Industry in Moatize
Estimates between 2.4 Billion mt to 6 Billion mt of coal
Anticipated Annual Production ~10 Million Tons/Year
Export estimates 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
Bidders down from 10 to 4 High financial and technical standards
4 Bidders selected were: BHP Billiton Rio Tinto Anglo American Companhia Vale do Rio Doce (CVRD)
Scoring system to evaluate bids Commitment during exploration phase Strategy, Business Plan, and Long-term commitment Company experience Financial offer
Competitive LandscapeCOMPANY PREVIOUS
COAL MINING EXPERIENCE?
PREVIOUS EXPERIENCE IN 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
ANGLO-AMERICAN
Yes –Responsible for most coal mining in Africa
Yes Also exp. w/coal & in Mozambique
Multilateral Agency Interest and Involvement
IFC selection process allowed for competitive bids Interest in financing?
South Africa’s IDC interest in project financing
Possible funding from African Development Bank (AfDB)
Moatize Project Uncertainty Bidding process obstacles
Limited geological information
Infrastructure risks Rail: Indian Consortium (RITES and IRCON) will rebuild
and operate the Sena rail line
Power: Moatize isolation requires US$2B investment in energy generation and transmission
Port: New facilities to the North of Beira Port
Moatize Project Terms
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:
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 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
During exploration period US$6.5 M During production phase US$50 M
Discussion Questions
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
NPV Valuation: Expectations of Coal Prices (Worst Case NPV ~ US $400) Real Option Considerations
Product Mix CVRD Potential Withdrawal
Cost of Capital Calculations What risks does CVRD face?
Financing Options/PPP Considerations