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 Breakdown

2003 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

Gabon

Bots

wana

South

Afric

a

Nam

ibia

Sw

azi

land

Angola

Leso

tho

Zam

bia

Kenya

Tanza

nia

Uganda

Moza

mbiq

ue

Rw

anda

Madagasc

ar

Mala

wi

Buru

ndi

Congo (Zaire)

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

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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

Qu

adri

llio

n 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