Mozambique has a new government, a new mining code and a lot of new infrastructure
When Vale inaugurated its multibillion-dollar Moatize mine in 2011, the media proclaimed the start of a coal boom in the Tete province, with major mining houses and ambitious juniors scrambling to invest. They had mixed results. Rio Tinto’s 2011 acquisition of the Benga coal project for $3.7bn and subsequent sale for $50m in 2014 has become emblematic of the industry’s hubris and carelessness during the boom years.
Logistical problems have so far capped Vale’s total coal exports at 6.5 million mt/y, despite nameplate production capacity of 11 million mt/y. The operators resorted to storing mined coal in stockpiles, which has caused environmental and safety problems. Heavy rains then led the Brazilian major to declare force majeure on shipments of 500,000 mt in 2013. Eventually, the company decided to take matters into its own hands, constructing the Nacala Logistics Corridor, its own integrated logistics network consisting of a 900 km railway and deep-water port complex. The project was completed in late 2015 at a cost of around $4.4 billion and Vale hopes this will now allow Moatize to become profitable.
Indian steel conglomerate Jindal is the other major producer in the region, with its Chirodzi mine currently producing approximately 3 million mt/y. Despite production capacity of nearly 10 million mt/y, Jindal has been beset with the same logistical problems as Vale, but is waiting until coal prices improve to invest in more infrastructure.
As Bill Jenkins, country manager for mining equipment producer and supplier Atlas Copco, notes: “One of the biggest challenges of doing business in Africa – not only Mozambique – is high transport costs resulting from poor infrastructure. If Mozambique is to realize its full potential, more and better infrastructure must be developed.”
In 2014, the Mozambican government updated the legislation that governs the mining industry, reflecting the sector’s strong growth since the previous legislation was passed in 2002. “It is important to point out that the changes are evolutionary and not revolutionary,” said Samuel Levy, managing partner at Mozambique’s leading law firm, Sal & Caldeira. “Most of the changes are fairly minor.”
The main changes can be divided into three broad areas: promoting local development and participation in mining, imposing more stringent requirements on mine operators and expanding the scope of activities regulated under the legislation. Taxes were not affected and are dealt with under separate legislation. Even if the fiscal regime were to change, investors are currently protected by a five-year stability agreement, which insulates them from tax hikes.
Under the new law, mine operators are required to give preference to local suppliers, assuming that the quality of the goods or services they provide is comparable with imports. Prior to this, there was a similar requirement, but it was subject to the price of Mozambican goods – if local procurement was substantially more expensive, miners could import.
New miners will also have to list their companies on the Mozambique Stock Exchange, though existing investors are exempted from this obligation.
There is now a clause that makes in-country mineral processing obligatory, if it is economically viable. While this may seem like a rather onerous obligation, there is no supporting text to define what constitutes “economically viable.” Given the high cost of power and transport in Mozambique, increased levels of beneficiation are unlikely to be economically viable.
A third change to the law pertains to environmental requirements. In step with global norms, prospective miners will have to submit a decommissioning plan along with their initial feasibility studies to receive a mining license. This should not pose a particular problem, as any respectable mining house will include such plans as standard from the first stages of development.
A final issue to bear in mind is a proposed shakeup to regulatory agencies. A new High Authority for Extractive Industries is supposed to assume ultimate oversight over Mozambique’s mining and oil and gas industries. However, 18 months after the plan was floated, there is still no sign of the agency becoming a reality.
Some feel that the changes did not go far enough. “Our policies and fiscal regime are based upon the economic realities of the previous decade’s commodity boom,” said Casimiro Francisco, CEO of Mozambique’s state mining entity, EMEM. “Now, some commodities have lost 50% of their value in three years and we have still not adapted our laws accordingly.”
Another complaint is a lack of consistency in application of the law across different regions. “Different provinces interpret the law differently so, in effect, there is one law for Nampula and Manica, and a different one in Maputo,” said Samuel Levy. “We are one country, not three and the practice of the law should reflect this.”
More mineral diversification
Mozambican mining is not just a story about coal. According to Mário Deus, managing director of local consultancy Gondwana: “Mozambique has plenty of unexplored ground and there are still fantastic opportunities to discover new mineral deposits. We also see great potential for construction materials as the domestic market is growing rapidly.”
Mozambique’s surface geology is fairly well understood, albeit to a fairly low level, and the country is mapped to a scale of 1:250,000. This is not a sufficient level of detail for a junior mining company to work with but the Ministry of Mines is working to create a 1:50,000 scale map. It is yet to be decided if this will take the form of airborne geophysical surveys or geochemical work.
Uniquely in the region, Kenmare Resources operates a dredge mine that filters heavy mineral sands for zircon and ilmenite, a titanium ore. Kenmare ramped up to full capacity in 2013, posting record production figures in Q3 2015. Their coastal location insulates them from the logistical issues that plague inland mines. According to Mozambique manager Gareth Clifton: “While we complain about the quality of power, the cost of power remains reasonable. As we dredge mine, our costs are very low and we would be towards the bottom of the industry cost curve.”
Although not yet in production, Syrah Resources’ Balama project has the potential to become one of the region’s major graphite hubs. With a JORC Compliant Ore Reserves of 81.4 mt at 16.2% total graphitic carbon for 13.2 mt of contained flake graphite, Balama is the largest graphite ore reserve in the world. “Our objective is to develop the mine and put graphite into production by the beginning of 2017,” said Syrah’s Mozambique manager, Dinis Napido. “A key advantage of our Mozambique operation is its low production cash costs of US$286 per product mt,” he added.
The Company successfully completed an US$148 million capital raising during August 2015 and is now underway with project development.
Baobab Resources is probably Mozambique’s most ambitious mine project. Initially envisaged as an iron ore mine and pig iron smelter, the owners now plan to build a fully integrated steel mill. With a proven reserve of 1 billion mt iron ore and major coal producers in close proximity, the company believes it can supply steel products to southern Africa more cheaply than they can be imported from China. “We now have the full package,” said managing director Ben James. “The project will generate good commercial returns, but also unprecedented socio-economic returns.”
Looking to the future, Casimiro Francisco of EMEM believes that REEs could form a significant part of Mozambique’s export economy. “There is a very interesting situation arising within the rare earths market. Some countries have already depleted their resources, but demand continues to grow. Mozambique hosts rich reserves that could help plug this supply gap,” he said.