Major coal deal imminent in Mozambique

[miningmx.com] — AUSTRALIAN junior Riversdale Mining has requested a halt to trading in its ordinary shares on the Australian Stock Exchange, “pending an announcement about a possible control transaction’.

This follows prior confirmation by the company that it had been in talks with diversified resource major Rio Tinto over a possible takeover bid.

Riversdale announced on December 6 that it had held discussions with Rio Tinto “concerning a possible transaction at the corporate level for indicative consideration of A$15 per Riversdale share.

“These discussions were undertaken in confidence, and Rio Tinto advised the company that it is not in a position to submit a proposal for the potential acquisition of the company.

“While discussions are ongoing, there is no certainty that Rio Tinto or any other party will proceed with any proposal for the acquisition of Riversdale.”

That announcement sparked a flurry of speculation about possible competing bids to take over Riversdale, including an offer from Brazilian resource giant Vale.

But Vale seems an unlikely buyer, given that the group already holds a dominant position on the Moatize coal field and is the most advanced in development of its own projects, which have huge brownfields development potential.

Taking over Riversdale will not be a straightforward exercise, given the nature of both the strategic shareholdings and alliances already in place with Indian and Chinese steel companies.

Also, any company taking over Riversdale with a view to realising the claimed export potential is in for a long haul.

It could take 10 to 15 years to put in place the rail and port infrastructure needed to handle the proposed export production from the Moatize field.

The current infrastructure is insufficient to handle what Vale wants to export in the first phase of its Moatize mine complex – let alone accommodate exports from anybody else.

According to Vale, the rehabilitated rail line between Sena and Beira will only be able to handle about 5 million tonnes (mt) per year of coal in total, compared with the 8.5mt/year of export coking coal the group plans to produce initially from Moatize.

Vale is due to start production next year and ramp up to initial full sales output of 11mt/year, which will include 2.5mt/year of steam coal in addition to the coking coal production.

A Vale company statement said “given the limitations of the Sena-Beira rail transport facilities, the viability study for the second Moatize project will depend on a different logistical solution.

“In this respect, we are examining the possibility of laying a new rail link of around 200km from Moatize to Nacala in northern Mozambique and building a seaport terminal in Nacala.”

An alternative being considered by Riversdale is to barge the coal down the Zambezi river – a project some observers, including Vale, do not think will be feasible.

Riversdale controls two projects named Benga and Zambeze, located adjacent to Vale’s Moatize mine .

Benga is a joint venture between Riversdale (which holds 65%) and India’s Tata Steel, which owns the balance and has the right to buy 40% of the coal produced. Tata also holds a 22% equity stake in Riversdale.

Construction of the first phase to produce at a rate of 5.3mt/year run-of-mine (ROM) is under way, with first production estimated for the second half of 2011. A feasibility study is being carried out on increasing this operation to 20mt/year ROM.

In June this year Riversdale signed a memorandum of understanding (MOU) over Zambeze with Wuhan Iron and Steel Corporation (Wisco), as well as a logistics partnership agreement with the China Communications Construction Group to develop Zambeze.

In terms of the MOU, Wisco can acquire up to 40% of Zambeze for a total of $800m. It will also have the right to buy at least 40% of the coking coal produced from Zambeze as well as 10% of the coking coal from Benga, and will also buy an 8% stake in Riversdale itself at an agreed price of A$10 a share.

The transaction was supposed to be completed by October, but that deadline was missed.

According to Riversdale chairman William O’ Keeffe, speaking at the annual general meeting in late October, “negotiations of definitive documents have progressed well and these are now at an advanced stage.

“Whilst the MOU has recently expired, the parties remain fully engaged and committed to concluding definitive agreements as soon as possible, on the basis of the terms contained in the MOU.”

Assuming the party bidding is not Rio Tinto, it is far more likely that either Tata or Wisco is after Riversdale instead of Vale.

On the face of it, Tata appears the more logical buyer but a report from the Times of India on December 11 also named state-run Indian ore miner NMDC as a potential bidder.