Chinese back Mozambique coal project

[] — AUSTRALIAN junior Riversdale Mining has lined up two major Chinese backers for its second proposed coal venture in Mozambique which is the Zambeze coal project.

Riversdale is carrying out a feasibility study to expand the proposed mine at its Benga project on the Moatize coal field to a run-of-mine (ROM) production capacity of 20 million tonnes per year (mt/year).

The company has already started construction of the first phase at Benga. It should be completed by the second half of 2011 and will produce 5.3mt/year of ROM coal.

Riversdale’s partner in the Benga project is Indian steel and manufacturing group Tata Steel, which holds a 35% stake.

Riversdale has now signed a “non-binding memorandum of understanding’ with Wuhan Iron and Steel Corporation (Wisco) and a logistics partnership agreement with China Communications Construction Company (CCCC) over the Zambeze project, which is adjacent to Benga.

The memorandum of understanding provides for Wisco to take a 40% stake in the Zambeze coal project for payments totalling $800m. These will be made in three tranches, subject to the achievement of certain milestones.

Wisco will also be issued 8% of the ordinary equity in Riversdale on signing of the definitive agreements at an agreed price of A$10 a share.

The memorandum of understanding calls for completion and signing of the definitive agreements within 120 days.

The geology of the Zambeze project is similar in structure to Benga and, as of end-May, the coal resource estimate at Zambeze stood at 9 billion tonnes.

Wisco will earn the right to buy at least 40% of the coking coal produced from Zambeze as well as the right to buy at least 10% of the coking coal from Benga, in both cases on market terms.

According to Riversdale chairman Michael O’Keeffe, the memorandum of understanding also covers the facilitation by Wisco along with CCCC and other Chinese companies of a comprehensive study of “mine-to-ship logistics’ to enable the export of large tonnages of coal from Zambeze.

That’s crucial because of the serious limitations on the current rail and port infrastructure within Mozambique.

Even with the current rehabilitation work being carried out on the Sena/Beira railway line and expansion of the facilities in the port of Beira, present facilities will not be able to cope with the tonnages that Brazilian group Vale intends exporting from Moatize – let alone what Riversdale wants to ship.

Those constraints have already led one coal operator to sell out of Mozambique, although its place has been immediately taken by another new entrant to the sector in the form of AIM-listed Beacon Hill Resources.

In May, AMCI Capital sold its Minas Moatize coal mine – currently the only operating coal mine in Mocambique – to Beacon Hill for $35m.

According to AMCI executive Egon Mauss, the decision to sell was taken because of logistical constraints and other factors affecting the development of coal businesses in Mozambique.

In October 2008 Mauss said: “In time Mozambique will have a viable infrastructure able to export tens of millions of tonnes of coal, but it’s going to take 10 to 20 years to put it in place. It is not going to happen in my working lifetime.’

Vale plans to start mining at its Moatize project next year and will ramp up to a full production rate of 11mt/year of saleable coal. Of this, 8.5mt will be coking coal and 2.5mt/year will be thermal coal.

Vale plans to rail the coal to Beira along the rehabilitated Sena line, which will have the capacity to handle about 6mt/year of which 5mt/year should be coal.

That capacity has been queried by Mauss, who reckoned the Sena line will only be able to transport 3mt/year of coal “under the best of circumstances’.

Given the obvious constraints on the line, Riversdale has commissioned a study to look into the possibility of sending coal to Beira in barges down the Zambezi river.

The longer-term solution is widely held to be development of the northern Mozambique port of Nacala which, unlike Beira, has a deep-water harbour where a dedicated coal export terminal could be built.

According to Vale: “Given the limitations of 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.’

The development of Nacala as a major coal export port could also be crucial for various proposals to develop coal resources in northern and north-western Zimbabwe.

According to Wisco general manager Kuang Zhong Xiang, the investment in Zambeze “represented a major strategic move to a coal basin of increasing relevance to Chinese steel mills’.

He added Mozambique was an attractive investment location with the potential to be a significant source of coking coal, as well as a region that “we recognise to be strategically significant for our future goals’.