METALLURGICAL COAL
Will Mozambique's Potential be Fulfilled?
November 2017
Mozambique was once expected to be the next big player on the global metallurgical coal market. In 2008, exports were expected to reach 40Mtpa by 2016; however, with years of delays and weakening coal prices, only 3.6Mt of exports were achieved for the year. In 2017, Vale’s Moatize mine is leading a significant production ramp-up, with coking coal exports to exceed 8Mt with positive cash margins. Are other producers likely to follow suit to fulfil Mozambique’s massive supply potential?

Teething Problems 

In its early stages, the development of coal projects in Mozambique suffered multiple setbacks. Infrastructure constraints on the landlocked Tete province meant new, high-cost logistics networks were required. These took some years to reach running capacity, with several issues, including gun attacks on trains, ongoing. Additionally, it was discovered most of the major deposits had poorer coal specifications than were originally reported and the level of phosphorus—which increases the brittleness of sponge iron—was found to be unexpectedly high. As such, reserves and resources were often overstated, with companies such as Rio Tinto forced to revise down reserve estimates and decrease the share of metallurgical grade coal. Combined with government intervention, each Mozambican coal project has experienced some, or all, of these setbacks, which were further compounded by years of declining coal prices. 

 

 

The State of Play

Currently, there are only two actively producing metallurgical coal mines in Mozambique; Vale’s potential 22Mtpa Moatize mine and Jindal Steel’s Songa mine, both located in Tete Province. Moatize is advancing well in its ramp up in 2017, and is expected to export around 8.5Mt of hard coking coal for the year, whereas Songa is anticipated to supply less than 500kt to the export market in 2017. There are also two well-documented projects with the potential come on line over the next fifteen years, depending on infrastructure and market conditions. These are ICVL’s 16Mtpa Zambeze and Talbot Group’s 8Mtpa Revuboe projects. Additionally, two operations are currently idled, namely ICVL’s Benga and the former Beacon Hill Resources’ Minas Moatize mines. 

Vale and Mitsui’s Moatize mine is the most advanced coal operation in Mozambique. With production commencing in 2011, the mine’s ramp up was delayed several times due to lack of transport infrastructure. Vale spent over US$4.4bn developing its own rail link to the port of Nacala and constructing its own deep-water terminal, which were completed at the end of 2015. With mine construction already complete, full commissioning of the new corridor, combined with continued optimisation of the mine’s two coal handling plants, has allowed Moatize to ramp up significantly in 2017. This is anticipated to continue over the coming years, with the mine reaching its full 22Mtpa capacity by 2022. The improved economies of scale and increase in coal prices are expected to result in Moatize’s first full year cash profit in 2017. AME forecasts the mine to remain economically viable going forward, with positive cash margins of US$300m per annum at full capacity.  


 

Jindal Steel and Power commenced production at its Songa mine in 2012 with the plan of an initial 3Mtpa mine, followed by a Stage Two expansion to 10Mtpa to commence soon after. In the first four years, the miner failed to exceed 0.5Mtpa of production, due to high mining costs and a lack of capacity on the Beira rail line. Due to unprofitability, Jindal idled Songa in February 2016, before restarting later that year in October on the back of surging coal prices. Songa is currently operating at a rate of 125kt ROM per month (1.5Mtpa), with Jindal targeting to increase to 2.4–3Mtpa ROM in the near term. Unless further costs reductions are achieved, it seems unlikely Jindal will execute Songa’s 10Mtpa Stage Two expansion in the short to medium term. 

When Rio Tinto purchased Riversdale Mining, including the Benga project, in 2011 for US$3.9bn, the company was aiming to significantly increase its export metallurgical coal production. As it became apparent that Rio would not gain approval to dredge the Zambeze River and barge product coal to the coast, Benga’s economics weakened dramatically. Rio Tinto eventually sold its Mozambique division in 2014 to India’s ICVL for US$50m, with the new owners idling Benga in 2015 due to unprofitability. As market conditions improved, ICVL announced plans to restart production at Benga in 2017, and released a tender for contract mining services in May. The company has also offered multiple tenders for the sale of thermal coal, the latest of which presented 200kt of deliveries between November 2017 and January 2018. With operations seemingly yet to recommence, AME expects ICVL is searching for a committed buyer prior to restarting production. Upon resumption, ICVL is set to target 375kt of ROM production per month at Benga, equating to 4.5Mtpa. This is far less than the originally targeted 13Mtpa, and it is unclear whether this volume will ever be pursued. 

 

The Future Prospects 

Five years ago, several large-scale Mozambican projects were progressing through the approvals process to imminently commence operations. With over four years of declining coal prices combined with the high costs and logistics problems faced by established Mozambican coal producers, significant doubt now exists as to whether these projects will be developed. While issues such as rail capacity shortages are largely rectified, the economics of these greenfields projects is uncertain. The two most advanced metallurgical coal projects are ICVL’s Zambeze and Talbot Group’s Revuboe. 

ICVL’s Zambeze project was intended to produce at a nameplate capacity of 16Mtpa, targeting 10Mtpa hard coking coal and 6Mtpa domestic thermal coal at a strip ratio of 5:1. ICVL were planning to develop Zambeze after ramping up its Benga mine to its nameplate 13Mtpa, likely to be achieved by around 2025. With considerable doubt over Benga’s expansion, and with the Indian government distancing itself from exploration blocks in Mozambique, it seems unlikely Zambeze will be developed in the next ten years. 

Talbot Group’s Revuboe project was planned to produce 8Mtpa, of which approximately 63% would be hard coking coal. With a predicted relative low capital cost of US$500m and with strong joint venture partners in 
Nippon Steel & Sumitomo and POSCO, the signs for Revuboe were promising when a mining concession was granted in August 2013. Since then, all development progress on the project seems to have ceased, with no further developments reported by the controlling company Minas de Revuboe. If development were to recommence, AME expects at least 3–5 years construction time after the last approval is obtained.   

The other prospect, Minas Moatize, was a small mine developed in 2011 by Beacon Hill Resources that produced 1Mtpa, of which around half was export hard coking coal. Despite purchasing its own trains to try to reduce transport costs and gain priority access to new rail capacity, the mine was idled in early 2014 after sustaining heavy losses. Beacon Hill Resources has since been liquidated, with operations at Minas Moatize unlikely to be continued by another company.  

Even without the development of additional projects, Mozambique is set to markedly increase its share on the international metallurgical coal market from 2.7% in 2017 to over 5% by 2025. If the economics of coal operations in Mozambique improve over the next five years, this market share could potentially reach up to 10%, overtaking the US and Mongolia as the fourth-largest exporter of metallurgical coal globally.