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Rio’s Write-Down Takes Casualties

Last week’s surprise US$3B write-down of the assets in Rio Tinto Coal Mozambique will have far-reaching repercussions, beyond the changeover of leadership at Rio. David McKay from South African Coal Report looks at the implications.

Rio Tinto Coal Mozambique | Leadership | Assets | Riversdale Mining | News
PRLog - Jan. 25, 2013 - BRISBANE, Australia -- Rio Tinto Coal Mozambique’s (RTCM) write-down of assets is a body blow to other coal miners and exploration companies operating in the southern Africa country as it raises fears infrastructure development will take longer than anticipated with a consequent impact on capital budgets, analysts said.

One analyst said Rio Tinto’s investment in Riversdale Mining in 2011, which forms the basis of RTCM, for just under $4B, was “a poor investment”. Although not exactly an indictment on Mozambique as an investment destination, the write-down nonetheless brings into sharp perspective the challenges to Mozambique’s ambition that it become a 100Mtpa coal exporter by 2018.

Rio Tinto announced on January 17 that its CEO of six years standing, Tom Albanese, as well as Doug Ritchie, formerly head of Rio Tinto’s energy division, had resigned from the company. Albanese is to stay on in a handover capacity until July 16, but any options or bonuses awarded to him after 2011 were removed. “That’s a sign of a bad leaver,” said Des Kilalea, an analyst for RBC Capital Markets. “That’s how CEOs get fired in the modern age,” he said.

Ritchie, who brought and managed the Riversdale Mining investment to Rio Tinto, left the group with immediate effect.

In its announcement, Rio Tinto said the primary reason for the resignations was an impairment charge totalling $14B. Of this, between $10B and $11B related to write-downs in Rio Tinto Alcan, a largely anticipated event that had been flagged by Rio Tinto earlier in its financial year. In addition, the aluminium market is also acknowledged to be in a fairly poor shape.

Rather, it was the $3B write-down at RTCM that did the damage to Albanese. Said Jan du Plessis, chairman of Rio Tinto: “The Rio Tinto board fully acknowledges that a write-down of this scale in relation to the relatively recent Mozambique acquisition is unacceptable.”

A key disappointment for RTCM was a decision by Mozambique’s government to refuse it the right to barge coal down the Zambezi river, said Du Plessis.

“Rio Tinto sought to transport coal by barge along the Zambezi River, but this option did not receive formal approvals,” he said. “These infrastructure constraints, combined with a downward revision to estimates of recoverable coking coal volumes on the RTCM tenements, have led to a reassessment of the overall scale and ramp up schedule of RTCM and consequently to the impairment announced today,” he said.

He added that Rio Tinto continued to engage with Mozambique’s government on “all transport infrastructure options.”

Abdul Razak, Mozambique’s deputy mines minister, said geological surprises were common in mining. Regarding infrastructure, however, he said the Mozambican government wanted sight of Rio Tinto’s technical information.

“We hope they can show us technical data about these findings for us to carry out our own checks,” Razak is reported to have told Portuguese news agency Lusa. He said government was working with mining companies to increase transport capacity over the short to medium term.

“Of course there is no immediate solution, but, in the future, not in the medium term, there will be solutions for carrying coal and other products, on the Sena [rail] line and Nacala line, as well as on other railroads that are due to be built,” said Razak.

Analysts were worried about the implications of the write-down – which virtually represents the entire Riversdale deal.

“This does raise a ‘red flag’ for all the other miners that became caught up in the scramble for Mozambique ‘coking coal’ assets,” said Peter Davey, an analyst for SBG Securities in London. “The region should be seen as a five to 10-year development project,” he added.

Rio’s capital expenditure program had amounted to $600M since the acquisition of Riversdale.

“The implications of the Mozambique news are more serious elsewhere with a number of other operators, including the juniors Baobab Resources and Beacon Hill Resources probably affected by country association,” said Roger Bade, an analyst for UK stockbroker, Whitman Howard.

“This also implies that ENRC’s plans to raise $5B for its railway are even less than zero than they were before,” he added.

ENRC said in November last year that it hoped to build a 40Mtpa to 60Mtpa railway linking its mine in Tete province in northern Mozambique with Nacala, a new port in which the Brazilian firm is also investing. Vale has started an 18Mtpa line from its Moatize mine in Tete to Nacala at a cost of $4B to $5B. ENRC had earmarked first freight to roll on its line in 2014.

HSBC analyst, Jonathan Brandt, said in a report that it was possible the write-down could drive Rio Tinto into a partnership with Vale which has stated before it would prefer to have a partner.

"This potential partnership would be very much in line with Vale's strategy of reducing capex through partnerships," Brandt said. Vale's Moatize had production capacity of 11Mtpa in its first stage of development, but the Brazilians plan to double the capacity of Moatize to 22Mtpa in 2014.

Infrastructure delivery has been far from predictable in Mozambique. The refurbishment of the Sena railway to 6Mtpa which connects Tete to Beira was nearly two years overdue.

“If Rio is struggling to make its assets there work, then the same would likely apply to others in the region. Probably good news for other coking coal sources around the world,” said Marc Elliot of Investec Securities. In a note to clients earlier in the day, Investec said the write-down was acknowledgement Riversdale was “a poor investment”.

“I think what it shows is that Rio Tinto was too optimistic about overcoming the infrastructure constraints in Mozambique,” said Kilalea. “I almost think the mining firms didn’t learn from west Africa (iron ore mining developments that are heavily limited in terms of infrastructure).”

In terms of Albanese’s future at the company, it was “… the straw that broke the camel’s back,” said Kilalea.

As late as April 2012, Rio Tinto insisted that barging some 3Mt of coal from 2015 down the Zambezi from its Benga coal mine was a transport option for its coal despite the Mozambican authorities decrying it as ecologically unacceptable as dredging the river could worsen flooding.

Du Plessis’ comments however that recoverable coal at the Benga and Zambeze prospects were lower than expected seems to be new, and all eyes will be on Albanese’s replacement, Tom Walsh, on February 14 when he announces the group’s full-year operational and financial results. Mozambique coal watchers will want to know the extent of the output downgrade.

RTCM said it hoped to produce 1Mt of coal from the $500M Benga mine in its 2012 financial year, growing to 1.5Mt in 2013. A second stage development would see output expanded to 6Mtpa of coking coal and a further 4Mtpa of thermal material from the mine. At Zambeze, first production was targeted for 2015 with some 10Mtpa of coking coal and 6Mtpa of thermal coal forecast by 2018.

For the full story, subscribe to Energy Publishing’s South African Coal Report. The South African Coal Report is published weekly and provides comprehensive analysis along with price, trade and tender information on the coal industry in southern Africa.  To receive a free trial subscription, contact us at marketing@energypublishing.biz or visit http://coalportal.com/.

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