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Coal in Moatize Gambo Audu Julio Ribeiro Oliver Scott Hajime Taniguchi Finance 456/February 2006.

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Presentation on theme: "Coal in Moatize Gambo Audu Julio Ribeiro Oliver Scott Hajime Taniguchi Finance 456/February 2006."— Presentation transcript:

1 Coal in Moatize Gambo Audu Julio Ribeiro Oliver Scott Hajime Taniguchi Finance 456/February 2006

2 Introduction Estimated 2.4 billion ton reserve of coal in Moatize, Mozambique Projected extraction cost of US$1 Billion Open bid process under supervision of IFC and Mozambican Government Limited geological information of the region Poor infrastructure (rail, power, port)

3 Companhia Vale do Rio Doce (CVRD) Brazilian company Formed in 1942 with 80% government ownership Privatized in 1997 Market Cap of US$48 Billion Expertise in large-scale mineral projects Own high volume mine-railroad integrated systems Major global supplier of pelletized iron World’s largest producer and exporter of iron ore World’s second largest producer of manganese

4 CVRD Strategy Diversify mineral activity further Widen spectrum of products offered First investment in the coal industry Become a global player in the mining industry Attempting to acquire assets abroad Recently lost bid for copper mines of Noranda (Canada) and Las Bambas (Peru) Vertical integration Owns significant interests in companies in the Brazilian steel industry Positioning for projected growth of steel industry in Brazil

5 Current Product Line Breakdown

6 History of Mozambique 1975- Independence from Portugal 10-year guerrilla war Marxist Frelimo party emerges victorious Renamo challenges and begins civil war 1992- First peace in three decades 1994/1999- Democratic elections Frelimo wins them handily Renamo remains key opposition party 2004- Elections in December

7 Positive Macros Human Development Index increase 1993 to 2003 from.261 to.379 Mozal aluminum smelter Accounts for 50% of MZ GDP Created 5000 additional jobs Major jump in FDI 1997 to 1999 from $64mil to $382mil

8 Positive Macros

9 Limited Progress One of the poorest countries in world GDP per capita of $255 Total debt 103% of GDP 168 Human Development Index rank Life expectancy 40 years Literacy rates are 40% Heavily Indebted Poor Countries granted $4.3bill in debt relief

10 Limited Progress

11 Coal Industry Essential energy resource Energy consumption: Coal:26%, Oil: 37%, Natural Gas: 24% Dominates electricity and industrial fuel markets, especially in emergent Asia Two types of coal in Moatize Thermal- electricity generation Metallurgical (Coking)- steel and aluminum production Environmental issues

12 Historical Coal Prices

13 World Coal Consumption By Region (Source: EIA)

14 Coal Consumption in China by Sector (Source: EIA)

15 The Coal Industry in Moatize Largest unexplored coal deposits in the world Sporadic development since the 1940’s Activities suspended in 1983 due to civil war Transportation still a major problem- destruction of railway line during the civil war

16 Current State of The Coal Industry in Moatize Estimates between 2.4 Billion mt to 6 Billion mt of coal Anticipated Annual Production ~10 Million Tons/Year Export estimates  3-4 million tons/year to Far East, Europe and Brazil  2 million tons/year to Nigeria  Remainder feeds future coal-fired power station Reconstruction of railway line

17 Competitive Landscape Bidders down from 10 to 4 High financial and technical standards 4 Bidders selected were: BHP Billiton Rio Tinto Anglo American Companhia Vale do Rio Doce (CVRD) Scoring system to evaluate bids Commitment during exploration phase Strategy, Business Plan, and Long-term commitment Company experience Financial offer

18 Competitive Landscape COMPANYPREVIOUS COAL MINING EXPERIENCE? PREVIOUS EXPERIENCE IN MOZAMBIQUE? ADDITIONAL NOTES BHP BILLITON YesYes – Principal sponsor of Mozal Aluminium Smelter Project In talks to acquire WMC, lead sponsor of Corral Sands project in Chibuto RIO TINTOYesYes – Ilmenite exploration Exp. w/coal & in Mozambique ANGLO- AMERICAN Yes –Responsible for most coal mining in Africa YesAlso exp. w/coal & in Mozambique

19 Multilateral Agency Interest and Involvement IFC selection process allowed for competitive bids Interest in financing? South Africa’s IDC interest in project financing Possible funding from African Development Bank (AfDB)

20 Moatize Project Uncertainty Bidding process obstacles Limited geological information Infrastructure risks  Rail: Indian Consortium (RITES and IRCON) will rebuild and operate the Sena rail line  Power: Moatize isolation requires US$2B investment in energy generation and transmission  Port: New facilities to the North of Beira Port

21 Moatize Project Terms License to explore the Moatize Coal Reserves 2 year feasibility study Feasibility risks assumed by bid winner Bid winner granted a mining concession after 2 years if:  At least 5 million tons per year of saleable coal found  Proven technical and economic viability of the project Mozambique government involves bid winner in all infrastructure related projects Government failure to comply: Contract termination and compensation for bid payment and all feasibility costs

22 Moatize Project/CVRD bid Bid offer of US$122.8 M Consortium with American Metals & Coal Inc. Feasibility study cost US$34 M 3% production tax once mine is operational 5% carried interest for the Mozambique government 10% of shareholding reserved for Mozambique nationals Community and social development programs During exploration period US$6.5 M During production phase US$50 M

23 Discussion Questions Should Companhia Vale do Rio Doce (CVRD) bid for the rights to explore the Moatize coal mine? Is such investment aligned with CVRD’s strategy? What is the impact of the current political environment on the timing of bid? How would a change in coal prices affect the viability of the project?

24 Conclusion NPV Valuation:  Expectations of Coal Prices (Worst Case NPV ~ US $400)  Real Option Considerations Product Mix CVRD Potential Withdrawal  Cost of Capital Calculations What risks does CVRD face? Financing Options/PPP Considerations

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