JOHANNESBURG/LONDON, Jan 22 (Reuters) – Rio Tinto has begun a review of its Mozambique coal mining operations which cost it a $3 billion write-off, reconsidering development plans, partners and its options for getting the coal from pit to port.
Rio’s troubles in Mozambique offer a cautionary tale on big projects in new areas, which have become increasingly unattractive for miners under pressure from shareholders to control spending and improve returns.
A source familiar with the project said the review was underway. “The reality is that Rio has to look at what it has, and at what options there are,” said the source. The focus is not currently on a sale, although a new project partner could help Rio to share the infrastructure and development costs.
Rio sacked chief executive Tom Albanese last week when it wrote off $14 billion on the value of its aluminium arm and the Mozambique coal assets it bought in 2011. Mozambique’s infrastructure had proved more challenging than expected, Rio said, and estimates of recoverable coking coal used in steel production were lower than expected.
Benga mine, in which India’s Tata Steel owns a minority stake, began exporting last year but the amounts remain a small fraction of the eventual estimated capacity of Rio’s total Mozambique coal assets.
The coal writedown and review come less than two years after Rio took control of the assets by buying the Riversdale mining company for $4.2 billion. This embarrassment is likely to deepen miners’ reluctance to tackle big projects from scratch, particularly where infrastructure is poor.
Rivals Vale and BHP Billiton have already begun pulling back from big African bulk commodity projects, where overcoming infrastructure problems is vital for success. This reflects investors’ demands for more cash control and less profligate spending. However, Rio has Simandou, a major iron ore project in Guinea.
Vale of Brazil remains a major player in the former Portuguese colony of Mozambique, where a common language has helped it to build close ties with the government. However, Vale has retreated from its portion of Simandou in Guinea, where it is facing uncertainty over the right to develop the asset.
Anglo-Australian BHP has also largely retreated from West Africa.
“This is a… cautionary tale,” analyst Paul Gait at Sanford Bernstein said. “There is a real question mark there: the ability of the majors to successfully operate in these frontier countries has yet to be demonstrated.”
Rio snapped up Riversdale during a brief flurry of activity as commodities recovered from lows hit around 2008. Industry sources said it was under pressure at the time to strike a deal in Mozambique, seen as the new coking coal frontier, and concerns about infrastructure in Africa became secondary.
A spectacular rise in China’s steel demand then also backed the case for a Mozambique purchase.
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