Coal global demand and supply 2011-2050 & Demand for clean tech: Mozambique: Moatize Coal Deposit

In November 2004, IFC concluded a mandate advising the

Government of Mozambique on selecting a developer for the

Moatize coal deposit in the poverty-stricken Zambezi Valley.

The Moatize Coal Project is intended to serve as anchor project

to develop the Zambezi Valley, increase economic activity, and

improve local social conditions while also contributing to the

country’s income.

The winner was Brazil’s Companhia Vale do Rio Doce (CVRD), which bid US$122.8 million

for the rights to explore and develop the coal deposit. CVRD’s proposal included

an integrated feasibility study for the Moatize Coal Project and for associated railway

and port infrastructure, plus studies to develop a 1,500 megawatt coal-fired power

plant, along with pre-feasibility studies for other industrial projects. CVRD committed

to spending US$6.5 million on community development projects during the project

exploration phase and more than US$50 million during the production phase.

IFC benefited from the support of DevCo to pay for international technical and legal

consultants. Devco is a trust fund supported by the U.K. Department of International

Development, the Swedish International Development Cooperation Agency, the Department

of Development Cooperation of the Netherlands Ministry of Foreign Affairs,

and IFC.

Background

Mozambique enjoyed some economic success from 2001 to 2004.

Its GDP had a sustained growth rate in excess of 7% spurred by

the Government’s strategy of promoting economic development

through some successful “mega projects”. Even though these

capital-intensive projects contributed greatly to the country’s

economic growth, their trickle-down effect was not at the level

the Government had anticipated and did not spur growth in the

traditional and informal sectors. Consequently, Mozambique

continued to face great challenges: a GDP among the lowest in the

world with large disparities between regions, half the population

below the national poverty line, low life expectancy, and only 40%

literacy rate.

The Zambezi Valley remained simultaneously one of the least

developed and one of the most populated regions of the countrty,

with approximately 3.5 to 4.0 million people living off subsistence

agriculture. The region was ravaged by a 15-year long civil war and

remained largely on the sidelines of the economic development

experienced by the rest of the country.

IFC’s Role

Following 10 years of unsuccessful attempts to attract a company

to develop the Moatize mine, in November 2003, the Government

hired IFC to advise on the selection of developer and set the

conditions for its successful development. The Government’s

objectives were socioeconomic and included :

engendering sustainable development, particularly • in the Zambezi

Valley;

• strengthening and diversifying Mozambique’s productive base.

The project presented major challenges. In particular, the

complex geology and the limited availability of geological

information, which prevented potential investors from presenting

well-informed offers; legacy issues; large capital investment

requirements; and complex infrastructure arrangements as the

600-km long Sena railway line had just been awarded under a

25-year concession --which made the project dependent on the

railway investor for its connection to the port of Beira.

Specifically, IFC:

• prequalified investors, resulting in the selection of four large

international mining companies;

• compiled all available data and assisted investors with due

diligence;

• defined the selection criteria and developed guidelines for the

proposals;

• assisted in negotiations with prequalified investors and lead the

drafting of the bidding documents; and

• assisted the Government in the evaluation of proposals.

Transaction structure

A complex selection process was designed to create competition

among four large mining companies while ensuring transparency

and credibility and obtaining the highest possible value for

the Government. Bidders were required to be committed to

environmental management and to undertaking community and

social development programs in the region.

Bidding

Ten mining companies presented credentials for prequalification

and four were prequalified: the Anglo American Corporation,

BHP Billiton Mitsubishi, CVRD, and Rio Tinto.

CVRD was declared the winning bidder on November 12, 2004.

In addition to a strong financial component, key elements of

CVRD’s proposal included a strong commitment to community

and social development as well as a long-term strategy that

included the development of a mine with a capacity of 21 million

tonnes per year, 3% royalty (production tax); 5% free carried

interest for the Government in the project, and up to10% of

shares reserved for Mozambican nationals.

post-tender results

• CVRD spent approximately US$80 million on the

feasibility study, in addition to US$130 million on

the fee for the exploration license.

• The expected investment includes US$1.5 billion for

developing the mine, US$1 billion for rehabilitating

the Nacala railway line, more than US$1 billion for

power generation, and US$0.5 to US$1 billion for

power transmission.

• The success of the project brought international visibility

to Mozambique’s potential as a coal producer,

spurring investment by large international companies

such as Tata, Riverdale, and India Coal in the

Tete region of the Zambezi

Valley that will result in

large inflows of investment

to the region.