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Mozambique 2016 | ENERGY & MINING | REVIEW: MINING

Mozambique's vast mineral reserves have yet to be fully explored and hold great potential; however, falling investment and infrastructural issues are holding the industry back.

Bearish sentiments in the global mining industry, contractions in growth among trading partners, plunging commodity prices worldwide, and postponed investments in the sector due to tensions in the northern part of the country have left mining companies in Mozambique feeling somewhat cautious about the future. Though market analysts predict real GDP growth of 6% in 2016, mining and the extractive industry remains a relatively small contributor to GDP growth in Mozambique. Production looks set to continue, regardless, spurred largely by increased productivity in the industry and growing demand for electricity locally. Mozambique's coal reserves are estimated at over 20 billion tons and rich mineral reserves of aluminum, graphite, gold, and rubies have continued to attract large international corporations. Still, while coal continues to be the major driver of its extractive industry, falling commodity prices have forced some of the world's biggest coal consumers to slowly move away from thermal coal energy and adopt alternative strategies, such as turning thermal coal into electricity or focusing on mining graphite and gemstones.

Sluggish growth prospects for coal across the globe of 0.4% a year until 2040 and falling coal prices have forced companies with existing investments to play the waiting game or cut their losses. Similarly, the price of aluminum has fallen by 15% since 2015. The African Economic Outlook noted that all coal mines in Mozambique are currently operating at a loss. However, analysts expect the mining sector to pick up in 2016, driven by rising coal production and prices of coal and aluminum picking up in 2017.

The state-owned Coal India in July called quits on its $80 million coal exploration efforts in Tete and relinquished most of its concession area in Mozambique. The company reported that coal yields in the area were of poor quality in addition to existing difficulties in transporting coal to Beira port. Conversely, International Coal Venture Private Ltd. (ICVL), part owned by Coal India, is ramping up production at its Benga mine, which it bought from Rio Tinto in 2014. The company aims to increase production at Benga mine from 5.3 million tons to 13 million tons a year over the next five years; however, the expansion hinges on improvements to Mozambique's infrastructural network.

The Nacala Integrated Logistics Corridor, a project spearheaded to solve Mozambique's infrastructural inadequacies in port and railway capacity, will be instrumental in boosting the mining sector. It will provide alternative transport of resources, cargo, and passengers, and further develop Mozambique's agricultural and manufacturing sectors. The African Development Bank in December approved a $300 million loan to support the $4.5 billion project to link Tete province to the port of Nacala e-Velha. The project will require the construction of 228km of new railway and the renovation of 684km of existing track as well as a new coal terminal at the port of Nacala. As of the end of 2015, 97% of work on the railway had been completed. Original plans to launch the corridor in October had to be shelved after work was delayed by severe flooding along the line and construction accidents but operations commenced in January. In April 2015, Vale announced that the project had successfully transported 1 million tons of coal to Nacala since its launch. Vale originally owned 80% of the corridor after having invested some $259 million on the project, with the remaining 20% held by local port and rail company CFM. However, as a result of a deal with Mitsui Japan in December, Vale and Mitsui now each own 35% of the project. Mitsui is also acquiring 15% of Vale Mozambique, which operates the Moatize coal mine—the biggest mine in the country—with both deals amounting to $1 billion in total.

Still, the operational Nacala Corridor has not eased the infrastructural woes of Mozambique's mining industry. The Sena railway line, which runs from Tete to the port city of Beira, was similarly refurbished in 2015 at a cost of €163 million to triple its capacity to 20 million tons; however, Beira port is already overloaded and will remain underequipped to handle the increasing load until 2020, when expansion plans are completed.
Demand for steel in Mozambique, meanwhile, is expected to soar in the next decade and companies have stepped up their investment plans. Baobab's planned integrated mining and steel-making operation in Tete province is targeted at servicing the growing demand for steel from Mozambique and neighboring markets of Zambia, Malawi and Zimbabwe, which are almost entirely dependent on steel imports. The project is also focused on industrialization and job creation for locals.

The World Bank warns commodity exporters in Africa to adjust to a new, lower prices and focus on developing new sources of growth in light of less supportive market conditions. Ncondezi Energy, Vale, and Jindal Africa are tapping into Mozambique's growing demand for power and branching out into power generation. With demand for electricity expected to increase by 15% annually and capacity currently peaking at 2,200MW, mining companies are taking advantage of the thermal coal they are producing as a by-product to generate power. Construction of a 300MW power station developed by ACWA Power of Saudi Arabia, Vale, and Mitsui using thermal coal from Vale's Moatize mine is currently ongoing. Approximately 80% of the power will be used for the Moatize mine while the remaining 20% will be sold to local power company EDM. The project will be developed in two phases and is expected to cost $1billion in the first phase. Similarly, Jindal Africa, a subsidiary of Jindal Steel & Power, will open a 150MW capacity power plant at Chirodzi coal mine to turn thermal coal into electricity. The company plans to use the majority of the electricity to power the Chirodzi mine and will sell the excess to EDM.

Ncondezi Energy, meanwhile, is focused entirely on mining thermal coal and burning it to create electricity to sell to EDM. The company is partnering with China's Shanghai Electric Power to build the integrated mine and power station, which will have an initial capacity of 300MW with a planned capacity of 1,800MW. The mine and plant will be commissioned in 2017 and is expected to commence operations in 2018.

Companies have also started exploring alternatives in the country. Australian mining company Triton Minerals signed a letter of intent with Chinese group Shenzhen Zhongjin Qianhai in April for a graphite mining project in Mozambique. The $200 million project involves Triton Minerals supplying the Chinese company with 200,000 tons of graphite concentrate over 10 years from Monte Nicanda, one of the largest known graphite reserves, in northern Mozambique, at a minimum price of $750 per ton. The Australian company also signed two other agreements with Chinese groups in 2016 to finance graphite exploration projects in Mozambique. Another Australian miner Mustang Resources Limited, meanwhile, acquired majority stakes in two exploration licenses in the Balama graphite mining project after identifying several areas for exploratory drilling for the discovery of high-grade graphite deposits.

Developments were also seen in Mozambique's gems and precious stones mining operations. An independent study confirmed the Montepuez ruby mine in Mozambique, one of the world's largest deposit of rubies, has mineral resources of 467 million carats of ruby and corundum at a grade of 62.3 carats per ton of ore. In conjunction with similar efforts to boost the industry, the Nampula provincial government announced in March its plans to open a $50-million gem and precious stones certification center to assess the commercial quality of gems and precious stones mined in the country and boost their production.

Mining will continue to be a significant part of country's economy but projects to diversify away from the extractive sector are key.