For some investors the jury is out on Mozambique’s promising Tete mining hub in light of Rio Tinto’s $3bn coal write-off there.
The write-off sent shockwaves across the African mining sector at a time when there are serious questions about the industry’s appetite for major growth projects.
According to Baobab (LON:BAO) chief Ben James, though, there have since been positive signs in Mozambique that the situation is improving.
Since Rio’s action - at the end of January - the region has seen significant developments.
Brazilian mining major Vale this month confirmed that a new railway link capable of carrying 30mln tonnes each year would go ahead.
Around 12mln tonnes of that capacity would potentially be available for third parties including companies like Baobab.
“The Rio write down was something of a reality check for the government,” James said.
“There is a possible fairytale opportunity here for Mozambique, but it will only come off with a lot of elbow grease and with everybody working shoulder to shoulder.
“So we now seeing the government, rather than taking a backseat, actually taking a much more proactive approach. And that’s wonderful news for companies like ours.
“The government is much more ready to pick up the phone, reach agreements and broker meetings.
“And that is also true of the majors, both Vale and Rio, too. They are being very co-operative with the juniors. We are showing that we can all work together to develop and define infrastructure solutions.”
Baobab is in the midst of the important feasibility and mine planning stage. After finding over 700mln tonnes of iron ore in the Tete province it now has to confirm if and how a mine can be built.
Crucially it must also secure a viable export route to take its end product to market.
James explains that a number of options are open to the company and it is continuing talks to secure allocation on one or both of the two key railway lines currently in development.
He says the company won’t be putting all its eggs in one basket and it is pursuing these opportunities through both the public and private sector.
“We’ve been talking with Vale for a long time and that route really looks like it is going to go ahead now.”
In fact, he says he'll soon be visiting the new rail spur construction in Malawi – where 2,000 men are building the railway through to Tete.
“The project is definitely happening. And there will be plenty of third party allocation on that railway line once it is commissioned.”
“What we are also seeing now is a very clear commitment from the international community, particularly the Japanese, for co-funding the east-west rail corridor.
“All of these things are in play."
Meanwhile, James also points to positive signs that the expansion and refurbishment of the Sena rail line is well underway.
Fellow AIM-firm Beacon Hill recently secured an allocation on this line, which connects the Tete province to the Port of Beira, at the mouth of the Pungue river on Mozambique's coast.
"We would expect to see the railway handling up to 6mln tonnes per annum very soon, and it will continue expanding from there on.”
“For us, the route through to the Port of Beira would present an ideal solution for our exports because of both the distance to the coast and the fact that we won't be constrained there unlike the coal miners.
“We would require Handymax sized vessels, which are operating very efficiently at the port at the moment. So while Beira is not an ideal port for the coal players, it is ideal for Baobab.”
James explains that Baobab has always had strong support from the Mozambique government and this is, in part, because the company plans will see additional industry being developed in the region.
Through intermediate smelting at the ‘mine gate’ it plans to add value to the ore it mines, processing it into pig iron.
“The government has been keen to endorse and support these plans.”
This pig iron operation can become one of the largest of its kind in the world, with the potential to produce up to 4mln tonnes of ‘pig’ iron each year over a 35 year life.
Currently the largest producer is a Russian operation that yields around 2.5mln tonnes a year.
The process requires significant volumes of coal, which in itself presents an opportunity given the region’s vast coal fields and its currently limited scope for exports.
Both Vale and Rio are keen to talk to Baobab about the coal requirements, according to James.
“Their thermal coal can’t be commercially exported at present. It is simply not viable for them. So it is just building up in stockpiles at the moment.
“We will need coal. We can take some of it off their hands. So we’re in the process of opening discussions about possible off-take arrangements and we are confident of getting very competitive mine gate rates for that coal.”
The development plans are now coming together with the fully funded prefeasibility study drawing to a close.
Last week, Baobab revealed the latest in a series of resource upgrades that have seen the Tete project’s resource base grow massively from to over 700mln tonnes from 160mln tonnes in the summer of 2011.
It has also made a bold step in kicking off a drilling programme and work on other ‘time critical’ elements for the definitive feasibility study.
This decision was made as the mine developer became sufficiently confident in the outcome of the ongoing pre-feasibility work.
From a financing point of view Baobab is in a strong position as it moves the project forward, James says.
The prefeasibility is fully funded and so is the ‘front end’ of the bankable work.
And in the meantime, wheels are now in motion on a process to select a strategic partner to help bring the project through commissioning and into production.