Monday, January 21, 2013

Rio Tinto's $3bn Mozambique coal impairment-implications for India

Last week, RioTinto(the global miner) announceda $2.8bn writeoff of its Mozambique coal mines. Since companies like Jindal Steel, Tata Steel and Mercator Lines have coal mining operations in Mozambique, I thought of analyzing this situation if it holds any insight for investors. For some background, note that by acquiring Riversdale’s operations in Mozambique, Anglo-Australian RioTinto took control of 22 exploration licenses in Tete, including 65% of the Benga mining project (Tata Steel from India holds the other 35%) and the 100% of Zambezia project. Benga mine was under prelimnary production while Zambezia was under exploration. Under RioTinto's original plan Coal would have to be moved from its mines then loaded on to a train so it could travel 600km to the Zambezi River where it would be taken to the coastline
But Rio could not win the approvals to ship the coal down the Zambezi. To compound its challenges, coal prices have stayed weak and Rio appeared to overestimate the amount of coal it could access in Mozambique. As per the Reuters article below, 65% of the Mozambique coal holding company is now valued by RioTinto at $600MM, thereby giving a total enterprise value of $1bn. Even giving a 50%(very conservative considering it was the higher potential mine) valuation to Benga, that gives it an EV of $500MM. 

Given that Tata Steel paid a bargain basement price of $88MM for its 35% stake, it need not fear any impairment even using the same assumptions
Even for Mercator Lines which I wrote about earlier below, the Kotak Report in below PDF of 23Aug2012, assigns a value of around Rs 12 to the coal mining operations+coal trading operations. By coincidence, the market values the company at the estimated NAV of the ships only, without giving value to the volatile coal business, or the troubled mining business.
Lesson:- Companies like RioTinto have global experience of navigating these issues. The fact that they failed to do so in Mozambique, should be a cautionary note to the other Indian companies who rushed to do business in Africa-for example Karuturi which faced flash floods wiping out its first year crop in Oct-12 And before according premiums to the relaxed regulatory regime in those countries(like for African farmland/mining concessions), do accord the regulatory risk and enhanced NGO scrutiny.


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