Write-down by Rio Tinto.
We rarely have an opportunity to put a value on logistics, but recent reports have shed some light on what logistics can be worth to a business. In 2011, one of the world’s largest mining companies paid U$4.2b for a coal mine in Mozambique. Last week they wrote the value of the mine down by U$3b. The reason for such a dramatic reduction in value? The company had underestimated the challenges of getting coal from the north west Province of Tete to the coast, for export to Asia.
The Moatizi coal basin is considered as the world’s last undeveloped coal reserve. With initial estimates of 150b tonnes of coal and the potential to mine 100m tonnes per year, availability of the raw material is not the problem. The focus for managers must be moving the coal.
As development of mines gathers pace, the urgency to transport the coal grows. The current rail infrastructure cannot cope; even with upgrades to the 575km line from the mines to the port of Beira; available capacity was far short of demand. What to do?
When Rio Tinto purchased its mine it also acquired an idea to transport the coal by barge 500km down the Zambezi River, then load bulk ships offshore from a floating terminal. This would overcome the rail capacity limits, but require dredging and widening parts of the river. Media reports indicate this idea was developed into a plan that was subsequently rejected by the Mozambique government, because the earthworks were likely to worsen damage caused by the annual tropical cyclones.
Waiting for capacity
With limited rail capacity and the barge option rejected, the U$4.2b paid for the mine could not earn a return, resulting in the write-down. Of course, all is not lost as the coal assets remain; it is a matter of timing. The current line to Beira will have additional upgrades; a new 900km rail line cutting through Malawi is due to be operational in 2015 and a new rail line to the mouth of the Zambezi River with an associated loading terminal could be operational by 2018. If all goes to plan, then by 2018 the three rail lines will provide the capacity required by all mining companies in the Moatizi coal basin.
As a large multi-national, Rio Tinto can afford to write-off U$3b and wait six years for sufficient transport capacity; but, can your business afford logistics planning failures?