Only five years ago, Mozambique’s economy was one of the fastest growing in Africa on the back of rapidly rising commodity prices. The province of Tete, in north-western Mozambique, holds some of the world’s largest untapped thermal, coking and metallurgical coal (met coal) reserves. Coal, alongside LNG reserves, was set to transform the country’s economic future as foreign investors, including mining majors such as Vale, Anglo American and Rio Tinto, acquired or expanded assets worth billions.
Fast forward to 2014 and for Mozambique, like many sub-Saharan African states with an economic reliance on commodity exports, the outlook was beginning to change. The collapse of coal prices inevitably would hit the Mozambican economy hard; in fact, any substantial price reduction was bound to have a disproportionate impact. Longstanding issues around inadequate infrastructure meant miners were already managing higher operating costs on account of unreliable power supplies, inefficient and ageing port infrastructure, and regular attacks on the railway lines.
The collapse of coal prices meant many projects in Mozambique were no longer financially viable; Anglo American exited the country in 2013, Rio Tinto sold its coal assets and wrote off USD3.5bn in the process, while Vale remained in Mozambique but halted expansion projects.
By the latter half of 2016, the lift in met coal prices should have encouraged the first green shoots of recovery for Mozambique’s coal sector. Unfortunately, it will be several years before the country’s mining sector begins to return to full strength. In April 2016, a debt scandal was revealed by investigative journalists; it emerged that back in 2014, the government had signed secret deals for nearly USD2bn of loans. These loans increased debt levels to 90% of GDP and were not disclosed to the International Monetary Fund (IMF), or other international donors. Aid was immediately suspended.
The debt scandal is of such significance that it has changed the outlook for Mozambique over the next five years, at a time when the country should be capitalising on the recovery of met coal prices. The additional debt burden, combined with the lasting impact of the 2016 drought, means that there are changes ahead for the country’s investment environment from an economic, political and security perspective – all of which have the potential to impact miners.
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