david humphrey, standard bank - developing new models of finance to bring vital heavy haul rail...
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Financing Rail in Africa
Nacala Corridor Section 3 Malawi
Bridge 3C52 at 128km, 21st January 2014
1 Introduction
With the exception of South Africa, the railways of sub-Saharan Africa have been in decline since
independence.
Competition from road, political instability, corruption, poor management and lack of investment have left most
African railways with very old rolling stock, and infrastructure that is in poor condition.
Most railways remain owned by national Governments. Some railways have their operations and maintenance
concessioned out to the private sector. Most struggle.
Governments generally lack the balance sheet, resources or expertise to develop complex projects such as
rail by themselves
The need to exploit and transport new bulk commodity (coal, iron ore, manganese) projects to port
by rail in parts of Africa will however lead to significant demand for rail in Africa over the next decade
The size of the opportunity in the next decade is difficult to gauge, but it is likely to be 2-3000km of new rail,
with investment in excess of $25bn needed.
Standard Bank hopes to play a leading role in the development and funding of these projects in the coming
years.
Key points
Africa’s railways are
largely a legacy of the
colonial past, which
relied on general freight
for revenue.
In essence, as freight
moved to road, it has
been a sector that has
been in decline except
parts of South Africa
But…..bulk
commodities such as
iron ore, coal and
manganese can
generally only be
economically moved
by rail, and it is here
that the opportunity for
rail lies in Africa in the
near term.
“Bulk is Rail and Rail is
Bulk” is a good
summary
2 Three types of railway in Africa, only one profitable
There are three types of railway in Africa. Only one is inherently profitable, heavy haul freight
Passenger
– In terms of passenger/kms mostly metro, and here only really the densely populated cities in Egypt,
North Africa, Nigeria (Lagos) and South Africa (JHB and Cape Town) make sense. As with most metro
systems globally, the services need public subsidy to operate successfully
– The challenge here is getting consistent government support to allow the metro railways to deliver
investment and improve services
Lower volume freight/passenger railways
– These comprise the vast majority of African railways, and are mostly freight with the occasional
passenger service
– Around 50% of the railways are operated by private sector companies either under concession or
management contracts, the rest by government owned operators
– Outside South Africa, most railways suffer from investment deficits with track, rolling stock,
maintenance, signalling and training all below ‘standard”
High volume heavy haul freight railways
– These are usually profitable operations, mostly in the coal and iron ore sectors, and existing example are
the Orex line and RBCT line in South Africa, the line between Zouerat and Cansado in Mauritania, and
now between Pepel and Tonkolili in Sierra Leone
– New projects in this category (Mozambique, Guinea, Congo etc) are economically viable, but the
challenge is bringing them to market
Key points
3
Africa has a Rich Mineral Endowment…........
(1) Major known mineral resources
Source: Standard Bank, Raw Materials Group
Relatively under-explored
and under-exploited with
South Africa being the
exception
Route to market is the key
issue for all commodities.
Precious metals ,PGM and
copper can survive on road.
Bulk commodities such as
iron ore, coal and
manganese can generally
only be economically moved
by rail
KEY(1)
Au
Cu
Co
Coal
Diamonds
Iron Ore
Al
Ni
Sn
Ti
U
Zn
Oil
PGMs
Mn
Cr
Key points
4 …including heavy haul minerals, but concentrated in the South and West
KEY*
Cu
Coal
Iron Ore
Al
U
Mn
Coal is predominantly
situated in southern Africa,
specifically Botswana,
Mozambique and South
Africa itself.
Other countries, including
Nigeria and Kenya have
proven reserves
Iron ore exploration
continues, but the highest
concentrations have so far
been discovered in South
Africa and Western Africa,
stretching from Mauritania,
Liberia, Guinea, Sierra
Leone, Cameroon, Ivory
Coast, Congo Brazzaville to
Gabon
South Africa dominates the
Manganese landscape, with
over 80% of the world’s
proven reserves
Copper, Uranium and
Aluminium tend to be refined
into concentrate at site before
transportation. However
where this is not possible,
usually they need to be
transported by rail.
* Major known mineral resources
Source: Standard Bank, Raw Materials Group
5 Global Mineral Depletion – Africa is underdeveloped except SA
This map shows
the fall in the
financial
value of a
territory’s mineral
resources
due to current
extraction rates
Territories with the
highest mineral
depletion are
Australia, Brazil,
Chile and China
Mineral extraction
often causes
environmental
damage, itself a
form
of depletion.
Territories that are
small on this map
may lack minerals
or have used
those worth
extracting
6
Existing bulk mines have rail, new ones will need rail infrastructure
Most of the continent’s
bulk production is done
in South Africa, as a
result of significant
investments made in
the sector over the
years
Here the correlation
between bulk resource
and railway density is
high
Elsewhere in the
continent, it is generally
very low, but the quality
of Africa’s bulk
resource now means
that serious railway
development has to
occur if miners are to
have a viable route to
market, particularly
Mozambique and West
Africa
KEY
Iron Ore
Manganese
Coal
Key points
Cape Gauge
Metre Gauge
7
The need for investment in existing rail is often..........
........self-evident!
8 West Africa – Major deposits of bulk commodities, lack of railways
This map shows the imbalance between resource and rail infrastructure. We have tried to correlate size of resource to the size of the
‘blob’ . What is striking is the lack of railway infrastructure in proximity to most of the discoveries.
GUINEA
SIERRA LEONE GHANA
TOGO NIGERIA
BENIN
COTE D’IVOIRE
BURKINO FASO
CONGO BRAZZAVILLE
EQ GUINEA
SENEGAL
THE GAMBIA
GUINEA BISSAU
LIBERIA
GABON 0°
10°W
5°N
5°E
10°N
5°W 0° 10°E 15°E
Iron Ore deposit
Railway
Note: Gabon Standard Gauge
MAURETANIA
CAMEROON
Manganese Ore deposit
Coal deposit
9
The Guinea-Liberia-Sierra Leone province is at a much more advanced stage of development, with producing
assets such as African Minerals’ Tonkolili and London Mining’s Marampa operations
West African iron ore: infrastructure
Source: Broker research, company websites, Intierra
Port
National Capital City
City
Railway
Proposed Port
Railway Proposed
Assets
African Minerals has
built a railway to
service its Tonkolili
project and Arcelor
Mittal has a low
capacity railway for
its Liberian projects
However
development of
Simandou requires
development of
major infrastructure
with capacity excess
of 100Mtpa
IVORY COAST
LIBERIA
SIERRA
LEONE
GUINEA
Greenville
Pepel
Conakry
Monrovia
PUTU
(Severstal)
WESTERN CLUSTER
(Sesa Goa, Elenilto)
SIMANDOU BLOCKS 1&2,
SIMANDOU SOUTH
(Vale, BSG Resources)
SIMANDOU 3&4
(Rio Tinto, Chalco, IFC)
MOUNT NIMBA
(ArcelorMittal - Liberia)
(BHP, Newmont, Areva - Guniea)
(Tata Steel - Ivory Coast)
BONG
(Wuhan Steel, CAD Fund)
Buchanan
TONKOLILI
(African Minerals)
Freetown
MARAMPA
(London Mining)
MARAMPA
(Cape Lambert)
KALIA
(Bellzone)
10 West African iron ore: infrastructure (cont’d)
Infrastructure will continue to be the main challenge in exploiting West African iron ore
The Mbalam project is anticipated to be the key to unlocking projects in Gabon, RoC, and Cameroon, but it does not
enjoy exclusive infrastructure rights
GABON
NIGERIA CENTRAL
AFRICAN REPUBLIC
CAMEROON
Infrastructure is
essentially limited,
requiring
development of rail
and port facilities to
access international
markets
Port
City
Railway
Proposed Port
Proposed Sundance
Railway
KANGO
(Core Mining)
NGOVAYANG (Legend Mining)
Mamelles
Douala Yaounde
MAYOKO-MOUSSONDJI
(Equatorial Resources)
MAYOKO (Exxaro Resources)
ZANAGA (Xstrata and Zanaga Iron Ore)
D.R. CONGO
CONGO
Libreville
BATOUALA
(CMEC)
Pointe-Noire
Port Gentil
Bata
NKOUT (Afferro Mining)
Assets
Dolise Brazzaville
BADONDO
(Equatorial Resources)
MINKEBE (CMEC)
YOUKOU (Waratah Resources)
BAMEGOD/ELOGO (Sundance Resources)
MBALAM (Sundance Resources)
BELINGA (CMEC) MELA
NABEBA (Sundance Resources)
AVIMA (Core Mining)
MT LETIOUKBALA (Sundance Resources)
BOKA-BOKA (CMEC)
LES MARMELLES (Sinosteel)
Kribi
11 Potential West African Iron Ore rail & port infrastructure investment required
These tables only show iron ore – more is
needed for manganese
Some iron ore deposits are situated near to
existing railways, including Mauritania, Liberia
and Sierra Leone
The remainder are not.
Not all resources will be commercially viable,
for those that are costs are probably
understated
The quantity of iron ore discovered is
enormous, and the size of the potential
infrastructure projects equally so,
potentially in the region of over $25bn in
the next 10 years.
Country Average Resource size
(mt)
Capital
Expenditure ($m)
Average
production (mtpa)
Capex /
Resource
($/t)
Liberia
China Union – Bong 290 2 600 1 9.0
Elenito – Western Cluster 1 100 2 400 12 2.2
Sierra Leone
Cameroon 2 500 3 360 35 1.3
Gabon 750 3 000 30 4.0
Guinea
Rio Tinto – Simandou 2 250 6 000 39 2.7
Bellzone – Kalia 2 400 4 456 40 1.9
Congo
DMC – Mayoko 850 486 7 0.6
Mauritania 5 239 5 960 52 1.1
Subtotal 15 379 28 262 216
Total Resource Size 40 844 468
Country Rail Refurbishment (km) New (km) No of Ports to be
redeveloped No of new Ports New Power Stations
Liberia 570 120 2 0 2
Sierra Leone 84 106 2 0 1
Cameroon 0 480 0 2 2
Gabon 0 560 0 1 1
Guinea 0 1 066 0 2 2
Congo Brazz 439 0 0 1 0
Mauritania 650 150 0 0 0
Total 1 743 2 482 4 6 8
Key points
12
Analyzing the Rail Opportunity
Listed below is an analysis on AML from market sources. Analysis helps sculpt the opportunity
Which country the project is in will heavily influence investors appetite in terms of size, tenor and price
Heading Issue What/when Status Comments
Climate Wet Season June-Oct
Production will be challenged by wet season - 3 metres
of rain per annum
Mine Size of Resource 12 bn World class iron ore body
Distance to port 200km Close by heavy haul standards
Mining Licence Yes
Difficulty of terrain Benign Gradient at mine
Volumes planned 12-20 mtpa Phase 1
Cost of Rail & Port >$1bn Existing upgrade/new cape gauge: affordable
Time to Operations N/A Upgrading in phases
13
Analyzing the Rail Opportunity (cont’d)
Heading Issue What/when Status Comments
Rail Other Users? No
Rolling Stock In place
Infrastructure In place Being completed
Port Discharge Dumpers In place
Ship loading Trans-shippers In place
Government Mining licence policy Developed
Railway legislation n/a AML has control of pit to port
Railway regulation n/a
Financing Debt Yes
PXF Yes
Equity Yes
Mozambique - Mining and Infrastructure Opportunity
Dona Ana Bridge over the Zambesi
1996 2011
15 Mozambique – Enormous Coal Resource, Lack of Rail Capacity
The coal in the Tete basin is a combination of thermal and coking coal. Vale and Rio in particular claim to be
sitting of very large quantities of coking coal, which currently has a market value of over $150 per tonne.
Most of the coal in Tete can be mined via open-caste techniques
With resources of over 35 billion tonnes, its proximity to high demand areas such as India and the Far East, the
high value of much of the resource, means that high volume routes to market such as exist in Queensland and
Indonesia, will need to be built
The mining majors are present in force in Mozambique, and all are planning how they will get access to route to
market.
Resource: 35bn tonnes
Current export capacity
for coal: 1mtpa
Requirement: Up to
200mtpa
Rail and Port
Infrastructure
investment need: at
least $20bn
Company Project Average Resource size (mt)
ENRC Estima 1,000
Vale Moatize 9,500
Anglo (Talbot) Revebue 1,400
Rio Zambeze 10,000
Rio Benga 4,000
Rio Mozambique 10,000
To date Total 35,900
Key points
16 Mozambique – Rail Infrastructure requirement
From Tete, the shortest route to market is to Beira, but this is limited by the capacity of the line and the fact that
Beira is a shallow water port. Maputo is not an option – Maputo is also shallow and an export route for South
Africa. Maximum capacity will eventually be 20mtpa
Nacala is a deep water port, and has considerably more potential capacity than Beira. Vale is currently
upgrading the existing line to Nacala and building two new sections in Malawi and Mozambique to link Moatize
to Nacala. This line will have maximum capacity of around 40mtpa
The total volumes requiring transport in the next 10 years will be around 150m,tpa. So a third line will be
required – to a new port at Macuse with capacity for up to 50mtpa initially
MOZAMBIQUE
Zim
bab
we
NACALA
MOATIZE
BEIRA
MALAWI
Mchinji
Lilongwe
Salima
Chipoka
Balaka
Nkaya
Lichinga
Catur
Mitande
Cuamba Nayuchi
Entre Lagos
Mutuali Nalemia Namina
Liwonde
Lirangwe
Blantyre Limbe
Cambulatsissi Luchenza
Chiromo
Bungula
Nsanje
Dona Ana Vila Nova da
Fronteira
Vila Fontes
Marromeu Inhaminga
Manica
Chimoio
Dondo
Nampula Meconta
Monapo
Mocambique
Tete
Proposed New Line
Beira (or Sena) Line
Nacala Line
Export requirement:
anything up to
150mtpa within 10
years
Current capacity:
around 2 million tons
per year
The amount of
investment required
should be
transformational to
Mozambique’s
economy
Key points
Macuse
17
Financing Rail Opportunities
Distinguish between majors and juniors in the mining sector
The 4 major miners – BHP, Vale, Rio and Anglo – have the capacity to fund projects on balance
sheet
The junior miners on the other hand are unlikely to have the balance sheet to fund all their rail
requirements they need to take more of a project finance approach to their projects
Because of the demand for commodities in China, the China dynamic will frequently be present.
Banks and other investors need to understand the complex risk dynamic between
quality and quantity of resource,
distance to market, topography,
port requirements
capabilities of individual miners to develop projects
whether Governments are enablers or hinderers to project success.
Each project needs detailed analysis – as one would expect, the rail, infrastructure and mining
considerations are usually interdependent.
18
Finding the finance for iron ore projects
Each project is different, however the location of the deposits are often in relatively close
proximity to each other.
Iron ore mine-rail-port projects are most efficiently operated on a vertically integrated stand
alone basis.
Here we come across a dilemma:
Stand alone projects may be more efficient, and hence more attractive financially BUT
Too many railways and ports in one area can be too much of a financial challenge for
investors – how much money is there for railways and ports?
Governments see railways as strategic assets, and environmentalists rightly want to keep
the disruption caused by railways to a minimum
The result is that often mining houses will need to share infrastructure when they would prefer
not to, and Governments have competing interests to manage.
Financiers may want to stay on the sidelines until these issues are resolved, and countries
affected currently include Guinea, Congo B and Cameroon
19
Finding the finance for iron ore projects (cont’d)
Once clarity on how the project is to be developed, funding the infrastructure for each project
can be either part of, or separate to, the overall project. Some examples:
The ambiguity around how the infrastructure will be owned needs to be clarified before funding
can be put in place
Some ownership structures will be challenging to fund. The easiest to fund is vertical
integration, where the full suite of equity, debt, asset backed and PXF structuring can be looked
at.
Where the rail and port is separate from the mine, then the funding issues become more
complex.
Project/Country Comment
Simandou, other Guinea projects Mine – Company
Rail – Govt/Private Sector?
Port – Govt/Private Sector?
AML Mine, Rail, Port - Company
Mauritania Mine – Company
Rail – Govt involvement
Port – Govt involvement
20
Finding the finance for iron ore projects (cont’d)
Green field projects that require one railway and multiple mining projects to use same
infrastructure can become extremely difficult contractually, and hence protracted in execution
Funding these projects once the commercial case is made, and the contractual, legislative and
regulatory issues are resolved is theoretically relatively simple, but then country risk and
insurance issues usually have to be considered as well.
Miner A Miner B Miner C New Miner Z?
Railway Co
Gov’t
Miners
Port
Access Rights Take or Pay (Cashflow)
Equity Banks/DFIs Debt
Ownership in same
proportion to rail
allocation?
21
Conclusion
The bulk commodity mining sector in West Africa and Mozambique in particular will drive
significant investment in railways in these areas in the next decade.
Other rail developments will need international donor funding support or government subsidy as
a rule.
Each project needs detailed analysis – as one would expect, the rail, infrastructure and mining
considerations are usually interdependent.
Layered on top of this are the political and regulatory conditions in each country, which
translates into competence/ability to enable these projects to happen at all and the pace at
which they happen
The ability to finance these projects will depend on detailed analysis of each project
Standard Bank is a specialist in investing in the resource sectors of Africa, particularly mining,
and has financed projects in many countries in Africa including South Africa, Botswana,
Namibia, Zimbabwe, Zambia, Tanzania, Kenya, DRC, Ghana, Sierra Leone, Mali and Senegal.
Our investments in rail infrastructure and rolling stock amount to several ZAR billion, and are
also widespread, including South Africa, Malawi, Mozambique and Sierra Leone.
We look forward to doing more business with the heavy haul rail community in the future.
22 Thank You
“Wealth Creation.......”
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