Mining In Mozambique The End Of A Chapter

Until very recently, Mozambique was the star performer in SSA (sub Saharan Africa), with growth averaging above 7% per annum for almost 10 years. A phenomenal growth story driven by mining and oil and gas exploration. The diverse commodity asset base (coal and natural gas, heavy sands, gold, phosphates and rare earths, and a range of precious and semi-precious stones) and the stalwart aluminium smelter mega-project (Mozal), attracted global mining names such as BHP Billiton, Vale, Rio Tinto, to name but a few, and energy names such as Sasol, Anadarko, Eni, and the electricity hungry Eskom.

In spite of poor infrastructure, railways requiring refurbishing, ports requiring dredging and building, investment flowed into Mozambique’s mining and oil and gas sectors, and all the while the sidelined opposition, Renamo, cried ‘foul play’.

In 2015, the low commodity cycle finally hit…

In early 2016, rapid economic deterioration…

By June 2016:

o   a rapidly weakening currency

o   very little foreign currency available

o   More than one billion US dollars of undisclosed debt

o   Donor funding cut

o   IMF funding cut

o   Double digit inflation

o   Increased Renamo mobilisation

o   Refugees fleeing

o   And social and political strife

What does this mean for the mining and oil and gas sectors?

There are certainly easier countries in which to mine in SSA, with attractive reserves, better infrastructure and far less turmoil – Tanzania, Ghana, Namibia, Botswana and Uganda come to mind. But the appeal of Mozambique remains – abundant resources,  a +3000km coastline supporting West to East corridors and a resilient albeit impoverished population.

Yet Mozambique is at a crossroads – the socioeconomic and political will either improve soon or become a lot worse…

And the catalysts are the following:
1. Commodity prices
2. IMF support
3. Donor support

2. and 3,  depending on government’s cooperation in respect of the undeclared loans, transparency and an agreed fiscal and economic roadmap for the future.

The IMF was in Mozambique last week meeting with government and deciding its role in the future of Mozambique – an announcement is expected this week sometime.

This is a watershed moment for Mozambique – it can go either way.  Good sense tells us it is all going to be ok, but good sense has been wrong before. Afterall only six months ago in December 2015, the IMF loaned the country $286m when the commodity cycled turned sour.

Assuming that the IMF visit has a positive outcome, i.e. a continuation of the IMF programme, then Mozambique should realise increased foreign direct investment into its extractive sector and the pressure may be off. Global energy prices seem to be increasing, albeit far from previous highs, but at least these are moves in the right direction.

The coking coal sector should be depressed for another decade owing to surplus steel stocks, however, but Mozambique also has niche commodities as well, including bauxite, graphite and tantalum.

If the IMF refuses to finance the Mozambique government to support Mozambique, the country could very well spiral into a severe economic decline, growth could turn negative,  and we suspect that it could be years, before things improve.

But there is one certainty whatever happens – the bountiful commodity resources are not going anywhere.

 

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