Coal in Moatize Gambo Audu Julio Ribeiro Oliver Scott Hajime Taniguchi Finance 456/February 2006

1. Coal inMoatizeGambo AuduJulio RibeiroOliver ScottHajime TaniguchiFinance 456/February 2006

2. Introduction • Estimated 2.4 billion ton reserve of coal in Moatize, Mozambique • Projected extraction cost of US$1 Billion • Open bid process under supervision of IFC and Mozambican Government • Limited geological information of the region • Poor infrastructure (rail, power, port)

3. Companhia Vale do Rio Doce (CVRD) • Brazilian company • Formed in 1942 with 80% government ownership • Privatized in 1997 • Market Cap of US$48 Billion • Expertise in large-scale mineral projects • Own high volume mine-railroad integrated systems • Major global supplier of pelletized iron • World’s largest producer and exporter of iron ore • World’s second largest producer of manganese

4. CVRD Strategy • Diversify mineral activity further • Widen spectrum of products offered • First investment in the coal industry • Become a global player in the mining industry • Attempting to acquire assets abroad • Recently lost bid for copper mines of Noranda (Canada) and Las Bambas (Peru) • Vertical integration • Owns significant interests in companies in the Brazilian steel industry • Positioning for projected growth of steel industry in Brazil

5. Current Product Line Breakdown

6. History of Mozambique • 1975- Independence from Portugal • 10-year guerrilla war • Marxist Frelimo party emerges victorious • Renamo challenges and begins civil war • 1992- First peace in three decades • 1994/1999- Democratic elections • Frelimo wins them handily • Renamo remains key opposition party • 2004- Elections in December

7. Positive Macros • Human Development Index increase • 1993 to 2003 from .261 to .379 • Mozal aluminum smelter • Accounts for 50% of MZ GDP • Created 5000 additional jobs • Major jump in FDI • 1997 to 1999 from $64mil to $382mil

8. Positive Macros

9. Limited Progress • One of the poorest countries in world • GDP per capita of $255 • Total debt 103% of GDP • 168 Human Development Index rank • Life expectancy 40 years • Literacy rates are 40% • Heavily Indebted Poor Countries granted $4.3bill in debt relief

10. Limited Progress

11. Coal Industry • Essential energy resource Energy consumption: Coal:26%, Oil: 37%, Natural Gas: 24% • Dominates electricity and industrial fuel markets, especially in emergent Asia • Two types of coal in Moatize • Thermal- electricity generation • Metallurgical (Coking)- steel and aluminum production • Environmental issues

12. Historical Coal Prices

13. World Coal Consumption By Region (Source: EIA)

14. Coal Consumption in China by Sector (Source: EIA)

15. The Coal Industry in Moatize • Largest unexplored coal deposits in the world • Sporadic development since the 1940’s • Activities suspended in 1983 due to civil war • Transportation still a major problem- destruction of railway line during the civil war

16. Current State of The Coal Industry in Moatize • Estimates between 2.4 Billion mt to 6 Billion mt of coal • Anticipated Annual Production ~10 Million Tons/Year • Export estimates • 3-4 million tons/year to Far East, Europe and Brazil • 2 million tons/year to Nigeria • Remainder feeds future coal-fired power station • Reconstruction of railway line

17. Competitive Landscape • Bidders down from 10 to 4 • High financial and technical standards • 4 Bidders selected were: • BHP Billiton • Rio Tinto • Anglo American • Companhia Vale do Rio Doce (CVRD) • Scoring system to evaluate bids • Commitment during exploration phase • Strategy, Business Plan, and Long-term commitment • Company experience • Financial offer

18. Competitive Landscape

19. Multilateral Agency Interest and Involvement • IFC selection process allowed for competitive bids • Interest in financing? • South Africa’s IDC interest in project financing • Possible funding from African Development Bank (AfDB)

20. Moatize Project Uncertainty • Bidding process obstacles • Limited geological information • Infrastructure risks • Rail: Indian Consortium (RITES and IRCON) will rebuild and operate the Sena rail line • Power: Moatize isolation requires US$2B investment in energy generation and transmission • Port: New facilities to the North of Beira Port

21. Moatize Project Terms • License to explore the Moatize Coal Reserves • 2 year feasibility study • Feasibility risks assumed by bid winner • Bid winner granted a mining concession after 2 years if: • At least 5 million tons per year of saleable coal found • Proven technical and economic viability of the project • Mozambique government involves bid winner in all infrastructure related projects • Government failure to comply: Contract termination and compensation for bid payment and all feasibility costs

22. Moatize Project/CVRD bid • Bid offer of US$122.8 M • Consortium with American Metals & Coal Inc. • Feasibility study cost US$34 M • 3% production tax once mine is operational • 5% carried interest for the Mozambique government • 10% of shareholding reserved for Mozambique nationals • Community and social development programs • During exploration period US$6.5 M • During production phase US$50 M

23. Discussion Questions • Should Companhia Vale do Rio Doce (CVRD) bid for the rights to explore the Moatize coal mine? • Is such investment aligned with CVRD’s strategy? • What is the impact of the current political environment on the timing of bid? • How would a change in coal prices affect the viability of the project?

24. Conclusion • NPV Valuation: • Expectations of Coal Prices (Worst Case NPV ~ US $400) • Real Option Considerations • Product Mix • CVRD Potential Withdrawal • Cost of Capital Calculations • What risks does CVRD face? • Financing Options/PPP Considerations