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
indepen...
2
Three types of railway in Africa, only one profitable
There are three types of railway in Africa. Only one is inherently...
3
Africa has a Rich Mineral Endowment…........
(1) Major known mineral resources
Source: Standard Bank, Raw Materials Grou...
4
…including heavy haul minerals, but concentrated in the South and West
KEY*
Cu
Coal
Iron Ore
Al
U
Mn
 Coal is predomina...
5
Global Mineral Depletion – Africa is underdeveloped except SA
This map shows
the fall in the
financial
value of a
territ...
6
Existing bulk mines have rail, new ones will need rail infrastructure
Most of the continent’s
bulk production is done
in...
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 rai...
9
 The Guinea-Liberia-Sierra Leone province is at a much more advanced stage of development, with producing
assets such a...
10
West African iron ore: infrastructure (cont’d)
 Infrastructure will continue to be the main challenge in exploiting We...
11
Potential West African Iron Ore rail & port infrastructure investment required
 These tables only show iron ore – more...
12
Analyzing the Rail Opportunity
 Listed below is an analysis on AML from market sources. Analysis helps sculpt the oppo...
13
Analyzing the Rail Opportunity (cont’d)
Heading Issue What/when Status Comments
Rail Other Users? No
Rolling Stock In p...
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...
16
Mozambique – Rail Infrastructure requirement
 From Tete, the shortest route to market is to Beira, but this is limited...
17
Financing Rail Opportunities
 Distinguish between majors and juniors in the mining sector
 The 4 major miners – BHP, ...
18
Finding the finance for iron ore projects
 Each project is different, however the location of the deposits are often i...
19
Finding the finance for iron ore projects (cont’d)
 Once clarity on how the project is to be developed, funding the in...
20
Finding the finance for iron ore projects (cont’d)
 Green field projects that require one railway and multiple mining ...
21
Conclusion
 The bulk commodity mining sector in West Africa and Mozambique in particular will drive
significant invest...
22
Thank You
“Wealth Creation.......”
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David Humphrey, Standard Bank - Developing new models of finance to bring vital heavy haul rail project plans to fruition

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David Humphrey, Global Head of Power and Infrastructure, Standard Bank delivered the presentation at the 2014 Heavy Haul Rail Africa Conference.

The Heavy Haul Rail Africa Conference 2014 covers all the relevant issues including government and resource sector perspectives on future developments in heavy haul rail infrastructure, opportunities to source relevant funding, regulatory progress, challenges in planning and construction, rolling stock requirements, maintenance and capacity enhancement.

For more information about the event, please visit: http://www.railconferences.com/hhrafricaconference

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David Humphrey, Standard Bank - Developing new models of finance to bring vital heavy haul rail project plans to fruition

  1. 1. Financing Rail in Africa Nacala Corridor Section 3 Malawi Bridge 3C52 at 128km, 21st January 2014
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 7 The need for investment in existing rail is often.......... ........self-evident!
  9. 9. 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
  10. 10. 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)
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. Mozambique - Mining and Infrastructure Opportunity Dona Ana Bridge over the Zambesi 1996 2011
  16. 16. 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
  17. 17. 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 Zimbabwe 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
  18. 18. 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.
  19. 19. 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
  20. 20. 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
  21. 21. 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 CNew Miner Z? Railway Co Gov’t Miners Port Access Rights Take or Pay (Cashflow) Equity Banks/DFIsDebt Ownership in same proportion to rail allocation?
  22. 22. 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.
  23. 23. 22 Thank You “Wealth Creation.......”
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