Rio move clouds Corus future

Calcutta, Jan. 22: Anglo-Australian miner Rio Tinto's decision to write down the acquisition of Riversdale by three-fourth may hurt the long-term viability plan of Tata Steel Europe's (formerly known as Corus) operations as its search for cheaper raw material can get longer.

Tata Steel, which holds a 35 per cent stake in Riversdale's Benga coal block in Mozambique, is betting on the hard coking coal from the African country to support its European operations.

Rio Tinto last Thursday said the Mozambique mine did not have as much coal as it had anticipated, which might rule out the possibility of building rail lines on its own to carry the coal.

Rio operates the Mozambique blocks, including Benga, following the acquisition of Riversdale for $4 billion in 2011 from the latter's Australian promoters.

On January 17, Rio said it was taking a hit of $3 billion on the acquisition, leading to the resignations of chief executive Tom Albanese and Doug Ritchie, who led the team that bought Riversdale.

The company gave two reasons for the impairment of the Riversdale asset: a lower coal reserve than expected and a logistic challenge to bring the coal from the mines to port for shipping to customers.

"In Mozambique, the development of infrastructure is more challenging than Rio Tinto originally anticipated. Rio Tinto sought to transport coal by barge along the Zambezi River, but this option did not receive formal approvals," the company said.

"These infrastructure constraints, combined with a downward revision to estimates of recoverable coking coal volumes on the RTCM (Rio Tinto Coal Mozambique) tenements, have led to a reassessment of the overall scale and ramp-up schedule of RTCM, and consequently to the impairment announced today (January 17)," it added.

Analysts said it could be bad news for Corus's operations, which are running at a loss because of a sluggish demand in Europe. Raw materials such as coal and iron ore have to be bought from the market, which is squeezing margins.

Corus was expecting the first shipment of Mozambique coal by the end of 2012, helping to turn around the operations in Europe which posted a negative EBIDTA that forced the entire Tata Steel group to suffer a $69-million loss in the second quarter.

The Indian company, however, put up a brave front despite Rio's revelation. "This is an internal matter of Rio and hence no comments from us. We continue to work together in our joint venture in Mozambique without any impact," a Tata Steel spokesperson said.

"Rio and TSL (Tata Steel Limited) have a joint venture for Benga tenement out of all the leases owned by erstwhile Riversdale since taken over by Rio. Our joint venture in Benga continues to perform as planned and (there's) no substantial change in resource/reserve of Benga. Hence no impact," the spokesperson added.

There is a possibility of Rio making good on its residual investment with other big miners in Mozambique such as Anglo American and Vale, but on a smaller and slower scale.

While this will have a bearing on Tata Steel's long-term viability plan, the Indian company's engagement with Riversdale has not been a one-way downhill journey.

It was an early bird investor in 2007, shortly after the acquisition of Corus, buying a 35 per cent stake in the Benga project and a 40 per cent offtake assurance for $86 million.

Later, it started a creeping acquisition of the parent company in Australia to become the largest individual shareholder before selling out to Rio Tinto in 2011 for $1.1 billion, making over a 100 per cent profit in just four years.

However, the initial strategic initiative to invest in Benga now seems to be facing a challenge after the Mozambique government refused to give permission to carry coal in barges along Zambezi river to Beira port.

Following the cooling off of commodity prices � metallurgical coal prices have halved from $400 a tonne since 2011 � and a reduction in reserve estimate, building a rail line to the port for export to global markets, including Europe, has become a shaky proposition.

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