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.......”