The SEC Wants To Know How $3B Disappeared At Mozambique Coal Mine

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The SEC Wants To Know How $3B Disappeared At Mozambique Coal Mine

Valuation of resource projects is becoming a hot topic in regulatory circles. With the U.S. Securities and Exchange Commission (SEC) earlier this year investigating ExxonMobil’s practices around estimating the worth of in-ground oil reserves.

Rio Tinto

And this week, the official inquiry is spreading to valuations in the mining sector.

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Familiar persons tipped news services this week that the SEC has launched an investigation into financial practices at major miner Rio Tinto. Specifically looking at how the company valued a massive acquisition – and subsequent failure – in the east African nation of Mozambique.

Sources told the Australian Financial Review that the SEC wants to know what led to a massive writedown on Rio Tinto’s Mozambique coal projects in 2013. When the company booked a $3 billion charge on the assets.

The history here is, Rio purchased Mozambique coal development junior Riversdale Mining in 2011 – paying $2.9 billion cash for the company.

The major then began developing the coal assets. With the idea that coal supply could be transported by river barge to sale points near the coast.

That plan however, ended up unfeasible. With the planned river route turning out to be much less navigable than originally planned.

And with no way to move mined coal to market, the project was essentially rendered worthless. With Rio finally selling the assets for a mere $50 million after booking the massive impairment charge.

On the one hand, it makes sense the SEC would want to look at this. After all, having $3 billion disappear in just two years seems improbable.

But the case also illustrates some peculiarities of the resource business. Where identical deposits could be worth billions or worth nothing, depending on where they’re located in relation to critical infrastructure.

Such “soft” considerations introduce a lot of uncertainty into resource project valuations. Watch to see if the SEC tries to put more rules around the numbers in cases like this – or if they will continue to allow miners to use their own internal standards for project assessment.

Here’s to a box black as coal,

Dave Forest

Article by Peirce Points

Updated on

Dave Forest writes Pierce Points Free Daily E-Letter, an advisory on mining and energy read every day by BP, Rio Tinto, JPMorgan, BNP Paribas, Repsol, GDF Suez, GE, Platts, Warburg Pincus, and the UN. Sign up for free at www.piercepoints.com. Mr. Forest has funded and managed over $80 million in global exploration and development in natural resources, and continues to design and develop projects globally. He is a professional geologist.
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