Energy transition and the challenges that lie ahead for the Mozambican mining industry
Abreu Advogados, Lisbon
JLA Advogados, Maputo
Mozambique was one of the 200 countries represented at the 2021 United Nations Climate Change Conference (COP26), which brought together almost every nation on earth to discuss how to tackle the global issue of climate change.
Despite being among the least polluted countries, Mozambique is quite vulnerable to climate change, the effects of which pose serious challenges to the livelihood and development of the country. Mozambique has suffered severely in past years from cyclones and other threats such as floods, droughts, wind storms and a rising sea level. Yet its location and geography favour a big diversity of natural resources, namely wide fertile areas, suitable areas for aquaculture, forest, wildlife and fisheries, important watersheds, mineral resources including renewable and non-renewable energy sources and a long coast of significant economic, touristic and environmental potential.
Mozambique ratified the 2015 Paris Agreement, which sets out a global action plan to put the world on track to avoid dangerous climate change by limiting global warming to well below 2°C. This global action and goal must also take into account, however, the specificities and level of development of each country.
The Mozambican government approved in 2012 the National Climate Change Adaptation and Mitigation Strategy, having set a national priority ‘to increase resilience in the communities and the national economy including the reduction of climate risks, and promote a low carbon development and the green economy through the integration of adaptation and mitigation in sectorial and local planning’. This priority was reconfirmed in the government’s five-year plan for 2020-2024 as a clear indication that it continues to be committed and conscious of the great impact of climate change both at a domestic and global level.
Although the government has already put in place a legal and institutional framework, it is still necessary to mobilise the financial and technological resources needed and to strengthen the national technical and institutional capacities.
In this context, various economic sectors that are crucial for the development of the Mozambican economy are likely to be impacted or will require adjustments, in particular the mining sector.
The mining industry has, over time, gone through different stages. A first stage, between 1986 and 2002, was marked by the state’s monopoly on mining exploration, which was reflected in the legal regime governing the sector. Since 2002, this industry has been liberalised to the private sector and the government began to pursue a strategy for the attraction of foreign investment through the concession of attractive fiscal benefits such as tax exemptions and reduced royalties.
It is important to highlight that Mozambique has important deposits of coal, graphite, iron ore, titanium, apatite, marble, bentonite, bauxite, kaolin, copper, gold, rubies and tantalum, which attracted major international players and allowed them to kickstart relevant production in 2010.
The Brazilian company Vale made substantial investments in its coal mining business and, through its participation in the Northern Corridor Development (CDN) consortium, has refurbished the Nacala rail line, which runs through parts of Malawi to the deep-water Port of Nacala. The disposal by Vale of its mining assets in Mozambique to an Indian group was recently announced.
Significant investments have also been made in heavy sands deposits by Kenmare Resources plc, BHP Group Limited and Rio Tinto plc.
Gold deposits in the provinces of Niassa, Tete and Manica have attracted domestic and international investor interests despite being slow to develop as most activities are performed by informal artisanal miners.Increasing regulation of gold mining may lead to larger-scale and industrialised production, as the government begins to require miners to formalise their legal status.
Syrah Resources Limited (Australia) made its first shipment of graphite from its Balama project in the second half of 2017 and formally inaugurated the project in April 2018. The Balama project has a production capacity of 350,000 tonnes a year, which represents a 40 per cent share of the worldwide graphite market. Syrah will export most of this to China and the United States.
Mustang Resources Ltd has announced the fast tracking of its Caula Graphite and Vanadium Project in northern Mozambique, valued at about US$44m and with graphite deposits estimated at 700,000 tonnes from 5.4 metric tonnes of ore.
Baobab Resources Limited (Australia) is developing a pig iron project in Tete province to supply iron and steel for regional infrastructure projects.
Gemfields Group Ltd (UK) owns a 75 per cent stake in Montepuez Ruby Mining Limitada, which commenced operations in 2012, and represents a US$130m investment in developing northern Mozambican ruby deposits in a concession area of 2,600 square kilometres. Gemfields estimates that its existing concession contains an estimated 467,000 carats worth of rubies in both primary and secondary mineralisation.
In 2018, Fura Gems Inc (Canada) announced its acquisition of nine ruby assets in northern Mozambique from Mustang Resources Ltd (Australia) and Regius Resources Group Ltd (UK). On completion of the acquisition, Fura Gems would hold a ruby mining concession area of 1,104 square kilometres in northern Mozambique. Fura has announced its intention to invest upwards of US$19m in these projects over the next three years in a programme of drilling, bulk sampling and production mining.
The mining industry is therefore a fundamental driver for the development of the Mozambican economy, which is still heavily reliant on foreign aid and investment. Although there is the political will to foster an energy transition process, with a view to move from coal and gas to the use of cleaner energy sources, the potential of the mining industry cannot be disregarded.
The materialisation of the principles contained in the Paris Agreement poses challenges for the mining industry from a legal, socioeconomic and financial standpoint.
From a legal perspective, the energy transition process, which represents the awareness of the notion of the environment as a common good of humanity, must justify the adoption of specific legal frameworks and regulations that, while not discouraging investment in this sector, will strive for its development in compliance with stricter norms, aspiring to reduce the levels of environmental degradation.
Regarding the socioeconomic impact, it is worth mentioning that although the mining industry is known to have detrimental effects for the livelihoods of local communities due to environmental hazards such as soil and water pollution, it may also have positive effects on the local population. It increases employment opportunities and generates tax revenues that to a certain extent are channelled to local communities and used to improve public goods provision such as hospitals, schools, and roads. Also, mines often require infrastructure in the form of roads, electricity, or water supply from which nearby communities can benefit as well.
Finally, raising financing for this industry will also pose serious challenges as major multilateral and commercial banks are now being urged to disengage from financing all business activities and projects that continue the world’s reliance on fossil fuels. Thus, we are assisting a phase-out in the financing of coal mining projects aligned with the Paris Agreement commitments.
Even so, it would appear that the development and exploration of coal resources in Mozambique will continue at the current cruise speed pace and a clear sign of this was that the disposal by Vale of its coal assets attracted significant attention from many players. Therefore, we do not expect that the Mozambican government will seek the reduction of the exploration of these resources.
Mozambique has, however, pledged that by 2030, 62 per cent of its energy generation will be sourced in renewables and established as a priority to implement an energy transition programme based on a diversified matrix, with cleaner and more environmentally friendly sources, such as hydro, solar and wind power.
However, transitioning away from energy based on fossil sources entails costs, and must be a phased process to minimise the impact on the process of economic development. Mozambique intends to make the energy transition process via natural gas – even though it is considered non-environmentally friendly – a decision that was clearly influenced by the discoveries of significant quantities of this resource in the national territory.