Bloomberg News

South Africa $35 Billion Rail Plan to Unlock Minerals

June 12, 2012

South Africa is pumping 300 billion rand ($35.6 billion) into expanding and improving its railways, ports and fuel pipelines, a catalyst to help unlock the world’s greatest mineral wealth.

Transnet SOC Ltd., the state transport company, is extending its rail network for the first time in four decades and replacing locomotives bought in the 1960s and 1970s. Championed by President Jacob Zuma, the plan will let Transnet double its freight capacity within seven years, boost the amount of coal it can carry by 44 percent and increase iron ore carriage by 57 percent.

Kumba Iron Ore Ltd. (KIO), the world’s fourth-largest supplier of seaborne iron ore, and Xstrata Plc (XTA), the biggest producer of power-station coal, are just some of the mining companies set to benefit as production expands. The overhaul may enable South Africa to tap more of the mineral resources that Citigroup Inc. (C:US) said in 2010 were worth $2.5 trillion, the most of any nation.

“Capacity has been a major constraint,” Asief Mohamed, who oversees 1 billion rand in assets as chief investment officer of Aeon Investment Management in Cape Town, said in a June 7 interview. “With the committed expansion by Transnet, mining companies would be able to increase volumes, which would be good for earnings.”

Mohamed holds shares of Pretoria-based Kumba, which has gained 20 percent in the past 12 months, and Assore Ltd. (ASR), a Johannesburg-based iron ore and manganese producer that’s surged 31 percent in the same period. Zug, Switzerland-based Xstrata has dropped 0.8 percent in London so far this year after declining 35 percent in 2011.

Bond Sales

Transnet will fund about a third of the program by selling bonds, including in foreign currency, with the rest coming from operating revenue. The utility may consider selling debt to Japanese investors or Islamic bonds to diversify its sources of funding, Chief Executive Officer Brian Molefe said on May 29.

Molefe took office in February 2011, becoming the utility’s first permanent appointee in the position for almost two years. Before that he was head of the Public Investment Corp., South Africa’s largest money manager.

South Africa has battled in the past to implement large investment projects. This time, Zuma has set up a panel, which he chairs, to coordinate and monitor infrastructure spending as the government pushes to boost economic growth and create jobs for the one in four people in the country that’s unemployed.

Doubling Capacity

“We are currently ramping up our capacity,” Francois Louw, executive head of projects at Kumba, said in a June 1 phone interview from Pretoria. “We are absolutely reliant on Transnet. If Transnet doesn’t expand then we are stuck. We are really excited about their plans.” Kumba has committed to using 15 million metric tons of the new rail capacity.

About 17 percent of South Africa’s freight is transported on Transnet’s rail network, with the rest reliant on roads that needs constant renovating because of damage caused by trucks. The total cost of transporting goods via road is about 75 percent more than on rail, according to the utility.

Transnet plans to double freight capacity to 170 million metric tons over the seven-year period. Rail projects will account for 201 billion rand of the new investment and include the purchase of 1,317 new locomotives and the construction of 25,000 new rail wagons.

“We have to bring in better and modern equipment that will allow us to provide a professional service,” Molefe told lawmakers in Cape Town. Over the past five years “67 percent of capital expenditure was going toward maintenance. With the 300 billion rand we are able to cover all the maintenance backlogs, continue current maintenance and have 58 percent of the money going towards new expansion.”

Building New Links

South Africa doesn’t have the best track record on building infrastructure, with projects frequently delayed or costs running above projections. The government spent just 68 percent of its 260 billion-rand infrastructure budget in the year through March 2011, Finance Minister Pravin Gordhan said in his budget speech on Feb. 22.

Logistics isn’t the only impediment to faster expansion of mining in South Africa, where output declined in the 10 months through April due to strikes and electricity constraints. Eskom Holdings SOC Ltd., the state-owned power utility, is building coal-fired power plants as part of a 500 billion-rand expansion program to ease electricity shortages.

Aside from expanding existing iron ore and coal lines, Transnet will build new links to access coal and chrome in northern Limpopo province and construct a dedicated line to transport 16 million tons of manganese to the Coega port on the country’s south coast. South Africa has about 80 percent of the world’s best manganese reserves.

‘Not the Best Way’

“We would love to get more material on rail,” Deon Dreyer, managing director of Zug, Switzerland-based Xstrata’s South African chrome unit, said in a June 1 phone interview from Johannesburg. “We are using a lot of road transport, which is not the best way to do things, but we are coping. We will be expanding further next year. When we want to do more tons, we might run into transport bottlenecks.”

About 47 billion rand will be spent on expanding port terminals and modernizing them so that harbors can process 76 percent more cargo. Durban and Cape Town ports are being deepened to handle larger vessels and piers, while the new port at Coega is being built in three phases and will include four container berths. Transnet also plans to dig a new deepwater port in Durban, which has yet to be budgeted for.

“Our economic infrastructure is lacking,” Richard Downing, an independent economist in Pretoria whose clients include the South African Chamber of Commerce and Industry, said in a phone interview on June 11. “It will take a few years, but this investment is going to make it cheaper and more efficient to do business.”

To contact the reporter on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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