Baobab makes the grade in Mozambique

Baobab Resources has achieved 'first-mover' status in Mozambique through four prospects in the central-north of the country. Mozambique's mineral profile was previously woefully inadequate, partly because in large parts of the country almost no modern exploration techniques had been deployed, but also because the mining industry was held back by two decades of civil war. The potential for political instability still presents a risk factor, but almost five years after joining Aim, Baobab has made significant headway towards establishing a commercial resource base and opportunities abound.

The main focus for the company is its flagship Tete iron ore project, which shares licence boundaries with two coal operations owned by Vale, Rio Tinto, and India's Tata Group. The proximity of these projects to Baobab's Tete project is hugely advantageous because port and rail links are already in place and there are substantial new infrastructure plans in development, including an upgrade in rail capacity and plans for a barge network down the Zambezi River. The Zambezi provides Baobab with access to reliable, low-tariff hydro-electric power – a factor that can't be taken for granted on the 'Dark Continent'. The potential importance of the Tete project to the local economy can be gauged by the fact that the World Bank, in the form of its commercial arm – the International Finance Corporation – has entered into a strategic partnership with Baobab and has a 15 per cent stake in the project.

Baobab's managing director, Ben James, reckons that the company is "rapidly approaching a watershed in the development of the Tete project", because a pending resource statement from the Ruoni South prospect within Tete should ensure that Baobab will meet or exceed its 300m tonne iron ore resource target. An additional resource statement based on current work at the adjacent Tenge prospect is scheduled for release early next year, and Baobab anticipates that this will push its resource inventory well beyond the base requirements needed to secure investment and accelerate Tete towards the commercial planning stage. Baobab's next most advanced project is the Monte Muande magnetite phosphate deposit, located 25km northwest of Tete, with a 200m-250m tonne exploration target.

But unlocking Mozambique's mineral wealth won't come cheap. Mr James estimates a $500m (£318m) capital expenditure bill for Tete alone, so Baobab's share in the project is likely to be diluted over time. The most direct route towards commercialisation would be to simply sell the proved assets at Tete, or perhaps bring in a partner with sufficient financial clout to see it through to production. Given the strong port and rail links already in place, and a short easterly sea-route to India, a prime candidate might be Tata Group, the world's seventh-largest steelmaker. Baobab has £5.7m in cash to progress Tete towards commercialisation, in addition to a £15m unused drawdown equity facility, so the company has sufficient resources to enable it to make a measured decision on the Tete resource when the time comes.