Dodging a Bullet in South Africa...

February 24, 2011

 

Looking back, we dodged a steel bullet in South Africa. Or to be more precise, we dodged an iron ore bullet. After shipping iron ore from Palabora Mining Company to China for years, we bid to buy the entire company when principal owners Rio Tinto and Anglo-American decided to sell.

 

The mining complex borders world famous Kruger National Park in Limpopo Province in the northeast corner of the country. It is south of Zimbabwe, east of Botswana and just west of Mozambique.

 

There are no fences and elephants, water buffalos, giraffes and other wildlife wander freely between the Park and the mine property.

 

Palabora had stockpiled 240 million tons of iron ore over the years as a by-product of its huge copper mining operation.

 

But iron ore prices were too low to justify the expensive rail transport to the closest ports of Richards Bay and Maputo, Mozambique and then ocean shipment to foreign steel mill markets.

 

Rising iron ore prices improved the economics of Palabora's business model. They started to rail and ship ore. But rail transport from the mine was constrained by inadequate tracks, bridges and signaling equipment and also by a shortage of rail cars and locomotives.

 

As part of our $1.1 Billion bid to buy Palabora Mining Company, we also proposed a leasing company to improve logistics and increase "rolling stock" (i.e. locomotives and wagons).

 

This proposal was made to Transnet, the government-owned entity that controls South Africa's rail and port systems.

 

Our team drove alongside the rail line from Palabora to Maputo, the capital of Mozambique and its largest city and biggest port. We visited the ports at both Maputo and neighboring Motola.

 

We met with senior government officials in Maputo regarding their country's participation in our logistics company.

 

 

 

We visited Maputo's magnificent train station (above), designed by Gustave Eiffel, whose eponymous tower dominates Paris.

 

We then drove through Swaziland to the port of Richards Bay back in South Africa. This is the other destination for ore railed from Palabora.

 

The Palabora Mining Company sale was managed by the Johannesberg office of investment banker Rothschild. Our group advanced to the final round of the auction but was ultimately outbid by a Chinese entity.

 

Our disappointment was assuaged as iron ore prices plummeted and the fundamental economics of the transaction deteriorated.

 

The winning bidder now had an albatross and not the profitable business they had envisioned. The new owner tried to back out of their transaction and Rothschild re-engaged our group with no luck.

 

But our logistics solution gained traction at Transnet through an auction to supply electric and diesel locomotives to South Africa. WIth our Chinese loco manufacturing partner, we won a large piece of this multi-billion dollar business.

 

And so one thing leads to another...

 

 

Real estate is all about location, location, location. But Mining is all about logistics, logistics, logistics.

 

Our shipping of iron ore to China and our attempt to buy Palabora Mining Company led to our successful logistics businesses in South Africa, Mongolia, China and elsewhere.

 

The deep water port of Richards Bay in South Africa can accomodate large enough ships for economic and efficient transportation to distant markets like China and India.

 

 

 

More efficient rail transport along with improved port infrastructure and storage areas (left) all contribute to the competitive strength needed for South African exports.

 

SP Africa Logistics is the entity our group developed to respond to the Transnet tenders and requirements.

 

 

 

Update: Our company has applied or is applying its South African business model in other markets such as China, Mongolia and most recently Ukraine.

 

For example, our SP Mongolia Logistics operation leases rail cars and locomotives to miners to transport their coal and iron ore to China for use in power plant and steel mills.

 

In China, we have a related project building a rail line in Inner Mongolia, the country's northern province that borders Mongolia.

 

 

 

This project in China ties directly into our rail business to the north in Mongolia. And we are working with the manufacturing and leasing companies for the Inner Mongolia project that partnered with us in SP Africa Logistics.

 

Such is the synergy of working on similar projects in different parts of the world. Each new transaction builds on the success of earlier projects.

 

Such experience has built our reputation in the infrastructure space over the last 15 years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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