* Shareholders want better returns and spending controls
* Mozambique coal output small fraction of planned capacity
* Maputo vetoes Rio's Zambezi barge plans
* Rail option also hits snags
JOHANNESBURG/LONDON, Jan 22 Rio Tinto has begun a review of its Mozambique coal mining operations which cost it a $3 billion write-off, reconsidering development plans, partners and its options for getting the coal from pit to port.
Rio's troubles in Mozambique offer a cautionary tale on big projects in new areas, which have become increasingly unattractive for miners under pressure from shareholders to control spending and improve returns.
A source familiar with the project said the review was underway. "The reality is that Rio has to look at what it has, and at what options there are," said the source. The focus is not currently on a sale, although a new project partner could help Rio to share the infrastructure and development costs.
Rio sacked chief executive Tom Albanese last week when it wrote off $14 billion on the value of its aluminium arm and the Mozambique coal assets it bought in 2011. Mozambique's infrastructure had proved more challenging than expected, Rio said, and estimates of recoverable coking coal used in steel production were lower than expected.
Benga mine, in which India's Tata Steel owns a minority stake, began exporting last year but the amounts remain a small fraction of the eventual estimated capacity of Rio's total Mozambique coal assets.
The coal writedown and review come less than two years after Rio took control of the assets by buying the Riversdale mining company for $4.2 billion. This embarrassment is likely to deepen miners' reluctance to tackle big projects from scratch, particularly where infrastructure is poor.
Rivals Vale and BHP Billiton have already begun pulling back from big African bulk commodity projects, where overcoming infrastructure problems is vital for success. This reflects investors' demands for more cash control and less profligate spending. However, Rio has Simandou, a major iron ore project in Guinea.
Vale of Brazil remains a major player in the former Portuguese colony of Mozambique, where a common language has helped it to build close ties with the government. However, Vale has retreated from its portion of Simandou in Guinea, where it is facing uncertainty over the right to develop the asset.
Anglo-Australian BHP has also largely retreated from West Africa.
"This is a... cautionary tale," analyst Paul Gait at Sanford Bernstein said. "There is a real question mark there: the ability of the majors to successfully operate in these frontier countries has yet to be demonstrated."
Rio snapped up Riversdale during a brief flurry of activity as commodities recovered from lows hit around 2008. Industry sources said it was under pressure at the time to strike a deal in Mozambique, seen as the new coking coal frontier, and concerns about infrastructure in Africa became secondary.
A spectacular rise in China's steel demand then also backed the case for a Mozambique purchase.
"Back then, the market was recovering, the China story was sound and coking coal was constrained. Mozambique sounded easy, more stable than other African states or even other coking coal producers," one industry source said.
Stretching along Africa's southeast coast, Mozambique holds some of the largest untapped deposits of coking coal and is also in a prime position to supply growing markets in Asia.
Other industry sources suggested Rio did not do sufficient due diligence on the project and related infrastructure plans.
Before the takeover, Riversdale was forecasting its Benga project would start producing in 2012 at a rate of 2 million tonnes, rising to 10 million tonnes the following year. Actual production from Mozambique last year was 272,000 tonnes of thermal coal, which is burnt in power stations, and just 188,000 tonnes of the higher-value coking coal.
The larger Zambezi project was expected to start producing in 2015, yielding up to 20 million tonnes a year of both types of coal a year.
Rio has declined to confirm the targets or the distribution of coking to thermal coal, while a slump in prices also hit projections for the project.
Rio Tinto's review will consider issues including options for exporting its coal. Initially, it had hoped to send the coal down the Zambezi river by barge. In a June 2011 presentation, the company said it expected its proposal to be approved by October that year, with the barge shipments starting in 2014.
Although barges are widely used in Europe and South America, the Maputo government turned this option down in early 2012 on environmental grounds. Rio Tinto has decided not to resubmit the proposal and is pursuing a rail solution instead.
This has not been helped by what local industry sources say have been tougher relations with Maputo.
The sources said Rio initially wanted a railway which would be privately-owned and operated, a model which has worked in Australia. This met with reluctance in Mozambique where the government has tried to keep infrastructure in state hands.
The company is now considering options for a rail link open to other users, possibly also outside mining.
For now, Vale and Rio Tinto have been using the Sena railway line to move their coal to the port at Beira, but the volumes shipped last year fell short of quantities envisaged due to delays in completing an upgrade to the line.
Other miners were forced to move their product by truck or refrain from exports altogether.
At a recent conference in Maputo, state-owned logistics group CFM presented various rail and port infrastructure projects planned over the next five years.
Nowhere did CFM's plans refer to an infrastructure corridor proposed by Rio Tinto. When asked, a CFM official declined to comment on why that option had not been included in his slides.
Rio Tinto declined to comment.