These 3 Stocks Could Soar On Mozambique Assets

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 |  Includes: AAUKY, BHP, RDS.A, RIO, VALE
by: Investment Underground

by Jaiyant Cavale

If you have not listened to Fado, you probably are missing something very beautiful. Fado is a musical genre from Portugal and is characterized by soulful strumming of guitar and lyrics that evoke 'saudades', a Portuguese term that can be roughly translated as nostalgia for something that can't ever be reclaimed. Fado ballads evoke feelings of longing, sadness and a mystic romanticism that is typically associated with sailors who may never return home. Portugal was once the most powerful maritime power, and most of its sailors never returned home. They either died of diseases, married natives of foreign lands or simply went missing. Those that were left behind in Portugal sang Fado songs in remembrance of these forgotten sailors.

One of the most famous Fado singers of today, Mariza, is only partly Portuguese. An important part of her lineage descends from Mozambique, the African country that lies in the South-eastern region of the continent. Mozambique has begun to sing Fado for its own forgotten martyrs who fought during the Civil War that lasted between 1970s and 1992, after it received independence from Portugal in 1975. With vast reserves of coal, precious metals and natural gas, Mozambique has become one of those African success stories that we rarely hear about. Though marred by slums and shanty towns, the capital city Maputo has a number of colonial monuments and glitzy buildings with glass facades that house multinational oil and natural gas companies.

Royal Dutch Shell (NYSE:RDS.A) and Rio Tinto (NYSE:RIO) are two companies that are actively engaged in mineral and gas exploration in Mozambique. Rio Tinto plans to spend $160 million on local acquisitions in order to continue its mining activities in the Moatize district. A backward and largely rural district, Moatize has huge reserves of coal that will eventually help Mozambican companies to provide employment, work towards building infrastructure and helping the straddling nation to grow its economy.

Rio Tinto is closely working with local companies to help build its own operational requirements. These include consultancy services, fuel, catering, explosives, logistics, transportation and supplies. In 2011, Rio Tinto spent $120 million in Mozambique, and that did not include the costs of building mining facilities and coal processing. In fact, the company has decided to partner with international organizations to help develop small and medium sized companies in Mozambique that may eventually become Rio Tinto's subsidiaries and suppliers in Mozambique. Mozambican Confederation of Economic Associations (CTA) is closely working with Rio Tinto as well, and many of these activities are actually very exciting.

While most people do not consider Mozambique even a tourist destination, this civil war-torn country with scars from the last century has a lot to offer in terms of coal, natural gas and oil. Rio Tinto is making a very wise decision by working with local companies, as Shell has begun to work on exploring natural gas and oil off the coast of Mozambique. Clearly, Rio Tinto needs to develop its niche as a land mining expert, when its international competitors have already begun to explore oil and natural gas.

BHP Billiton (NYSE:BHP) has already used Mozambique's cheap electricity to power its Mozal I and II's smelters. These plants are responsible for 500,000 tons aluminum each year. However, sensing something amiss, the Mozambican government refused to let BHP expand its operations to Mozal III saying enough electricity wasn't available. Rio Tinto's direct coal competitor Vale (NYSE:VALE) recently transported 1 million tons of coal from the Tete province to the port of Beira. However, Vale has been facing a lot of resentment from local people who have been displaced or disturbed by its mining activities in western Mozambique. Protests have been quashed, but when the public's anger is incited, a company will have to bear the brunt of a ruined PR. Companies that have damaged their own reputation by acting irresponsibly will have to sing strains of Fado that lament the loss of their positive image in the eyes of locals. Anglo American (OTCPK:AAUKY) signed a $630 million deal to acquire coal mining interests way back in December last year.

However, Rio Tinto seems to have the most consistent image amongst Mozambicans and their government. Rio Tinto recently announced that it would closely work with the country's government to make sure that environmental concerns are addressed and that its mining and exploration activities do not harm the country's rich natural resources and fragile ecology. It is quite possible that Rio Tinto will also help in infrastructural developments, as it recently announced an evaluation study.

With these developments, one can assume that Rio Tinto's investments and acquisitions in Mozambique will pay huge dividends. Thanks to a positive public image and a genuine concern on the part of Rio Tinto, we can expect a very stable and rewarding relationship between Rio and the Mozambican government. In fact, these are the micro situations that help a company strengthen its stock and increase investor confidence.

Through 2012, I expect Rio Tinto to work more closely with the Mozambican government in order to establish a deeper presence in the resource-rich nation. By helping the nation build its own infrastructure directly or indirectly, Rio Tinto is securing its future as a major player in Southern Africa. This shall have more meaningful consequences in the coming years, as neighboring Botswana, South Africa and Tanzania have potential sites that Rio Tinto could explore as well.

In fact, by working with the Mozambican government, Rio Tinto has acted as a role model to other oil and mining companies that have ignored the benefits of working on their public image. For investors, this means stability, increased growth and confidence, which are what we all desire when we buy a stock. Mozambique will continue to be a very important country to assess in news headlines, as developments in that country will certainly affect your mining and gas stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.