The Business of Mining

Top Stories of the Week:

• Indonesian and US supply drives coal prices lower
  • A surge of exports of thermal coal (used for power generation) from Indonesia and the increasing exports from the USA caused by domestic replacement of coal demand by gas demand are driving thermal coal prices to the lowest point in 2 years.
  • Continued low sales prices are causing various coal miners to get close to financial distress. As their share prices have decreased too, analysts expect a new wave of acquisitions in the industry.
  • Sources: Financial Times; Seeking Alpha
• Alpha closes steam coal mines in USA
  • Alpha Natural Resources, the company that recently bought Massey for $8.5bln, is reducing steam coal production and cutting approx. 150 jobs by closing 4 small mines in Kentucky and offices in 4 US cities, aiming to reduce G&A by 50-60$mln/year.
  • The company mentions low coal prices and new regulations for coal-fired power plants as the key reasons that the mines have become uneconomical and are unlikely to return to making a profit.
  • Sources: Alpha Natural Resources news release; Wall Street Journal; Reuters
• Xstrata reveals GlenStrata organization structure
  
  • The organization structure revealed in the merger documentation supporting Glencore’s bid for Xstrata shows a merger of the organization with very little initial integration. The heads of marketing of the business units continue to report to Glasenberg, and the heads of the asset groups continue to report to Davis.
  • Glasenberg agreed to not using his significant share of voting power to force any changes of the or structure for the first years after the merger.
  • Sources: Xstrata – Glencore merger documentation

Trends & Implications:

• The global changes of steam/energy coal business are mainly demand-driven. China and India are building coal-fired power stations at a high pace, increasing their share of global demand. At the same time stronger regulation in the Western world and the promise of cheap gas are suppressing the demand. As a result the coal business is getting more global, with a larger part of demand being imported from overseas.
• The business unit focus of the GlenStrata organization reveals an inclination to try to realize the arbitrage opportunities that make up a large part of the merger’s synergy potential on a product-by-product basis. Global markets for each of the products is diverse enough to make a generic approach to geographic, product, and timing arbitrage unpractical.

©2012 | Wilfred Visser | thebusinessofmining.com