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Posts Tagged ‘thermal coal’

Coal India Plans JV With Indonesian Mining Company

September 28, 2011 Comments off

“Coal India Ltd. plans to ask the Indonesian government to allocate it a coal mine, and also seek approval to set up a joint venture with a state-run mining company there. Coal India will ask for the approvals at an October meeting of a coal working group set up by the two countries, Interim Chairman Nirmal Chandra Jha said recently.
He didn’t name the Indonesian company or specify the reserves of the mine that Coal India is targeting.

The proposed Indonesian venture will come after a brief overseas pause for Coal India, the world’s largest producer of the fossil fuel. The company has halted its overseas acquisition plans due to delays in getting government approvals. The coal ministry last year told Coal India to invest only in listed overseas companies after allegations of corruption rocked the federal government. Coal India has so far succeeded in getting allocation of only two blocks in Mozambique.”

Source: Wall Street Journal, September 21 2011

Observations:

  • Indian power utilities imported about 42 million tonnes of Indonesian thermal coal last year. Coal fired powerplants produce over half of the country’s electricity. Various Indonesian coal miners are already tied up with Indian financial partners (e.g. Bumi & Tata).
  • Indonesia is working on a ban of exports of coal with low calorific value (<5100kcal/kg), which would threaten part of the thermal coal exports from the country.
  • Indonesia’s energy coal products exports to China has increased by over 25% per year for the past 5 years.

Implications:

  • The Indian government actively tries to reduce secure reliable access to coal via both Coal India and targeted acquisitions by ICVL. As increase of domestic production is slow the government might try to lure foreign miners into operating assets in India to boost productivity.
  • Increased Indian investment interest in Indonesia will pressure the Indonesian government to speed up the regulatory processes around the new Mining Law and the proposed environmental taxes. The new law was introduced over 2 years ago, but implementation regulations are still not fully worked out.

©2011 | Wilfred Visser | thebusinessofmining.com

GVK Acquires Majority Stake in Hancock

September 19, 2011 Comments off

“The GVK group said Friday it has acquired a majority stake in the Hancock coal project in Queensland, Australia, for $1.26 billion to secure thermal coal supplies for its planned power plants in India. It has acquired a 79% stake in the two Alpha mines, 100% of the Kevin’s Corner mine, as well as full ownership of ongoing rail and port projects connecting the Hancock coal projects.

The Hancock group, led by billionaire Australian businesswoman Gina Rinehart, said in a separate statement that GVK will pay $500 million up-front and the rest in phases. It will pay $200 million one year after the deal closes, and $560 million on the financial close of the coal project, anticipated to be in 2012. The GVK group owns and operates power, airport and other infrastructure projects in India, most of them through its listed entity, GVK Power & Infrastructure Ltd.”

Source: Wall Street Journal, September 19 2011

Observations:

  • GVK secures long term access to at least 20mln tons of coal a year, approx. a quarter of the total planned production of Hancock coal.
  • GVK has coal power projects in India in Punjbab and Goindwal Sahib, and owns 2 small coal mining projects in the state of Jharkhand (Tokisud and Seregarha).

Implications:

  • Indian companies are increasingly looking abroad to secure coal access. Both thermal coal and metallurgical coal are in demand, as coal mining capacity does not keep up with high economic growth.
  • For Hancock the sale of the coal projects frees up cash to develop the current project further and to pursue other opportunities more aggressively. Next to Hancock coal the group is involved in the Hope Downs iron ore project and the Jacaranda Alliance Joint Venture.

©2011 | Wilfred Visser | thebusinessofmining.com

Rio Tinto suffers decline in output

July 19, 2011 Comments off

“Rio Tinto revealed a steep decline in output at the world’s largest copper mine, demonstrating the mining industry’s difficulties supplying enough copper to keep up with rising global demand. In the first six months of the year Rio’s share of copper production at Escondida, the Chilean mine that accounted for 7 per cent of global production last year, fell 23 per cent to 118,000 tonnes over the same period in 2010.

The drop at Escondida – whose ownership is split between BHP Billiton, Rio, and Mitsubishi – dragged the miner’s total copper output lower by 18 per cent to 273,000 tonnes. Rio, which published its mine-production report on Thursday, disclosed the drop ahead of BHP, the larger partner at Escondida. The production report came ahead of the big miners disclosing their financial results for the first half.

Copper’s deteriorating supply base has helped push the price of the red metal above $9,000 per tonne this year. Analysts expect supply-side problems to influence Rio’s and BHP’s earnings from copper, despite the high profit margins they are enjoying.”

Source: Financial Times, July 15 2011

Observations:

  • Iron ore, thermal coal, and bauxite production increased by 12%, 18%, and 11% respectively compared to the same quarter last year. Main productivity issues are in copper (-24%) and coking coal (-26%).
  • Rio quotes lower grades at the Escondida and Kennecott copper operations as the key reason for the drop in copper production. Weather conditions are the key reason for lower coking coal production.

Implications:

  • Rio Tinto has a very strong portfolio of copper projects, but grades of remaining ore in many old projects is rather low. Other companies mining similar types of deposits face the same issue, resulting in both higher production costs and lower production with the same equipment fleet.
  • Iron ore remains the single key driver of Rio Tinto’s financial performance. Production at the key operations of Pilbara and Hamersley increased. With current commodity prices the company is likely to try to increase capacity at both iron ore and (new) copper operations as fast as possible.

©2011 | Wilfred Visser | thebusinessofmining.com

Itochu beats rivals to $1.5bln Drummond deal

June 17, 2011 Comments off

“Itochu, the Japanese trading house, has beaten global commodities and mining rivals, including Glencore and Xstrata, to secure a 20 per cent stake in Colombian coal assets owned by Drummond, a family owned US mining company, for $1.52bn. The deal, announced on Thursday, is the clearest sign of the renewed appetite among Japanese traders for thermal coal, the commodity used to fire power stations, as the post-tsunami nuclear crisis threatens the future of electricity generation in the country.

The transaction values the assets at $7.6bn, well above the $6bn that other bidders were prepared to pay, highlighting the rapid appreciation of coal assets driven by strong demand from Asia. China and India have joined traditional buyers such as Japan and South Korea in competing for supplies, which has driven up prices. Berlin’s decision to phase out nuclear power in Germany could also boost demand in Europe. Drummond said that the transaction would give Itochu “rights” to market coal produced in the Colombian mine into Japan.”

Source: Financial Times, June 16 2011

Observations:

  • Last November Glencore was reported to be interested in buying Drummond’s Colombian assets: Mina Pribbenow and El Descanso open-pit coal mines located in the Cesar Coal Basin near La Loma; Puerto Drummond, a deep-water ocean port on the Caribbean Sea near Santa Marta; and coal transportation and handling facilities.
  • Itochu, a Fortune 500 trading company with approx. $150bln annual revenues, hopes to benefit from high prices for steam coal in Japan. It will get the rights to market coal from the Colombian assets, which will still be operated by Drummond, in Japan. Drummond will use the funds from the sale of the 20% ownership of the assets to increase the capacity of the mines.

Implications:

  • After the nuclear crisis in Japan the interest in coal fired power in the country has returned, increasing the market value of steam coal. Itochu is hoping to benefit from this trend in the long term, but will now also benefit from the profitability of the Colombian assets.
  • The ownership stake bought by Itochu does not prevent any other company from buying out Drummond and gain control over the assets. The sale of this stake gives a potential acquirer a clear valuation, which could help to bid for the remaining 80%. To Itochu this would not necessarily be an issue, as long as the contracts to market the coal in Japan are not changed.

©2011 | Wilfred Visser | thebusinessofmining.com

Indonesia’s Indika to Expand Coal-Mining Capacity

June 15, 2011 Comments off

“Coal miner PT Indika Energy will expand capacity at least 25% in the next three years to meet the growing demand for fuel in expanding Asian economies, the company’s chief executive said. Indika plans to boost the capacity of the mines it controls through PT Kideco Jaya Angung to 50 million metric tons in the next two to three years from 40 million tons, said Arsjad Rasjid, Indika’s CEO and president director. The company hopes to lift capacity at least in part through acquisition.

The Jakarta-based company, which had revenue of around $440 million last year, is seeking to keep up with rising demand for thermal coal to fuel the power plants of India, China and in Indonesia. Indika is Indonesia’s third-largest coal miner, behind PT Adaro Energy and PT Bumi Resources.”

Source: Wall Street Journal, June 14 2011

Observations:

  • Indonesia is located close to China and India, both of which depend on thermal coal imports. At the same time the economic development in Indonesia (with over 240 million inhabitants) is driving the domestic demand. As a result the coal mining sector in the country is recently getting strong international attention.
  • The Indonesian coal mining industry was strongly reshuffled last year after Vallar combined the assets of domestic champions Bakrie and Bumi. Part of the this deal, which results in a FTSE-listed Bumi plc., is executed this week by Vallar issuing convertible bonds to Bumi resources.
  • Coal India is also looking to invest in Indonesian coal mines, using part of the funds raised through last year’s IPO, which had the company enter the global mining top 10 in terms of market capitalization.

Implications:

  • Indonesian coal reserves are rather small compared to Chinese and Indian reserves. With the strong rise of domestic demand it is foreseen that Indonesian exports are not going to be much higher than current levels. However, as most of the reserves are located on the island Kalimantan and demand is mainly on Java and Sumatra export facilities will be built anyway, linking the Indonesian market to the global seaborne coal market.
  • Indonesian government is trying to find a balance in regulating production and exports, looking at the conflicting perspectives of energy requirements for own development and income from coal exports. High export tariffs and/or production caps could possibly hurt the international investors.

©2011 | Wilfred Visser | thebusinessofmining.com

India in race to snap up coal assets

June 7, 2011 Comments off

“From the mining belts of Queensland, Australia, to East Kalimantan in Indonesia, Indian companies are racing to secure coal assets across the globe. Last year, Indian companies overtook those from China, Korea and Japan as the biggest Asian buyers of overseas coal assets. They were following their US counterparts in trying either to increase their exposure to coal at a time of high commodity prices or lock in fuel supplies for industries such as steelmaking.

Unable to guarantee access to supplies at home because of a mixture of bureaucracy, corruption, logistical and environmental issues, many Indian groups have been aggressively trying to buy assets in Indonesia and Australia. India signed $2.4bn of deals out of a global total of $16bn last year, according to Wood Mackenzie, the consultancy. Meanwhile, Indonesia’s coal association has said it expects India to surpass Japan as the leading buyer of the country’s coal.”

Source: Financial Times, June 6 2011

Observations:

  • According to Ernst & Young’s analysis of M&A in the mining industry over 2010 India has risen to the 7th place worldwide with $5.5bln overall acquisitions in the industry. A large part of India’s acquisitions are aimed at coal mines and transportation infrastructure.
  • Most Indian acquirers of coal assets are private utility-linked companies, which are mainly interested in thermal or energy coal assets.

Implications:

  • The gold-rush mentality of many new players and the resulting high premiums paid for coal assets will help the industry in India consolidate, as the more sophisticated players will soon outperform the players that pay too much for access to resources.
  • The Indian government is trying to mobilize state controlled companies to participate in the bidding for overseas coal assets. The creation of the ICVL consortium and the IPO of Coal India are aimed to create more coordination in government efforts.

©2011 | Wilfred Visser | thebusinessofmining.com

Coal India in Talks to Buy Stake in Indonesian Mines

May 27, 2011 Comments off

“Coal India, the world’s largest coal producer, may submit a final bid by the end of June to buy a stake in Indonesia’s PT Golden Energy Mines, a person with direct knowledge of the matter said. The state-run coal monopoly is currently doing due diligence of Golden Energy, said the person who declined to be named. Coal India brought out its initial public offer last year. ‘It is not a controlling stake,’ the person said, and didn’t provide more details. He said Coal India is yet to decide on a valuation for the stake it plans to purchase as a proposal is yet to be placed before the company’s board. ‘There are various proposals in countries like Indonesia, Australia, U.S., which Coal India keeps on evaluating,’ the person said.

Coal India, which contributes to more than 80% of the country’s coal needs, faces several obstacles in augmenting its output such as delays in environment clearances. To meet rising demand from consumers, mainly in the power sector, the company has been scouting for mining assets overseas. More than half of India’s power-generation capacity of 174.36 gigawatts is based on thermal coal. The country aims to add 163 GW of capacity in the decade through March 2017 and a major portion of the new capacity would also be dependent on fossil fuel. India, the world’s second-fastest growing economy in the world, faces shortage of coal as environmental concerns have delayed approvals for local mining, hurting production. The country is facing a shortage of 142 million tons of coal for the current year. Local production of coal is expected to be 554 million tons against demand for 696 million tons, according to government estimates.”

Source: Wall Street Journal, May 26 2011

Observations:

  • The rumors about a potential acquisition by Coal India were spread around the time of announcement of quarterly results. The company posted net income for the quarter of over $900mln.
  • A small part of the company was sold in an IPO last year, providing several billions of dollars to be used in overseas acquisitions and domestic expansion to fuel Indian demand for thermal coal. The government projects a shortfall over the next year of approx. 140mln tons, roughly a third of the total Coal India production for the year.

Implications:

  • Stepping up mine production in India is mainly hindered by slow environmental permitting processes. Part of the problem lies with the government’s inefficiency in running the permitting process, the other part of the problem lies with Coal India and other miners in the country that have not yet adapted to the increasing stringency of regulation.
  • Indonesia is growing into an important coal supplier to both India and China. The acquisition of Vallar of a series of assets and participations to form Bumi plc is just one example of the rising importance of the country. However, just as in India the environmental and social regulations in Indonesia are being strengthened, which might slow down the development of coal production in the country.

©2011 | Wilfred Visser | thebusinessofmining.com

Mongolia’s future as commodities exporter

May 24, 2011 Comments off

“Mongolia is going to be a major future supplier of commodities from coal through gold to copper – and maybe even crude oil. But how soon will this landlocked country with a population of 3m really begin delivering these resources to the world in a significant, market-moving way?

Although Mongolia is located right next to its biggest customer, China, their history of rivalry makes Mongolia suspicious of its southern neighbour. And capricious politics – parliament has tried to oust Dashdorj Zorigt, minister for mineral resources and energy, twice this year – mean that economic logic is sometimes subordinate to politics or nationalism.

Take the development of Tavan Tolgoi, by some calculations the world’s second-largest coal deposit. The government recently scrapped plans to build a railway directly to the border, less than 300km away, even after feasibility studies and initial permits for the line had been granted. Instead a new line will go east, connecting the mines to the Trans Mongolian Railway that leads to both Russia and China, albeit by a longer route. …

There are some exceptions to this pattern: the Oyu Tolgoi mine, which is co-owned by Rio Tinto, Ivanhoe and the Mongolian government, is ahead of schedule and will come online next year. The copper and gold produced there will be shipped out by truck, posing fewer logistical difficulties than the bulky coal. But still, the investment agreement governing the mine took more than five years to negotiate and remains a source of intense political debate.”

Source: Financial Times – Commodities Note, May 20 2011

Observations:

  • Tavan Tolgoi holds estimated coking and thermal coal reserves of 6.4bln tons. Indian ICVL has expressed interest in buying into the project, which the Mongolian government wants to bring to the stock exchange.
  • Rio Tinto’s development of copper and gold deposit Oyu Tolgoi with/through Ivanhoe is the first major foreign investment project in the country, which appears to go smoothly so far. Rio Tinto’s shareholder Chinalco has repeatedly indicated it would like to take part in the project, but has been kept out by Rio Tinto to date.
  • In October last year Ivanhoe was still hoping to export the products from Oyu Tolgoi by rail. In current plans the transport to the Chinese border (80 kilometers) will initially take place using trucks.

Ivanhoe's Oyu Tolgoi logistics plan

Implications:

  • Western companies will try to tease the Mongolian government into collaborating in the construction of direct rail links to the Chinese rail network in the south. The government’s objective in linking the producing region to the Trans-Mongolian Railway mainly is to stimulate domestic processing industry and to gain political leeway in the relationship with China by having the option to supply to Russia. Most likely the corporates and the government will come to a compromise in which the costs of infrastructure development is shared in some way.
  • The elections in Mongolia next year could create a complicated situation for the western miners in the country, as any new government will try to review and/or renegotiate development and royalty deals currently in place.

©2011 | Wilfred Visser | thebusinessofmining.com

Anglo American: Restructured and competitive again

February 21, 2011 Comments off

“Anglo American performed strongly in 2010, both operationally and financially, and we have continued to deliver on our clear strategic objectives. In addition to benefiting from higher commodity prices, our focused commodity businesses are driving superior operating performances, through major productivity improvements, disciplined cost management and the benefits of our asset optimisation and global supply chain programmes. We completed a number of sales of non-core businesses during 2010 and into 2011 and our divestment programme is now well advanced. Anglo American’s EBITDA of $12.0 billion, operating profit of $9.8 billion and underlying earnings of $5.0 billion, reflects delivery on all fronts.

We have transformed our Platinum business, moving it down the cost curve, with 23% productivity gains and cash operating costs controlled below inflation, and further safety improvements, while exceeding our refined platinum production target of 2.5 million ounces. Our Kumba Iron Ore, Metallurgical Coal and Nickel businesses also delivered productivity gains, while the benefits of the restructuring of De Beers are clear to see, with the business reaping the rewards of the much improved environment for diamonds.”

Source: Anglo American press release, February 18 2011

Observations:

  • Anglo American’s revenue, EBITDA and Earnings per Share outperformed analyst’s average expectations. Contrary to BHP Billiton and Rio Tinto the company managed to keep controllable costs stable while increasing output.
  • Capex for the next 3 years is planned at $16bln, below planned investments for the main competitors. However, the company has a strong exploration portfolio, especially in thermal coal, copper and platinum.

Implications:

  • The company did announce dividends, but is not yet planning to buy back shares. As the company now holds over $6bln in cash it might be aiming for targeted acquisitions in the near future.
  • The high commodity prices of last year have helped all major diversified miners to reduce gearing to low levels (Anglo American now at 16%). The low gearing and the high cash flow from operations will enable the miners to undertake large projects, both in organic growth and M&A.

©2011 | Wilfred Visser | thebusinessofmining.com

Korean Consortium Leads in Whitehaven Coal Takeover

February 17, 2011 Comments off

“In the latest scramble for Australia’s resources by Asian consumers worried about energy security, a Korean consortium has made an initial offer to buy Whitehaven Coal Ltd., a company valued at 3.5 billion Australian dollars (US$3.5 billion).

The non-binding offer by Korea Resources Corp., known as Kores, and Daewoo International Corp. underscores how volatility in commodity markets is driving consumers to bid more aggressively for high-quality reserves that can be shipped home. Coal prices recently surged to two-year highs after major mines around the world were hit by heavy flooding.

Whitehaven, which produces coking coal used in steelmaking and thermal coal used in power generation from five mines in New South Wales state, put itself up for sale last year in a move to capitalize on this wave of acquisition activity. Updating the market Feb. 7, Sydney-based Whitehaven said short-listed parties have been invited to complete more detailed due diligence and submit binding offers. It didn’t identify potential buyers, but the market expects companies from China, the U.S. and India to be involved.”

Source: Wall Street Journal, February 15 2011

Observations:

  • Whitehaven started an official takeover procedure, in which a list of potential bidders is invited to bid for the company based on information provided by the seller in a data room, last year. Initial offers were due of February 2nd, with binding offers expected over the coming month.
  • Driven by increasing coal prices, various Asian companies have bought Australian coal assets to secure access to raw materials over the past 18 months. China’s Yanzhou Coal Mining, Thailand’s Banpu Energy, and India’s Adani secured deals. China Shenhua (which owns assets near Whitehaven’s mines) and Indian ICVL are named as potential competing bidders for Whitehaven.

Implications:

  • The Korean Consortium will likely not be the only bidder in the takeover process. Typically multiple bidders are led to submit an offer in a takeover procedure in order to maximize the price paid for the company. Potential bidders without operating assets in Australia are not expected to be able to realize high synergies, making the bidder that is prepared to take most risk or that is most optimistic about the value ‘win’ the battle.
  • The buyer of Whitehaven might face regulatory obstacles from Australia’s Foreign Investment Review Board, which forced Yanzhou Coal Mining Co. to list the Australian assets in Australia to keep control over the domestic energy industry.

©2011 | Wilfred Visser | thebusinessofmining.com