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Productivity is key to coal’s future

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World Coal,

Rio Tinto has already achieved its cost cutting objectives, according to Sam Walsh, CEO of the diversified miner. Speaking at a recent investor seminar in London, Walsh told analysts that the company had reached US$ 2 billion of savings this year, including US$ 600 million from the Energy group, which includes thermal and metallurgical coal assets. The company has also divested US$ 3.3 billion of non-core assets, including the Clermont coal mine for US$ 1.015 billion.

Regardless of this there is little room for complacency: Walsh expects fragility and weakness to continue to plague global markets as underlying structural weakness remains, resulting in short-term risk.

Rio Tinto coal: getting back to basics
Echoing Walsh’s cautious tones, Harry Kenyon-Slaney, chief executive of Rio Tinto Energy, emphasised the “significant pressure” the energy industry has been under. Increasing costs, strong local currencies, lower commodity prices and weaker demand have meant that a third of global seaborne thermal coal would have been loss making at average 2013 spot prices. Coal productivity is also maintaining its downward path, continued Kenyon-Slaney, while a lack of access to finance is hampering the industry’s ability to make significant upgrades to existing operations.

Against this backdrop, Rio Tinto’s coal assets are cash and earnings positive, said Kenyon-Slaney. But there is still much work to be done.

External factors are still having a major influence. In Australia – where most of Rio Tinto’s coal assets are located – the strong dollar, increasing taxes and opposition form local communities have exacerbated the decline in productivity. Kenyon-Slaney singled out the example of the Mt Thorley-Warkworth mine extension, which has been halted by a state environmental court ruling despite already securing approvals from the relevant state government regulators, the independent Planning and Assessment Commission and the commonwealth government. “Mining is an industry of long lead times,” Kenyon-Slaney said: “We need predictability in policy and political certainty.”

Transforming the coal business
Away from the external factors, Kenyon-Slaney emphasised that Rio Tinto was transforming its energy business to remain competitive throughout the cycle. This includes:

  • Aggressive cost reduction: Rio Tinto Energy has already achieved US$ 600 million in cost reduction to October 2013 and is on track to achieve over US$ 1 billion of savings by the end of 2014.
  • Productivity improvements: examples given included raising labour productivity by 27% and truck utilisation by 7%, while its Mt Thorley mine has reduced breakdowns of its shovel fleet from 15 to 6 per month thanks to better maintenance scheduling.
  • Effective use of emerging market suppliers, which has seen a drop of 13% in consumables costs.

Beyond Australia, Kenyon-Slaney noted productivity gains made at the company’s Mozambique hard coking coal operations, where costs have been reduced by US$ 20/t, hard coking coal production is up 22% on 2012 and hard coking yield is up 5%. While challenges remain due to infrastructure constraints and broader market conditions, Kenyon-Slaney said the company is continuing to work with Mozambique’s government to establish a “globally competitive coal chain solution for the country”.

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