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Regional update – Colombia

World Coal,

Colombia’s major mining companies remain supportive of official projections of increased coal production over 2014, but at least one junior is facing problems.

The country‘s biggest miner, Cerrejón, a joint venture between Anglo American, BHP Billiton and Glencore, appears confident it will increase production over the year. Company president, Roberto Junguito, would not be drawn to give a specific forecast, but nonethless said: “We are convinced we will be able to produce and export more coal than in 2013.”

Production at the company’s El Cerrejón mine over 2013 was 33 million t. Overall, Colombia produced 85.5 million t of coal over that year in the face of strikes at most large mines and considerable disruption of logistics.

US-based Drummond is the country’s second largest coal producer. Its mines are targeting 25 million t over 2014.

The official expectation is that total exports should reach 97 million t. This is up from a previous forecast of 89 million t. Production over Q1 2014 was 24.5 million t.

More for less

However, some analysts will not welcome more Colombian coal into the market: “Alongside Australia and Indonesia, Colombia and South Africa have been major forces in aggravating the global oversupply situation,” they say. “Colombia exported 12.5 million t of coal in May, more than double the 5.4 million t shipped in the previous month. More Colombian coal in the market can only exacerbate the current oversupply situation – for which read prices and profits.”

The Colombian Government has since announced plans to dredge the Magdalena River, down which coal is barged. This, it says, could boost metallurgical coal exports fivefold. It has admitted that the project could potentially worsen the global oversupply of metallurgical coal, but says that it will help reduce the cost of transporting it from the Colombian mines to coastal coal terminals by as much as 50%.

Investor-support delays

At the recent launch of the Colombian Mining Association, Santiago Angel said that Colombia‘s economy could grow 1.5% faster each year if the government was to set clearer rules to draw more investment into the mining sector. “We are talking about one half percentage points for GDP in the coming year just looking at projects of strategic national interest,” he said. “There is a lack of co-ordination between national and local authorities, which leads to delays in issuing environmental licences and mining permits. This is limiting foreign investment and job creation.”

Beatriz Uribe, the head of Colombian mining company, Mineros, said the government needed to make clear whether it supported mining or not. Her company was considering abandoning some exploration projects, due to problems with local communities and authorities and licensing delays. She also reiterated concern over resumption of opposition-backed guerrilla activity.

However, Colombia has been recording growth that most other countries are unable to achieve, particularly those in Latin America. It currently forecasts real growth of 4.7% over 2014 – but expects to revise that upwards. The government attributes 12% of its exports to coal.

Obama boost for Colombia coal

US President Barack Obama’s ongoing war on coal may be leading to more coal mines closing throughout Central Appalachia, but it has certainly meant more business for Colombian coal companies. US imports of coal are going up and Colombia seems to be the preferred supplier.

It costs more to ship coal from Central Appalachia to US domestic destinations than to import it from Colombia – it is cheaper to move coal by ship than by train. Citing low labour costs and more cost-effective shipping, a number of reports say that coal from Central Appalachia can be landed in Florida at US$ 26/t, yet from Colombia the cost is at US$ 15/t.

US coal producer Alpha Natural Resources CEO, Kevin Crutchfield, said: “As we have to deal with stricter government regulations that are causing coal-fired power plants to close and no new ones to be built, markets remain extremely challenging. Prices are below the break-even point for most US producers. There are increased imports, primarily from Colombia.”

Global Trade Information Services said US coal imports were up 44% to 5.4 million t during H1 2014, compared year on year. Two thirds of the coal came from Colombia.

Junior’s geological woes

Junior miner and Colombia-focused TSX-listed Pacific Coal Resources is targeting production of 1.36 million t over 2014, compared with 1.32 million t in 2013 and 1.27 million t in 2012.

While financial revenues over 2013 dropped to US$ 119.24 million from US$ 129.01 million over 2012, with operating margins per tonne up to US$ 7.49 against a negative US$ 13.57 over the previous year. Net earnings were a profitable US$ 7.46 million against a US$ 123.75 million loss over 2012.

The company operates the La Caypa mine, from which it is targeting expects 960,000 t, as well as the Cerro Largo mine, for which it is forecasting production of 400,000 t.

However, after an encouraging Q1 2014 in which it cut a comparable 2013 loss of US$ 3.15 million to US$ 113,000, it ran into production problems.

At the flagship La Caypa mine, miners uncovered the naturally occurring burning of coal mantles due to a geological fault. Production fell 18% against Q1 and was 27% off-target.

At Cerro Largo, production was 12% more than in Q1, but the ramp-up was slower than expected and the final tonnage 36% below target.

Overall output was down 30% on 2013 to 279.6 million t, sales reduced by 35% to 229.3 million t. Alongside that, the average realised coal price for the quarter declined, bringing comparable revenue down 40%.

The market reacted primarily to the fault found at La Caypa and, unsure of the longer-term, outcome wiped off a third of the company’s market capitalisation. However, new investors still saw value and supported a US$ 6.5 million debt offering.

Strikes and strife

Both Cerrejón and the Drummond mines experienced strikes lasting several weeks during 2013. There were also logistical problems and, although deputy mining minister Cesar Diaz and the companies themselves play down the effects of the strikes, there are signs of more labour unrest and fears of a resumption of leftist guerrilla activity, which the government has previously insisted it could contain.

“We are worried about strikes, but we have no impact to report,“ Cerrejón‘s vice president of public affairs, Juan Carlos Restrepo, said.

Written by Barry Baxter. Edited by Sam Dodson

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