Clifford Smee, timetric, Australia.
2014 proved to be one of the bleaker years for coal project development, with coal prices following a downward trend, leaving little incentive to invest in both exploration and projects.
Exploration budgets reduced
Australia, as the pre-eminent supplier of coal to the seaborne market, is a great proxy for the decrease in exploration expenditure spent specifically on coal. Coal exploration in Australia rapidly decreased from its peak of US$227 million in 3Q11 to the US$80 million spent in 3Q14 – an incredible 64% drop in expenditure within three years. Unfortunately, this is a trend that is being seen globally and is likely to continue further due to the lack of available capital for junior explorers, which accounts for a significant share of exploration expenditure. Nevertheless, there has been some material advancement for different projects in different countries, including Mongolia, Australia, Canada, Russia and Mozambique.
Mongolia has seen considerable coal investment and exploration over the last ten years, despite lower prices due to the lack of access to the seaborne market, with the need to ship through either China or Russia.
Last year, Prophecy Coal released its mine plan for its Chandgana project. The project is targeting 3.5 million tpy saleable coal from an opencast operation, with a claimed mine gate cash cost of US$17.7/t. It remains to be seen whether the project can be financed.
South Gobi Resources is currently commissioning its 45 km coal-haul highway. This three-lane highway was built to international standards and will reduce operating trucking costs from the mine gate to the Chinese border. This will greatly assist South Gobi’s operating flagship Ovoot Tolgoi mine, which has a production capacity of 8 million tpy ROM coal.
Mongolian Mining Corp. (MMC), Mongolia’s largest coal exporter, has formed a joint venture with China’s Shenhua Energy to build a cross-border rail link. The project will involve the construction of a 13 km rail link from the Chinese border to a terminal where coal is delivered by trucks. Once operational, this will reduce transportation cost for MMC’s Tavan Tolgoi operations.
Little progress has been made at Tavan Tolgoi, which holds around 7.5 billion t of coal, since international bidding for the tender of the project collapsed in 2011. However, in December 2014, Mongolia relaunched an international tender to develop the project. Mongolia’s new Prime Minister, Chimed Saikhanbileg, identified the resource as a priority to energise the country’s lagging economy.
Australia: New South Wales
The Hunter Valley witnessed strong growth in the last decade and, due to M&A activity, it is now dominated by Rio Tinto Group and Glencore. Early in 2014, Glencore approached Rio Tinto about forming a joint venture to run their combined mines, in an effort to address high operating costs amid falling prices. However, Rio Tinto rebuffed this offer and Glencore subsequently announced that it would work with Peabody Energy and combine their Wambo and United opencast coal mines in a 50-50 joint venture that could produce 6 million tpy of thermal coal. The plan, expected to take effect in mid-2017, would improve recovery of coal from the combined operations and sharply cut capital and operating costs.
Northwest of the Hunter Valley coalfield lies the growing Gunnedah coalfield. This coalfield contains one the largest coal projects currently in development: Whitehaven Coal’s Maules Creek. Construction activities occurred at Maules Creek throughout 2014, with first coal expected in 2015. The project is one the largest greenfield projects to be built in the last five years with a nameplate capacity of over 10 million t. The mine will produce thermal coal and lower quality metallurgical coal, all for export markets.
The state of Queensland contains the Bowen Basin, which produces the world’s greatest proportion of hard metallurgical coal. The region has seen significant expansion during the last decade and recently saw the opening of BHP Billiton’s Daunia and Caval Ridge mines. Both of these operations introduced new metallurgical coal brands to specifically target the Chinese steel industry. However, like NSW, many Queensland coal operations remained uneconomic throughout 2014 and most majors were content to increase production efficiency, without significant CAPEX, other than that already committed, such as BHP Billiton.
Highly debated coal mining developments in Queensland are the proposed mega mines in the Galilee Basin, such as Adani’s Carmichael project and GVK’s Alpha project. Both projects sought environmental approval in 2014, with Carmichael receiving both environmental and government approvals. However, there is ongoing debate as to whether these two Galilee projects can be economically viable, with up to 500 km of railways needed to be built, and the projects relying on over 20 million tpy of production in order to bring operating costs down to below US$60/t. With current seaborne coal prices within the US$60/t range, it is difficult to see how such projects can operate and recover their financing costs. For example, Carmichael’s CAPEX is estimated at US$7 billion.
Canada’s coal mining industry suffered significantly in 2014: Anglo American idled its Peace River Coal operations and Walter Energy idled its Wolverine and Brazion coal mines in British Columbia.
Nevertheless, there were some early stage developments. Atrum Coal released a prefeasibility study for its Groundhog anthracite project. The project is targeting 5.5 million tpy with a capital cost of US$58 million. Atrum also appointed a tier one investment bank to assist it in securing the funding required to develop the Groundhog North underground mine. Meanwhile, Jameson Resources released its prefeasibility study for its Crown Mountain project. The project is aiming to produce 1.7 million t of metallurgical coal with a capital cost of US$340 million.
Russia’s export coal industry is particularly dominated by its Far East provinces. Its largest relatively untapped coal deposit, the Elga project, has experienced considerable commissioning issues, and is behind schedule. However, in 2014, Mechel was successful in bringing the Elga coal complex’s seasonal washing plant into an all-year mode. Starting in November 2014, the plant has now reached a capacity of 2.7 million tpy of ROM coal (2.3 million t of end product). Mechel expects to increase ROM coal production to 3.5 million tpy in 2015.
Meanwhile, Tigers Realm Coal released its feasibility study for its Amaam coal project. The project is targeting 1.5 million tpy with an estimated cost of US$122 million. Amaam could produce a semi-hard metallurgical coal product.
Finally, in Mozambique, Vale progressed well with its construction of the railway link from the Tete Basin to the Port of Nacala. The first reported train arrived in Nacala in late November 2014. This is a significant US$4.5 billion development that will greatly assist Vale to develop phase two of its Moatize mine, which would see the mine ramp up to 22 million tpy. The railway line was built by a joint venture between Vale and the Mozambique government and it is hoped the railway will allow other operators in the Tete Basin access to seaborne markets.
In early December, Vale also announced a US$763 million investment in its Mozambique projects from Japanese trading house, Mitsu & Co. The Japanese company will take a 15% stake in the Moatize mine (valued at US$450 million) and a 50% stake in Vale's investment units, which are responsible for development of the Nacala logistics corridor.
In summary, 2014 saw a distinct lack of development in the coal industry, in contrast to the previous years, with just five publicly released development studies for prospective mines, which is a record low for the last five years. The impact of low prices has been significant, together with the major companies reducing CAPEX budgets. A return of higher prices is needed to stimulate further investment in both exploration and projects, with the coal industry currently relying on projects that have already been committed to in previous years.
Written by Clifford Smee. Edited by Jonathan Rowland. This is a summary of an article that first appeared in the February 2015 issue of World Coal. Subscribers can view the full article by logging in and downloading the issue here.
About the author: Clifford Smee is the lead analyst - mining at timetric.
Read the article online at: https://www.worldcoal.com/special-reports/09022015/dark-times-coal-exploration-and-mine-development-review-2015-coal1862/