Australian Coal Companies in Rush to Dump Infrastructure Capacity

BRISBANE, Australia - May 5, 2013 - PRLog -- But in today’s climate of low prices once prized capacity is increasingly becoming a burden on company balance sheets, particularly if coal being mined costs more than the price it can be sold for.

The reason infrastructure capacity is now biting producers on the proverbial is because those ports and rail were funded on the back of take-or-pay commitments, ranging from a few dollars a tonne to an estimated industry average of $15/t.

“The problem is a port like NCIG (Newcastle Coal Infrastructure Group), while owned by an industry group, is 100% debt-financed and those financiers require guaranteed returns,” said a source at one mining house.

In the last few months, companies are increasingly looking to sell or trade their under-utilised capacity with Xstrata Coal said to be trying flog off around 5Mt of port capacity it owns in the first stage of the Wiggins Island port development at Gladstone in Queensland. The company originally had around 10.7Mt of allocation, which was intended to service its Rolleston expansion but, now plans to give up about half that capacity.

So far, there have been no takers. Other companies are in a similar position.

For instance, Yancoal Australia owns 27% of NCIG after it inherited port infrastructure through its merger with Gloucester. While the company’s mining developments slowed in response to the deteriorating market, the NCIG expansion continued to progress and is due to reach 66Mtpa by 2014.

Because it does not have the coal yet to put into the ever-expanding infrastructure in New South Wales, Yancoal has been forced to declare an estimated take or pay liability for 2013 of around $50-55m.

“Yancoal will attempt to lower its take or pay obligations for both port and rail allocations where possible by trading excess capacity,” the company said in its recent results.

Easier said than done when every other coal company is in a similar position.

Rio Tinto’s development of the Mount Pleasant deposit is in doubt and according to sources around 9Mt of capacity at NCIG was earmarked by Rio for that coal. Back of the box math implies a $300m take-or-pay liability on Rio’s books unless it can find another way to plug that gap, or offload the capacity.

Potentially the most at risk are junior developers who are yet to produce coal but who have locked in export capacity. While that was a smart strategy just a few short years ago, holding infrastructure capacity into which you cannot feed coal is a real burden today.

Take junior miner Cockatoo Coal. While there is some uncertainty about the funding for the planned $430m Baralaba mine extension, sources in the financial end of town say Japanese investor, JFE Shoji, with a 37.5% interest in Baralaba and a 20% stake in Wonbindi Coal, are supportive of management.

“The most likely outcome is Cockatoo’s debt could be converted to equity which would remove the refinancing pressure and buy them some time to secure development funding,” the banking source said.

Another angle on the whole take-or-pay debate is to consider what would happen if one company in a consortium which was underwriting a port went to the wall.

Not too many sources were sure about what might happen in such a situation but one did suggest 25% of the repayment liability would fall to the other companies while the banks would have to carry the can for the remaining 75%.

Coal industry consultant, Bede Boyle, suggests one way round the current challenge with take-or-pay contracts would be to index payments to the coal price, effectively sharing the pain and the gain. But the problem with this is trying to get all parties on board, particularly big financiers who require locked in returns for their billions of investment funds.

“In a volatile market there could be considerable benefit in indexing take-or-pay to prices,” Boyle said.

As another concerned analyst remarked: “If take-or-pay starts to unravel and bankers get gun-shy, what happens next time the industry starts looking for investment?”

The Australian Coal Report provides a comprehensive weekly overview of the Australian thermal and coking coal markets, including monthly export statistics, pricing intelligence, key index markers and freight rates along with in-depth commentary and analysis. For a free copy or more information, contact us at epi.coalinfo@ihs.com or visit www.coalportal.com.