Standard Bank Group Report Forecasts More Coal Mines to Close

BRISBANE, Australia - Aug. 20, 2013 - PRLog -- A comparison of South African and Australian coal assets – described as ‘Springbok versus Wallaby coal’ – shows that Australian coal assets are more likely to be closed, have higher unit and royalty costs, yet they have less exposure to labour cost inflation.

The report, drafted by Standard Bank Group Securities (SBG Securities) and published on June 18, indicates major coal mining groups BHP Billiton and Anglo American have more flexibility to respond to market economics in Australia than in South Africa.

Australian coal mining costs increased lower on a year-on-year basis than in South Africa, although they were off a higher base, according to authors of the report, Heidi Sternberg and Peter Davey.

Roughly-speaking, a quarter of costs could be ascribed to labour with BHP Billiton agreeing to a 5% year-on-year wage increase over the next three years in Australia. This is far lower than the average labour cost increases in the South Africa mining industry which have been between 8% and 10%.

South Africa’s Chamber of Mines recently offered a 5.6% wage increase to employees of its coal sector members – a bid that the major mining unions, the National Union of Mineworkers and Solidarity, said they would reject. The sides restarted wage talks on August 2.

Royalties in South Africa, however, are lower. BHP Billiton Energy Coal SA (Becsa) pays a 5% royalty on its thermal coal production whereas Anglo Thermal Coal pays a 3% royalty. Royalties in Australia comprise 14% and 9% of BHP Billiton’s and Anglo American’s hard coking coal costs respectively.

Owing partly to floods, BHP Billiton and Anglo American have recorded an increase in unit costs of 2.7 and 2.5 times respectively, said SBG Securities. Interestingly, the thermal coal assets in South Africa have been the best relative performers for the two mining groups of 1.6x and 2.1x respectively. On an absolute basis, however, BHP Billiton is the highest cost operator in Australia and South Africa.

There is scope for cost-cutting in Australia. The use of contractors for expansion projects has created an easy target for cutting out high costs, the analysts said.

“Contractors have been the convenient strategy in expansion projects and development of new projects, and as we forecast capex spend to be reigned-in across the industry over the near term, due to the less appealing economics, we expect a concomittant decline in the user of contractors,” SBG Securities said.

It expected project cutbacks, especially given the price of hard coking coal, with questions being asked about Anglo American’s Grosvenor, Moranbah South and Darbrook projects. BHP Billiton was not under the same cash flow pressure.

On an all-in sustaining cost basis, which includes development, expansionary and some corporate costs, SBG Securities said that Anglo American and BHP Billiton were probably not achieving breakeven at their Australian operations.

“We expect that if prices continue at current levels, both companies are likely to be considering further possible closures of entire mining units or selected pits which are currently uneconomical, in order to bring their cost bases under control as quickly as possible,” SBG Securities said in its note.

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