Coal miners in Australia are auctioning port assets worth tens of millions of dollars, an unthinkable prospect as recently as 18 months ago, when they were scrambling to secure berths

May 21, 2013

Coal Miners Try to Unload Australian Port Assets

By Rhiannon Hoyle and David Winning

Coal miners in Australia are auctioning port assets worth tens of millions of dollars, an unthinkable prospect as recently as 18 months ago, when they were scrambling to secure berths.

Australia exports more than 80% of its coal output, and miners signed long-term deals with port operators to lock in space at export terminals when coal prices were high. Now, these contracts are weighing on profits as companies face delays to new projects and battle falling coal prices.

Miners like Glencore Xstrata PLC GLEN.LN +3.30%and Yancoal Australia Ltd. YAL.AU 0.00%are putting excess port capacity on the block, signaling a lack of confidence that coal prices will rebound soon. But slack demand for coal and rising supply from Russia and Indonesia suggest the auctions will likely attract few bidders.“We have a situation where we have substantial growth in [Australian] port capacity, and not the tonnage to fill it,” said Brent Spalding, a coal analyst at U.K.-based consultancy Wood Mackenzie.

In the latest example, Glencore Xstrata said Monday it wants to sell nearly half of its annual allocation of 10.9 million metric tons at the Wiggins Island Coal Export Terminal in Queensland state. The port is due to start operating in early 2015.

“Due to changed market circumstances, we now expect five million tons per annum of this capacity may not be required in the near term,” the Switzerland-based company said.

Major mining companies like BHP Billiton BLT.LN +2.96% and Rio Tinto are unlikely to be interested in soaking up surplus port capacity. They have shut mines, laid off workers and put producing pits up for sale since September to cut costs.

A spokeswoman for BHP said the miner continually reviews its port capacity and would make changes as required. Rio Tinto declined to comment.

Prices of thermal coal used in power generation began falling just over 12 months ago and continue to hover near multiyear lows below $90 a ton as resource-rich nations like Russia ramp up exports of the fuel to China and Japan to offset weak consumption in Europe.

Port capacity is vital for miners in Australia, which was the world’s biggest coal exporter by volume until it was overtaken by Indonesia last year. Domestic power plants are the only other avenue, but they rarely call for tenders.

For years, Australia’s coal export terminals were operating at full capacity but couldn’t meet demand for the fuel. On the rare occasions that space was offered at new or expanded ports, such as Abbot Point in northern Queensland state in late 2011, demand outstripped available capacity.

In order for port and rail operators to finance these expansions, miners had to sign contracts at a fixed price for an agreed volume of material, whether the company used it or not. Several of these contracts—typically lasting 10 years—are giving coal producers a hangover now that coal prices have fallen.

“It has been a huge turnaround,” said Tom Sartor, a senior resources analyst at RBS Morgans. “Formerly, access to port capacity was highly prized. It was seen as a critical component for investors, but not anymore.”

People familiar with the talks say miners will consider almost any deal, because the contracts are eating into profits. Options include giving rival companies the right to ship just one or two cargoes under their allocation, or deals that would provide a longer period of access to port berths.

Yancoal Australia, which is majority owned by Chinese coal miner Yanzhou Coal MiningCo. 600188.SH +0.34%, said Tuesday it is facing a liability of up to 55 million Australian dollars (US$54 million) on its contracts with port and rail operators.

“We have made a small amount of progress on reallocating some capacity, but we still have a significant amount of excess,” spokesman Ian McAleese said.

In February, Yancoal attributed its swing to a $5.2 million loss before interest and tax in 2012 to the transportation contracts, lower coal prices, a strong Australian dollar and higher operating costs.

Late last month Whitehaven Coal Ltd. WHC.AU -0.44%, Australia’s second-largest listed coal producer by market value, said it expects costs to rise because it is paying for unused rail and port capacity following delays at its flagship Narrabri mine and Maules Creek development.

Smaller miners are unlikely to fill the gap, because the cost of developing untapped coal reserves often dwarfs their market value, and financing is hard to come by.

Offloading these once-sought-after assets may prove to be a hard sell.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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