WHILE many mining companies have struggled during the last 12 months, Anglo American is firing on all cylinders: reporting peak operating profits and underlying earnings. The company, which follows the January to December US reporting season, posted a 14 per cent increase in operating profit to US$11.1 billion for 2011, up from $9.8 billion in 2010. Underlying earnings rose
from US$5 billion in 2010 to $6.1 billion. In addition, Anglo paid down its net debt: shrinking it from US$7.4 billion in December 2010 to $1.4 billion by the end of 2011.
Driving Anglo’s record earnings was its Metallurgical Coal business (MC), which reaped a $1.1 billion profit for 2011: far exceeding its $780 million profit in 2010. Anglo manages its metallurgical (hard coking) and thermal coal arm in Australia through MC, which was formed in July 2000 after Anglo purchased Shell Coal. The company’s strategy at the time was to take advantage of the burgeoning Asia-Pacific coal market via the Shell acquisition.
MC oversees Anglo’s six Australian coal mines and a wholly-owned coal mine in Canada, which exports to Japan. At the time of writing, Anglo was the second largest exporter of metallurgical coal in Australia.
Out of Anglo’s six Australian mines, one is wholly-owned and the company has a controlling stake in the remaining five. At the end of October 2011, MC’s coal assets had a combined resource of about 3.5 billion tonnes, which equates to about 100 years of production life. Five of MC’s mines are in Queensland’s Bowen Basin: Moranbah North, mining metallurgical coal (88 per cent stake);
Capcoal Grasstree, metallurgical and thermal coal (70 per cent); Foxleigh, metallurgical coal (70 per cent); Dawson, metallurgical and thermal coal (51 per cent); and Callide, thermal coal (100 per cent).
Anglo also owns 88 per cent of the Drayton thermal coal mine in NSW’s Hunter Valley.
All the mines have access to rail and port facilities at Dalrymple Bay and Gladstone in Queensland or Newcastle in NSW.
In its 2011 annual report, Anglo cited higher coking coal export prices and strong production recovery in the second half of the year for MC’s profit growth. The $1.1 billion profit was despite
setbacks from the Queensland floods in early 2011, which resulted in the declaration of force majeure over MC’s exports. The force majeure was in place until the end of the June quarter, and led
to a 9 per cent drop in hard coking coal exports in 2011, compared to 2010. The lower than anticipated production and additional flood recovery expenses caused elevated operating costs, while a strong
Australian dollar also had a negative impact on earnings. However, even with the setbacks, MC still grew its profits. The force majeure on exports led to coking coal shortages, which prompted record coal prices for the commodity. The average Australian free on board market price for coking coal was US$289 per tonne in 2011, up from US$191pt in 2010. The mean Australian free on board market price for thermal coal was $121pt in 2011, up from $99pt in 2010.
In 2011, MC exported nearly 14 million tonnes of coking coal, down from 15.7mt in 2010.
Total coking and thermal coal production for MC’s operations during 2011 was 26.7mt from Australian mines, plus 936,300t from its Canadian mine. Demand for coal Anglo is the world’s third-largest producer of metallurgical coal, with most of its hard coking coal coming from its Queensland mines. As hard coking coal is a core raw material for 70 per cent of the world’s steelmaking industry, Anglo receives strong demand for its product. In 2010, Australian coal mines supplied two-thirds of the world’s metallurgical coal to the international seaborne market. Anglo chairman Sir John Parker said that 2011 had brought with it a distinct slowdown in major emerging economies, compounded by the ongoing fragility of US and European financial markets. “By the end of 2011, most of the world’s leading economies had reported a material weakening. China, India and Brazil reported slower GDP [gross domestic product] growth rates and falling inflation,” he said.
“Europe remains the principal source of concern. There are growing worries that the crisis has now become so complex there is no practicable solution. It is possible this could lead to a further intensification of the crisis in 2012 and a deep recession.”
Sir John said, however, that he thought this was unlikely to occur. “More likely, policy makers seem to have done enough to contain the crisis. “In the longer term, we expect further significant growth in the main emerging economies as they ‘catch up’ with the advanced economies. Over the next decade, this should mean all of the major emerging economies grow rapidly. “The main outperformer [in price] among the commodities produced by Anglo American was coking coal, particularly in the first half of the year, as producers continued to recover from the flooding and
industrial disruptions in Queensland,” Sir John said.
He added that the resumption of operations at MC’s and other affected coal mines in the second half of 2011 led to global hard coking coal stocks growing again and the price dipping in the second
half of 2011 to 2010 levels. “Thermal coal also demonstrated relatively resilient pricing: drifting by only 4 per cent in the second half of the year. “The December 2011 average price of copper, coking coal, thermal coal and iron ore all remained well above analyst consensus forecasts of long-term ‘through the cycle’ prices,” Sir John said. New direction In December last year, Anglo announced its board had approved the development of the Grosvenor metallurgical coal project in the Bowen Basin. The development cost for the project has been estimated at US$1.7 billion.
Grosvenor is south of Moranbah North and, once operational, the underground longwall mine is expected to produce about 5mt per annum for about 26 years from 2015.
MC chief executive officer Seamus French said the business had a distinct plan to triple hard coking coal production by 2020.
The strategy involved developing new longwall mines and included increasing MC’s export thermal coal production in the Hunter Valley.
“As we move towards underground operational excellence, we are targeting best practice longwall performance at our two existing longwall operations, Moranbah North and [Capcoal] Grasstree,
which will set the benchmark [for the development of future projects],” Mr French said. “We have also received preferred respondent status for the right to develop our own coal terminal at Abbot Point, which will provide port capacity certainty for our project pipeline and existing operations,” he added.
Part of the strategy to triple metallurgical coal production was to grow MC internationally.
In 2011, MC acquired 100 per cent of the Peace River coal mine and surrounding tenements in British Columbia, Canada. “We plan to increase production of hard coking coal from our Canadian operations to more than 4 million tonnes per annum by 2016.
“We are also looking more globally beyond Australia and Canada, and continuously review opportunities in other regions,” Mr French said.
“We’ve come a long way to streamline the way we perform as a business, and this year we will continue to implement improvement projects to drive our costs down and achieve operational excellence.”
By Lorna Seatter