Performance mitigating price weakness

0 Comment
 13 Aug 2015   Posted by admin


Capcoal employees discussing the dragline operations. (Photo courtesy of Anglo American)

Capcoal employees discussing the dragline operations. (Photo courtesy of Anglo American)

By Jane Goldsmith

August 13, 2015

ANGLO American’s global portfolio, spanning iron ore, manganese, metallurgical and thermal coal, copper, nickel, platinum and diamonds, has undergone notable reductions since the start of 2015.

In July, the company announced workforce cutbacks of up to 53,000 people globally, after flagging the sale of underperforming assets.

In its financial report for the six months ended 30 June 2015, Anglo American reported group underlying earnings before interest and tax (EBIT) of US$1.9 billion; a 36 per cent decrease year-on-year.

The company blamed acutely weaker commodity prices for the results, despite globally weaker producer-country currencies and cost reductions partially offsetting the conditions.

In response, Anglo American accelerated productivity improvements and indirect and capital cost reductions across the period. The improved operational performance and cash flows delivered comparatively strong net debt results (US$13.5 billion as of 30 June 2015, compared to US$12.9 billion at 31 December 2014).

Anglo American’s Australian operations have remained focussed on coal, with five major projects spanning Queensland – including the Capcoal longwall and underground mine; Callide, Drayton and Dawson open pit projects; and Moranbah North longwall. The company operates its projects under full-ownership or within joint ventures, and is the third largest metallurgical coal producer globally.

Despite the market conditions, Anglo American’s coal business performed comparatively well in the first half on 2015.

“Our  coal  businesses  in  Australia  and  South  Africa  delivered  a  3 per cent  underlying  EBIT  increase  due  to  a combination of productivity improvements,” Anglo American chief executive Mark Cutifani said in the 2015 half yearly report.

“[This included] unit cost reductions of 13 per cent in Australia and 3  per cent in South Africa in local currency terms, and volume discipline in Canada.”

A truck dumping material for plant processing. (Photo courtesy of Anglo American)

A truck dumping material for plant processing. (Photo courtesy of Anglo American)

Capcoal

Combined open cut and underground operation Capcoal has produced 11 million tonnes per annum of hard coking and pulverized coal injection (thermal) coal since 2014. The joint venture is operated and managed by Anglo American (70 per cent ownership) with Mitsui Coal Holdings Australia owning the remaining 30 per cent.

The Capcoal complex, in Central Queensland’s Bowen Basin, consists of the Grasstree longwall project and CapFox open cut operation, which includes three open-cut mines: Lake Lindsay, Foxleigh and Oak Park. Aquila underground mine, also within the complex, is under care and maintenance although plans to develop it into a longwall mine are currently under assessment.

Capcoal’s tenements cover about 33,513 hectares, and produce coal for export across Japan, China, Taiwan, Korea, India and Europe. The majority of coal is mined from the German Creek Formation, which includes five coal seam intervals: German Creek, Corvus, Tieri, Aquila and Pleiades seams.

“As part of Anglo American, Capcoal is committed to working together with our stakeholders – our investors, our partners and our employees – to create sustainable value that makes a real difference, while upholding the highest standards of safety and responsibility across all our businesses and geographies,” the company said in a statement.

“Capcoal is the main employer in the Middlemount community and has a proud history of supporting sustainable development initiatives within the local district.”

Anglo American employees taking samples from the coal screen. (Photo courtesy of Anglo American)

Anglo American employees taking samples from the coal screen. (Photo courtesy of Anglo American)

Coal market movements

Australia’s coal export market has weakened dramatically as demand continues to outstrip supply, and communities globally look for alternate energy sources. According to statistical data portal IndexMundi, the average price of Australian thermal coal fell to US$61 per tonne in April, continuing its steady decline from highs of US$140/t January 2011.

Statistics released by China’s National Energy Administration in July 2015 emulated the trend, showing China’s continuing demand decline across the first six months of 2015.

“What it comes down to is that China has decoupled its economic growth from its coal usage,” Institute for Energy Economics and Financial Analysis’ Australasian energy finance studies director Tim Buckley said.

“These new figures starkly demonstrate that while electricity demand continues to rise and [gross domestic product] growth remains at a level that would turn any Western treasury green with envy, coal consumption is rapidly declining as the country focuses on shifting to an ‘everything but coal’ energy mix.”

The report stated that although China’s electricity demand had increased 1.3 per cent year-on-year (June 2014 to January 2015), its coal consumption dropped by 5 per cent, building on the 3 per cent decline reported in the full year of 2014.

Although a possible concern for Australian coal producers – as traditional suppliers into China’s market – a report from the Australian Department of Industry and Science (DIS) stated there were still opportunities for growth in other markets, particularly India.

“India’s coal consumption has been growing at some remarkable rates in recent years. In the near term this is showing few signs of changing as investment in new coal-fired electricity generating capacity continues to grow at robust rates,” DIS’ Coal in India report, released in May, stated.

“Reflecting its large domestic reserves, coal is already a major component of India’s energy supply, accounting for 45 per cent of its total energy mix, 60 per cent of installed electricity capacity and 71 per cent of electricity generation in 2012.

“Given the plans for investment in new coal-fired capacity, coal will continue to be a major component of India’s energy mix over the longer term.”

Anglo American’s coal stackers in action at Queensland’s Port of Gladstone. (Photo courtesy of Anglo American)

Anglo American’s coal stackers in action at Queensland’s Port of Gladstone. (Photo courtesy of Anglo American)

Future outlook

Mr Cutifani said that, given Anglo American continued to optimise its business strategy, the company’s outlook would remain steady into the medium term.

“The transformation of Anglo American that I set out 18 months ago is progressing, despite considerable external challenges,” he said.

“Having defined our portfolio and significantly improved operational performance, now is the right time to accelerate the right-sizing of the organisation that supports the future business; we are targeting a US$500 million total cost saving, of which US$300 million will be realised from our ongoing core business, through the reduction of 6000 overhead and other indirect roles.”

Mr Cutifani emphasised that 2015 had been a particularly difficult year, although he didn’t expect any price relief into the foreseeable future.

“The first six months of 2015 saw considerable further price decreases for our products amidst a volatile market environment and economic uncertainty in certain key markets,” he said.

“Looking to the balance of this year and into next, I expect the current period of volatile markets and economic uncertainty, fuelled in part by pockets of geopolitical tension, to continue.

“Overall performance for the half year was solid and largely in line with our expectations, reflecting a number of planned or otherwise expected impacts.

“We are making fundamental changes to transform Anglo American – operationally, structurally and culturally – into a fit for purpose organisation with an enhanced resource endowment.

“Combined with our diversified strategy across the early, mid and late cycle demand segments, we are ensuring that the business is sustainable through the commodity price cycles, as well as shorter-term price shocks, and offers investors attractive and differentiated exposure to the mining industry.”