the mother of all disappointments

  1. 3,567 Posts.
    Will this takeover talk prove to be the "mother of all disappointments"?

    Looks like some coal miners are having tough times...

    Macquarie takes bath on coalmine
    March 24 2003

    Peaks and troughs ... lower coal prices, coupled with currency movements, are weighing heavily on exporters' economics. Photo: Robert Rough

    And other players are likely to be doing the same. Brian Robins looks at a troubled industry.

    In the biggest loss by an outside investor in the NSW coal sector, a fund managed by Macquarie Bank has a $50 million exposure to start-up Hunter Valley coal miner Nardell, which collapsed late last month.

    Cost over-runs and mining difficulties saw Macquarie stop funding Nardell, pushing it into administration.

    Macquarie Investment Trust III, with an 88 per cent stake in Nardell Holdings, the mine's owner, may be able to recoup part of its exposure in a sale of the suspended mine, although it stands to lose much of its original investment.

    The big loss has underscored the dramatic deterioration in the economics of much of the export coal industry, especially in NSW, which mostly produces mid-quality coking coal and steaming coal. Coking coal is mainly used in the steel industry and steaming coal is used primarily to generate electricity.

    A sharp downturn in export prices, coupled with the upswing of the Australian dollar, is making life tougher for all of the nation's coal exporters. The ones most able to withstand the downturn are those producers of hard coking coal in Queensland's coalfields, dominated by BHP Billiton and MIM.



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    In the latest round of negotiations with Japanese buyers, hard coking coal prices have been cut by $US1.80 to $US2.20 a tonne to about $US46 a tonne, according to McCloskey's Coal Report.

    The steel mills want to cut soft coking coal prices by around $US2 a tonne to around $US30 a tonne, while spot steaming coal prices are trading at around $US24 a tonne.

    Those cuts, especially to prices of semi-soft coking coal and steaming coal, are weighing heavily on exporters' economics.

    The NSW coal industry has faced rounds of closures in recent years as it has become more concentrated into fewer, larger, mines.

    Most of the mines closed have been small, marginal mines, often towards the end of their economic life.

    Four mines closed in 2000, six in 2001 and four in 2002. Last year's closures were of Tower and Bellambi West in the southern coalfield, and Moonie and New Wallsend No 2 in the Hunter Valley.

    Industry consultant Don Barnett of Minec said that with steaming coal trading at an average realised price of $US25 a tonne, "US65c for the Australian dollar is the real critical level".

    Against the backdrop of continuing mine closures is the development of large new mines such as Mount Arthur North, where output is planned at 15 million tonnes, and Dendobium. Both are BHP Billiton developments.

    This could boost export coal output in NSW to as much as 117 million tonnes, according to a new study by Barnett, Australia's Coal Exports: Prospects to 2015, up from 95 million tonnes in 2002.

    "Looking at supply projections for 2005, and a 15 per cent return on investment, of the potential 30 million tonnes increase in steaming coal, about 45 per cent of this won't cover its costs.

    "It's about time coal managers worked on the premise that if you can't get your return on investment, forget it."

    Macquarie funded the start-up of Nardell from December, 1999, progressively earning an 88 per cent stake.

    "Nardell has a substantial resource of coal," says Macquarie Direct Investment's managing director, Sandy Lockhart. "It has one of the last substantial resources of semi-soft coking coal in the Hunter Valley."

    The intention was to use cash flow from Nardell to fund increased output.

    Nardell's development application was aimed at maximising use of the Ravensworth rail terminal. This meant the mine had to tap into the northern part of the mine lease first, where the quantity of coal available was smaller, and not amenable to the use of longwall mining equipment, the most cost-effective approach.

    Also, there is a large fault zone through the middle of the Nardell lease, which proved to be the mine's undoing.

    Output from the northern part of the lease was intended to be ramped up from around 1 million tonnes a year to as much as 4 million tonnes a year once production had moved through the fault zone and into the southern part of the lease.

    "The assumption was that it would be cash-flow positive from continuous miners to enable ongoing mine development in the south, where longwall miners could be deployed," says Macquarie Direct Investment's division director, David Wrench.

    Apart from the fault zone, Nardell was hit by falling coal prices coupled with the increase in the Australian dollar.

    "A year ago, we were getting $US32/33 a tonne," says Macquarie's Lockhart.

    "Now it is $US27/28. And the Australian dollar went from US55c in December to over US60c in February.

    "That meant a 30 per cent reduction in revenues, which was a major hit to cash flow. Plus operating costs were much higher than forecast.

    "By mid-February, it became clear we were unable to be cash-flow positive in the northern area [of the mine lease] and that it would cost significantly more to get into the southern zone."

    After Macquarie had invested $50 million, a further $20 million needed to be spent before operations could move into the more economic southern part of the field.

    Following a big ramp-up in production from late 2002, Nardell was operating at around 750,000 tonnes a year, which it expected to raise to 1.2-1.5 million tonnes.

    The mine is not expected to be the only casualty of current conditions.

    "If prices hold around these levels and the Australian dollar does what people say it will, a lot of people will be under water," the operator of a privately owned mine said.

    "The industry consolidation is a double-edged sword.

    "It means the big boys will be able to take [the industry pressures] on the chin but they will be doing the sums on how much it will cost to close down, and how long it will take for prices to recover.

    "No one is in the industry to make a loss."

    For Macquarie's direct investment arm, the loss on Nardell is only the second in its history. The other was Cinema Plus.

    Equally, it is confident that the strong performance of other investments will more than offset the effect of Nardell's collapse on planned returns.

    Macquarie Investment Trust III raised $180 million out of a maximum possible raising of $220 million, and holds J&B HiFi, along with funeral home operator SCR and a quarter of the Repco auto parts group.

    Macquarie Direct Investment's Sandy Lockhart reckons the fund is already ahead $50 million on the J&B HiFi investment, and $50 million up on its investments.

    Recent plans to list J&B HiFi on the stock exchange were aborted due to the downturn in equity markets.

    Yet while Macquarie has done its dough on Nardell, and much of the export industry is battening down for a tough few years, some old hands have been quietly expanding their coalmine portfolio.

    Roger Massy-Greene, along with other stalwarts from Resources Finance Corp, have quietly built up a portfolio of coalmines across the Hunter and southern coalfields.

    In January, the restyled Eureka Capital Partners merged its coalmines with an unlisted public company, Excel Mining. Institutional shareholders such as Queensland Investment Corp and ING Life were bought out.

    The enlarged Excel Mining now controls mines producing 5 million tonnes of coal a year, including the Wambo, Metropolitan and Chain Valley mines. Their output is mostly slated for export. It also owns Kembla Coal & Coke's coke ovens in Port Kembla.

    It is considering expanding Wambo from its present 4 million tonne a year capacity to as much as 10 million tonnes, although committing to the expansion may mean waiting for the next upcycle in coal prices.
 
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