When Bathurst resources started sniffing around New Zealand for something to make money from, the price of coking coal (or metallurgical coal = metcoal) was looking pretty good.
It was back in 2007/8 and the commodities world was doing high fives as the demand for steel – and coking coal – soared. Prices soared. Bathurst moved into New Zealand, set up with L&M’s Buller Coal, and started the process of trying to get consent to mine the beautiful and ecologically precious Denniston Plateau.
By the time Geoff Butcher, Bathurst’s economic guru, gave evidence in May 2011 to the West Coast Regional Council consent hearing, prices had soared again, to around $300 a tonne, largely due to floods in Queensland mines causing a drop in global supply. His evidence and economic assessments were based on a coal price of $275 a tonne.
More than a year later, in the Environment Court, Mr Butcher had revised his coal price down by about $30 a tonne, but was told by the judge that he had to come to an agreement with the Forest & Bird economist from NZIER, Peter Clough.
That statement, a “caucusing agreement,” signed by both experts in court, said:
“The project breaks even at a price of US$165, and the company is unlikely to proceed if it is only expecting to break even, so a minimum expected price for the project to proceed is perhaps $190.
“The company current view of the medium term price is $240 but PC suggests in his evidence a more likely price in the range of $165-$200.”
As The Press’s Michael Berry reported from the Environment Court:
“If the price falls to US$160 a tonne – a 30 per cent drop on the assumption – the project’s net present value would be not much above zero and the shareholders would get nothing, his analysis says.”
Just last week, BMA (BHP Billiton’s alliance with Mitsubishi), completed a contract with European and Indian companies for $131-$135 a tonne, a trend that experts say is expected to continue throughout 2014 due to a global oversupply of coking coal. BHP had, the week before, shed another 230 workers from its Queensland Saraji mine. Other mines are also shedding jobs. The sector’s in trouble.
BMA did well to secure its price, given the average spot price for coking coal today is US$127, around 23% less than what Bathurst needs to break even. And none of this is helped by the extremely strong NZ dollar that every day will push up an export price.
No wonder the company is now starting to hint that it might just delay its planned ramp-up to 1Mt of coal a year. Why would you dig up that much coal and sell it at a loss?
What has also not helped Bathurst is the low price for thermal coal, meaning they are not a very cashed-up company as their other mines built to finance Denniston are not bringing in as much money as they’d hoped. This was the message from Forsythe Barr after BRL’s quarterly report last week:
“Coal production was insufficient to ensure Bathurst was cash positive and operating cash flows were a disappointing $7.3 million as a result,”
What happens to a coal company when the prices crash?
Maybe we should look at Solid Energy’s experience. While there were quite complicated reasons cited for Solid’s demise, the reason most often quoted by both the company and the Government was the “perfect storm” of – get this: plummeting coal prices and a strong New Zealand dollar.
Bathurst needs cash. Last year Hamish Bohannan told investors that he was confident steel giant Stemcor would be good for the $50m in cash it had promised Bathurst. But Stemcor is still negotiating its way out of a $1.2bn debt, something it promised to sort out last October.
Who will finance the Denniston mine? Bathurst still hasn’t paid off its $5m loan from Westpac.
Part of the purchase arrangement, to avoid paying too much up-front, was a requirement to pay NZD$40m to L&M when they have extracted 25,000 tonnes and a further $40m when they have extracted $100m. Only then do they get to keep any profits.
Solid Energy’s “perfect storm” happened at a time when you could sell a tonne of coal for $165. Bathurst couldn’t get anything like that today. How’s it going to pay L&M with that type of income? Can it even afford to pay its workers?
Today’s low price of coal is all about oversupply. But there’s also a declining demand in steel, and experts tell us that’s not going to change any time soon.
There are some perfect solutions to Bathurst’s looming “perfect storm.”
First, Bathurst should stop right now, before they even start.
They promise 225 jobs, but that’s already out the window if they don’t “ramp up” to the one million tonnes that would produce that magic figure. Shareholders will get nothing. New Zealand will get nothing in terms of royalties as the company would be operating at a loss.
If the continuing oversupply of the coking coal market continues, as it’s supposed to for at least this year, and the global demand for steel continues to drop as it’s also expected to, we could well be looking at a destroyed Denniston Plateau, few – if any – jobs, and possibly more redundancies on the West Coast.
The other lesson here must be for Westpac, which has lent Bathurst $5m – more than half of its current cash reserves – which Bathurst may never be able to pay back. Westpac may be the first NZ company to demonstrate that financing fossil fuels is a loser.
When you consider the damage this loan can do to Westpac’s reputation as the “most sustainable bank” with a big new lending programme to “Clean Tech,” what on earth is in it for them?
Perhaps it’s better to quote someone else to finish up: Peter Huck in Friday’s NZ Herald, nails our view of Westpac’s loan to Bathurst, in light of its so-called sustainability claims:
“However, critics see this as “sustainability lite”, rearranging the deckchairs as climate change worsens. Had Westpac – indeed, most companies and governments – factored in the daunting cost of adapting to rising seas, water shortages, damage to infrastructure, disruption of supply chains in the global economy and myriad other challenges posed by climate change?”
This table below sets out the recent history of coking coal prices
|Date||Coking coal price (USD) per tonne||Event|
|2008/9||Coking coal prices treble to $300 +||Global excitement around demand for steel and need for coking coal. Rockets in price predicted.Bathurst joins L&M in joint venture Buller Coal and applies for consent and concessions to mine Escarpment.|
|2010||$200||Bathurst buys out L&M’s share of Buller Coal, sets up in NZ.|
|May 2011||$330||Bathurst evidence to WCRC (Geoff Butcher) based coal price on $275/tonne.|
|Nov 2012||$170||Environment Court document: Caucusing statement agreed between Geoff Butcher and Forest & Bird expert NZIER’s Peter Clough, November 2012: “The project breaks even at a price of US$165, and the company is unlikely to proceed if it is only expecting to break even, so a minimum expected price for the project to proceed is perhaps $190. The company current view of the medium term price is $240 but PC suggests in his evidence a more likely price in the range of $165-$200.” Michael Berry, The Press, reports from Environment Court:“If the price falls to US$160 a tonne – a 30 per cent drop on the assumption – the project’s net present value would be not much above zero and the shareholders would get nothing, his analysis says.”|
|Feb 2014||QLD Coal contracts:$127||“Analysts at Macquarie this month dropped their 2014 coking coal forecasts by 8 per cent to $US147 a tonne and for next year by 13 per cent to $US156.” – The Australian|
|Feb 2014||BHP Mitsubishi Alliance contracts settled at $135||Bathurst hints that it might not ramp up to 1Mt a year (quarterly report) (NZ Resources).Iron Ore, Coking coal outlook looks bleak (Mining.com)|