Glencore Xstrata studies Rio coal-assets combination plan

Glencore Xstrata studies Rio coal-assets combination plan

Bloomberg

11 June 2013

Glencore Xstrata Plc, the biggest exporter of power station coal, is studying a plan to combine some of its Australian coal operations with mines run by Rio Tinto Group, according to two people familiar with the matter.

Glencore and Rio own some of the largest thermal coal mines in the Hunter Valley region of New South Wales and have held initial talks on ways to share mines and infrastructure to cut costs, the people said, asking not to be identified as the discussions are confidential. There is no certainty an agreement will be reached, one of the people said.

Slumping Chinese imports of the fuel and rising output in Indonesia are suppressing demand for Australian coal, prompting producers to fire workers to reduce costs. Baar, Switzerland- based Glencore Xstrata has interests in about 35 coal mines in Colombia, Africa and Australia, accounting for about 10 percent of global seaborne supplies of the fuel.

Spokesmen for Glencore and Rio Tinto declined to comment.

"A sharing of infrastructure and some combination of operations would likely have significant merit given coal earnings are highly sensitive to any reduction in the unit cost base," Ash Lazenby, an analyst at Liberum Capital Ltd. in London, said today.

Glencore acquired Xstrata Plc in a $29 billion all-share deal last month, adding coal mines north of Sydney to its global commodities trading empire. The world's fourth-biggestmining company is completing an integration plan for Xstrata's assets and envisages more than $500 million in cost savings.

Queensland Mines

Rio Tinto's Coal & Allied unit owns mines in the Hunter Valley. The second-biggest mining company has hired Deutsche Bank AG to sell as much as 29 percent of the unit to reduce its stake to as low as 51 percent, the Wall Street Journal reported in April, citing unidentified people. Rio is also studying the sale of its stakes in Clermont and Blair Athol mines in Queensland state, it said.

Glencore Xstrata owns the Ravensworth, Mount Owen and Liddell coal operations in the Hunter Valley. The company halted work on the Balaclava Island export terminal last month in Queensland, citing poor market conditions, overcapacity and concerns that the medium-term outlook would be negative for demand.

Australia is the world's second-biggest exporter of power- station coal. Glencore Xstrata's Australian operations produced 11 million metric tons of the fuel for shipment overseas in the first quarter this year, it said May 13. Prices were 23 percent lower in the quarter compared with a year earlier, it said.

Lackluster Prices

Prices for thermal coal are likely to remain "lackluster for the near and medium term as supply continues to grow from miners trying to optimize production while demand remains subdued," Nomura International Plc analysts Sam Catalano and Patrick Jones wrote in a June 6 report, cutting their price forecast for the fuel by 9 percent for this year and the next.

Coal from Australia's Newcastle port, a benchmark for Asia and the shipment point for the fuel mined in the Hunter Valley, has traded below $90 for 12 weeks, according to data from IHS McCloskey, a Petersfield, England-based provider. Prices averaged $94.29 last year after slipping to a three-year low of $78.05 on Oct. 19.

Australian mining companies need to sell seaborne energy coal at $90 a ton to cover the cost of production and shipment, Goldman Sachs Group Inc. said in an April 12 note, cutting its 2013 forecast for the fuel by 6 percent to $93.

China, India

The nation's coal industry is "struggling to remain globally competitive," Darren Yeates, acting managing director of Coal & Allied, said in a statement on April 22.

Still, Asian coal imports are forecast to increase to 824 million tons by 2018, up from 665 million tons in 2012, Australia's Bureau of Resources and Energy Economics said in a March report. Shipments to China are projected to rise 22 percent, while exports to India are predicted to increase 83 percent, the Canberra-based bureau said.

Rio Chief Executive Officer Sam Walsh is seeking to sell assets and reduce $5 billion of total costs as lower commodity prices trim revenue.

Rio Tinto and Mitsubishi Corp. bought out the minority holders in Coal & Allied Industries Ltd. in 2011, leaving London-based Rio with an 80 percent stake, with the remainder held by Mitsubishi. The unit includes three mining operations with an annual production capacity of about 27 million tons of mostly thermal coal, according to its website.

Glencore Xstrata dropped 4.6 percent to 300 pence at 2:23 p.m. in London. Rio declined 2.5 percent to 2,670.5 pence.

--Editors: John Viljoen, Alex Devine