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Thermal costs follow similar trend to met coal
Total average export thermal cash costs declined 36% from 2012 to US$42/t in 2016
We expect this declining trend in costs to end in 2017, with an increase of 8% year-on-year as
productivity levels moderate, strip ratios rise and royalties increase in line with higher prices
FX rates are more stable now; fuel cost pressure to emerge from 2019
Seaborne export thermal coal cash costs (US$/t) Incremental change
Source: Wood Mackenzie, Dataset: May 2017 *Nominal to 2017 and real thereafter
Newcastle FOB benchmark
thermal coal price (US$/t)
Costs fall
by 36%
?
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Top performing countries and companies in the thermal coal sector
Cost changes by thermal coal companySeaborne thermal coal cash costs
Cost reductions were most prominent in Australia and Russia from 2012 to 2016, due to higher
production volumes and weak FX rates
Similar trend for top ten thermal companies, led by Russia’ Kuzbassrazrezugol and Indonesia’s Adaro
Source: Wood Mackenzie, Dataset: May 2017 *Nominal to 2017 and real thereafter
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Majority of thermal coal transactions secured since the start of 2016
on par with long-run scenario of US$72/tonne
Average implied price of US$72/tonne across last 6 transactions since Sep 2016, including US$69/tonne
for Yancoal’s deal with Rio Tinto/Mitsubishi Corporation
Benchmark Newcastle thermal coal deal implied prices (US$/tonne)
Benchmark FOB Newcastle
6322 gar price scenario
US$72/tonne (real 2018)
Source: Wood Mackenzie, Dataset: May 2017
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At US$72/t, 154 Mt of thermal coal projects can be incentivised
154 Mt, or <25% of thermal coal seaborne export projects can generate a minimum 15% IRR <
US$72/t Newcastle price, including 69Mt (Aus), 46Mt (Ind), 21Mt (SA), 14Mt (Col)
Attractive: Murray/Drummond (Col), Peabody/Glencore (Aus), Exxaro (SA), Foresight (US)
Benchmark thermal coal seaborne export incentive prices
(US$/tonne, 15% IRR, real 2018 terms)
Thermal coal seaborne export project supply
(base case v price constrained case)
Benchmark FOB Newcastle
6322 gar price scenario
US$72/tonne (real 2018)
Infrastructure constrained
Wandoan
TeknoOrbitPersada(MEC)
Carmichaelsurface
CarmichaelUG
Alpha
PersadaMultiBara(BEP)
KevinsCorner
132
79
302 Mt projects at risk by 2030
107 Mt projects at risk
by 2025
Source: Wood Mackenzie, Dataset: May 2017
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Small volumes of thermal coal at negative NPV and margin
38 Mt of total seaborne export thermal coal is at risk of closure (negative margin and PV) at US$72/t
price scenario; Indonesia (24 Mt) and Russia (4 Mt) most at risk on volume
Source: Wood Mackenzie. Bubble size scaled to estimate of 2018 production.
2018+ operating margin (export) less sustaining
capex v. remaining present value (1/1/18, NPV 10)
2018 marketable coal production (export) at risk
High risk
Negative
margin,
negative NPV
Medium risk
Positive margin,
negative NPV
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Metallurgical costs to increase…as long as price does
Average export metallurgical cash costs down 46% since 2012 to US$69/t in 2016 due to lower FX,
falling diesel prices, workforce rationalisation, high-cost closures and improved efficiency
Mining costs accounts for over half the reduction from 2012; overheads down over 50%
Costs to rise 16% on average in 2017, as royalties double on the back of a significant rise in prices
Seaborne export met coal cash costs Incremental change
Source: Wood Mackenzie, Dataset: May 2017 *Nominal to 2017 and real thereafter
QLD FOB benchmark hard
coking coal price (US$/t)
Costs fall
by 46%
?
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Top performing countries and companies in the met coal sector
Cost changes by met coal companySeaborne export met coal cash costs
Cost reductions were most prominent in Mozambique because of higher output volumes, lower rail
access charges and Nacala throughput, but falling from a very high cost of US$205/t in 2015
Strong performances from the top 10 met producers led by BHP and Mitsubishi
Source: Wood Mackenzie, Dataset: May 2017 *Nominal to 2017 and real thereafter
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Met coal transactions secured since the start of 2016 on favourable
terms relative to a long-run scenario of US$134/tonne
Average implied price of US$117/tonne across last 3 transactions since Sep 2016, including
US$116/tonne for Yancoal’s deal with Rio Tinto/Mitsubishi Corporation
Benchmark HCC Qld deal implied prices (US$/tonne)
Benchmark FOB Qld
HCC price scenario
US$134/tonne (real 2018)
Source: Wood Mackenzie
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At US$134/t, 90 Mt of metallurgical coal projects can be incentivised
90 Mt of met coal seaborne export projects can generate a minimum 15% IRR < US$134/t HCC price,
including 49Mt (Aus), 22Mt (Ind), 11Mt (Rus) and 6Mt (Can.)
Near term development: Inaglinsky/Denisovkskaya East (Rus), Byerwen (Aus)
Benchmark met coal seaborne export incentive prices
(US$/tonne, 15% IRR, real 2018 terms)
Met coal seaborne export project supply
(base case v price constrained case)
Benchmark FOB Qld
HCC price scenario
US$134/tonne (real 2018)
71
35
Source: Wood Mackenzie
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Positive margin and NPV for metallurgical producers
Very small volumes of metallurgical coal at negative margin and PV under a US$134/t price scenario
13 US met mines producing at negative margin and PV, two from Mozambique
Source: Wood Mackenzie. Bubble size scaled to estimate of 2018 production.
2018 operating margin less sustaining capex v.
remaining present value (1/1/18, NPV 10)
2018 met marketable coal production (export) at risk
High risk
Negative
margin,
negative NPV
Medium risk
Positive margin,
negative NPV
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How much further can costs come down at Australian operations?
Productivity at Australian mines
Productivity and price negatively correlated
Productivity peaked in 2003 following a decade of
low coal prices
After 2004 prices increased rapidly incentivising
higher cost and less productive projects to enter the
market
Prices peaked in 2011 followed by the low point for
productivity in 2012
Since 2012 productivity has increased by a total of
32% with higher cost output rationalised, more
production from lower cost assets, and headcount
reductions
Productivity at Australian mines has improved but still below historic highs
Further cost cuts possible should prices stay low
Source: Wood Mackenzie
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What would historic productivity levels mean for cost?
Another A$8/t reduction possible with lower labour costs the main driver
Cost savings could be eroded by oil price increase
Weaker FX led to 80% of fall in US$ costs in 2015 and will remain a key driver in future
Weighted average total cash cost Potential future weighted average total cash cost
USD ∆ 2012-2016 (47%)
AUD ∆ 2012-2016 (26%)
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Conclusions
Seaborne coal cash costs have likely
bottomed out
Chinese policies on supply restrictions
supporting higher prices and margins
across China and the seaborne market
A long-term price scenario of US$72/tonne
for Newcastle thermal coal and
US$134/tonne for HCC will support M&A
and incentivise project development
Further cost reductions for Australia are
limited
Source: Wood Mackenzie
Key
takeaways
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Disclaimer
This presentation has been prepared for Informa’s Australian Coal Conference on 25-
26 July 2017 by Wood Mackenzie Limited. The presentation is intended solely for the
benefit of attendees and its contents and conclusions are confidential and may not be
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The information upon which this presentation comes from our own experience,
knowledge and databases. The opinions expressed in this presentation are those of
Wood Mackenzie. They have been arrived at following careful consideration and
enquiry but we do not guarantee their fairness, completeness or accuracy. The
opinions, as of this date, are subject to change. We do not accept any liability for your
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