An assessment of the key risks facing the

global metallurgical coal market

Mike Elliott, Global Mining and Metals
Leader, EY
Overview

► How demand dynamics are changing

► The role of exchange rates and macro-economics
► The key supply based risks

June 2014
Steel demand dynamics will vary by region and sector

Source: Business Monitor International, EY Analysis

June 2014
Exchange rate and macro-economic impact
• Quantitative easing I & II weakened the USD v’s AUD, ZAR, BRL, RUB etc.
• US coal producers will continue to put supply on the seaborne market while the
USD is weak
• The longer interest rate rises are deferred in the US the longer US supply will
move seaborne
• In late 2013, developing nations depreciated and coal volumes into EU
increased
• AUD remains stubbornly high
• AUD to depreciate by 18% against the USD by 2018
• Qld producers set marginal cost of production due to dominance in market
• Cost and marginal pressures have been driving improved cost performance
• If producers can lock in cost performance, they will see swing
• producers fall away when the USD/AUD increases and will likely also mean
lower prices

June 2014
The exchange rate outlook vs. USD to 2018

Source: “Current and future steel market dynamics”, CRU World Steel Conference client briefing, 17 March 2014

June 2014
USD/AUD interplay with US coking coal exports
1.1 7,000,000

1.05 6,500,000

1 6,000,000

0.95 5,500,000

0.9 5,000,000

0.85 4,500,000

USD-AUD US Coking Coal Exports

0.8 4,000,000
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14

Source: Factiva, HIS McCloskey Coal, EY

June 2014
Seaborne quality adjusted metallurgical coal cost curve

16 April 2014

16 April 2013

June 2014
Need to recover lost capital productivity
Worldwide Mining Truck Annual Unit Production (tkm/t of Nominal Capacity) 2002-10 by
Performance

June 2014
How are met coal producers responding?

► Collaborate with suppliers

Innovate to do
► Apply lower cost and speed to market
what we do
► Integrate innovators within operations
better
► Opt for needs-based approach

► Monitor and analyze key processes

Better use of ► Understand best practice

“Big Data” ► Apply it consistently

June 2014
Resource nationalism impacting met coal

Retaining state or national ownership of resources

• In Mozambique, potential for state-owned company ownership to increase from
5% to 25%

Restriction of exports – strategic assets

• In South Africa, coal miners may be forced to sell at a discount in the local
market.
• Indonesia prefers mandated beneficiation

Imposition/increasing of royalties or mining taxes

• The removal of the Australian Mineral Resources Rent Tax on coal has failed in
the Senate
• Potential increase on coal royalties in Mozambique
• Potential new levy on coal from captive mines in India

June 2014
Infrastructure challenges

Development
• Governments are not investing in energy, rail and port infrastructure
• Producers are required to underwrite development
• Done via new debt or take-or-pay
• Both reduce free cash flow even without production

Take or pay deals

• Encourages production below cash-cost break-even
• Creates more volatility in pricing

June 2014
Infrastructure access – coal

• Coal India’s production growth is going to be limited to 30mt over the next few years
instead of up to 300mt due to abscense of rail linking its mines

Falling prices are threatening future development

• Future of the Abbot point terminal in Queensland, Australia under threat

Cost-sharing arrangements
• In Mongolia, China’s Shenhua looking to create joint venture for a rail link – but will lock
in domestic pricing
• Vale and Rio Tinto are searching for partners in Mozambique for the development of
their mines and associated infrastructure

June 2014
Planning for new projects

• Increase price volatility will delay approvals for vital new supply
• When should new development be targeted in the mine life cycle
• What capital structures are needed
• When should investing start

June 2014
High debt levels will reduce expansion options
Weighted average of North American metallurgical coal miners
FY2014–2016 estimates based on unlevered FCF
$30,000 200%
$28,534 $28,179
$27,813
159%
$24,828 $24,809
$25,000 150%
$22,628

$20,000 100%

$15,724
$15,000 39% 50%
18% 22%
13%
3% $10,887 $10,413 4%
1% -4% 4% 7%
$10,000 0 0%
$7,938

-53%
$5,000 -50%
$3,257 $2,953

$- -100%
FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 est. FY2015 est. FY2016 est.

Combined net debt, USD m Lev FCF / net debt

June 2014
Metallurgical coal prices
Steep decline, but longer-term recovery projected
310 Broker price forecasts: hard coking coal

290
EY view is for more
volatility than suggested
270 by broker forecasts
39%
250
US$/t

230

210

190

170

150
2010 2011 2012 2013e 2014e 2015e 2016e 2017e

RBC Capital Markets Macquarie Research Canaccord Genuity Morgan Stanley Research

June 2014
Lower met coal prices could threaten supply growth
400 Global supply of met coal
362
348 At
350 326 greatest
288
307 risk
300

Mt
250

200

150

100

50

0
2012 2013f 2014f 2015f 2016f

Australia North America Mongolia Russia Mozambique Colombia Other

Source: “Australian coal sector update,” Credit Suisse, 3 October 2013

June 2014
Major met coal projects pipeline*
Russia

Mongolia: 20-25mt
production by
North America 2016

7.0
3.5
India

Africa

Australia/New Zealand

Future met coal projects with estimated production start dates through
2024 and estimated capacity available
Source: Wood Mackenzie, Company Data, Morgan Stanley Research Estimates

June 2014
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EYG no. ER0161

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