Bathurst-Talleys JV expects to reap $65m-$82m from former Solid Energy mines
BT Mining, the Bathurst Resources-Talley's Group venture that acquired coal mines from the receivers of state-owned Solid Energy, expects to reap between $65 million and $82 million from the assets in 2018 and could earn more because of gains in coking coal prices.
BT Mining, formerly known as Phoenix Coal, acquired Solid Energy's Stockton, Rotowaro and Maramarua mines and other properties for as much as $96 million including contingencies. It took control of the mines on Sept. 1 in a deal that will lift production by 1.8 million tonnes a year to 2.2 million tonnes. Of that 1.7 million tonnes is steelmaking, or coking coal. Stockton's rail link runs to Lyttleton Port and it has existing steel-maker customers in India and Japan.
In a market update to the ASX yesterday, Bathurst said Stockton on the West Coast is forecast to produce 1 million metric tonnes of coal and an average cash cost of $100 a tonne at port and a margin of $50/tonne. That would generate earnings before interest, tax, depreciation and amortisation of $45 million to $55 million for BT Mining, of which Bathurst's 65 percent share would be $29-$38 million.
But the Stockton forecast margin is based on a coking coal price of US$135 a tonne while the coking coal spot price today in at US$198/tonne, suggesting some upside for the company if higher prices persist. It also assumes a New Zealand dollar at 70 US cents while the exchange rate is now closer to 72 cents.
Chief executive Richard Tacon said Bathurst has two main strategies. The first is to reduce the freight-on-board cost by $20/tonne to $80/tonne "as insulation against low prices" and the second is to investigate increasing production without increasing costs. He said the company has no plans to raise capital at present and if that changed it would be to acquire a cash-generating asset, of which there were none currently on offer in New Zealand.
Bathurst's investment in Stockton was in part driven by its infrastructure, which is strategically placed to service its Buller Coal Project, a rail link to Lyttleton Port and existing steel-maker customers in India and Japan. At present Stockton's coal washery is taken up with the output from Stockton but in three years it would be capable of handling coal from other parts of the Buller Coal Project.
While BT Mining's coking coal export markets are India, Japan and to a lesser extent South Korea, China "is the key factor" in determining spot prices, based on demand from its east coast steel mills and Beijing's determination to control prices and consumption of domestically produced coal. Bathurst does sell other coal grades to China.
"With this recent acquisition, we've moved well beyond being a New Zealand domestic supplier," Tacon said.
The improvement in coal prices means BT Mining faces a much more favourable market than Solid Energy struggled with before the SOE failed. Solid Energy sold 3.5 million tonnes of coal from Stockton in 2014 and generated earnings before interest, tax, depreciation, amortisation and changes to financial instruments of just $15.9 million on an operating margin of 4 percent. It also took a $105 million impairment against Stockton. That was the last year it separately disclosed Stockton's earnings but it cut output and jobs the following two years as prices tumbled.
Bathurst also forecasts ebitda of $20-$27 million from the Rotowaro and Maramarua thermal coal mines in the Waikato, of which its share would be $13-$18 million. Its 2018 forecast is for North Island production of 850,000 tonnes while its existing South Island domestic operations, which are 100 percent owned by Bathurst, are expected to produce 400,000 tonnes, generating ebitda of $12 million.
Bathurst has a 2 1/2-year contract to supply up to 150,000 tonnes a year from its Rotowaro and Maramarua mines to Genesis Energy's Huntly Power Station.
The company's stock rose 4 percent to 13 Australian cents on the ASX today, having earlier touched 18 cents, the highest since February 2014. Macquarie Research analysts last month raised their full-year 2018 forecast for hard coking coal forecast by 18 percent to US$155 a tonne in line with its upgrade for iron ore tied to what it saw as "improving sentiment for Chinese demand and strong macroeconomic data" that had driven most spot commodity prices higher.
Solid Energy was placed in voluntary administration in 2015 after concluding it had no realistic prospect of refinancing $239 million of debt facilities due to mature in September 2016. Its downward spiral began in 2013 when slumping global coal prices exposed its commercial error in carrying substantial debt on its balance sheet to pursue a variety of novel energy projects that a previous board and management believed would give the business a future beyond coal extraction.