Xstrata shines in 2007

KEEPING a tight rein on costs, Xstrata produced a star performance in 2007 announcing a 13% increase in profit to $US5.5 billion, with coal a stellar performer of its commodity line-up.
Xstrata shines in 2007 Xstrata shines in 2007 Xstrata shines in 2007 Xstrata shines in 2007 Xstrata shines in 2007

Temperature profile of UQ 2-metre column test of heating developed in a high volatile bituminous coal

Angie Tomlinson

Record annual production was achieved for both thermal and coking coal which contributed to a 7% increase in earnings before interest, taxes, depreciation and amortisation (EBITDA) to $11.3 billion.

The profit increase was achieved in the face of a number of unpredictable one-off operational disruptions this year, including torrential rain in eastern Australia and load shedding by Eskom resulting in electricity shortfalls in South Africa.

Saleable production from the Australian thermal coal operations increased by 1% to 41.4 million tonnes, with growth from the Rolleston mine in Queensland more than offsetting the planned reduction in thermal coal volumes from the Newlands-Collinsville-Abbot Point complex.

Despite increased production, sales volumes were restricted due to reduced export volumes through the Hunter Valley coal chain, which fell by 3% to 40.5Mt.

The severe weather conditions in the Hunter Valley in June and geological issues at Newlands Northern Underground negatively affected production. This was partially offset by the increased production from the low-cost Rolleston mine and ramp-up of production from the new Ulan longwall.

Coking coal production increased by 21% to 6.8Mt over the prior year, resulting from the start-up of production from the Newlands Wollombi pit and productivity improvements at Oaky Creek, following the installation of the new longwall and more favourable geological conditions.

Sales volumes increased by 11% to 6Mt, predominantly from the NCA complex as new coking production came on stream from Wollombi. Further growth was constrained by a lack of port and rail capacity for Oaky Creek exports through Dalrymple Bay, despite productivity gains from the new longwall equipment.

During 2007, real cost savings of $253 million were achieved despite ongoing cost inflation in the mining sector, in particular for energy, fuel and contracted labour.

Coal costs were affected by the ongoing port and rail constraints, with the situation particularly bad at Dalrymple Bay Coal Terminal and Newcastle Port. Demurrage costs more than doubled in 2007 to $110 million for Xstrata.

After stripping out the impact of coal mining sector inflations, CPI, demurrage and other one-off items, real unit costs savings of $77 million year on year were achieved, primarily from improved productivity at the South African operations and the Australian coking coal business.

Xstrata was busy on the acquisition front during 2007 and early in 2008, with $6 billion of bolt-on acquisitions in thermal and coking coal, platinum and nickel.

Xstrata said its position in the Hunter Valley thermal coal fields of New South Wales had been significantly strengthened through the acquisition of Centennial's Anvil Hill project for $468 million. It also took the remaining interests in Namara and Cumnock Coal in the region.

In December, Xstrata Coal made an offer for Resource Pacific and at February 29 it owned 85% of the company, with the transaction expected to complete shortly.

“These acquisitions will together represent an additional 4 million tonnes of predominantly semi-soft coal production annually from 2008, increasing Xstrata's earnings exposure to coal at a time of record spot prices," Xstrata said.

The company's acquisition of Austral Coal will add to its Australian coking coal business with 2.3Mtpa production from the Tahmoor longwall – as well as entry into the southern coal fields of NSW. Also, Tahmoor's coal is exported via Port Kembla, one of the few unconstrained ports in Australia.

On the flipside of the acquisition coin, Xstrata said it was continuing talks with Brazilian mining group Vale which "may or may not" lead to an offer for Xstrata.

Xstrata is also experiencing organic growth, with a number of brownfield options, including the new Goedgevonden and 5-Seam operations in South Africa which commenced production last year and will ramp up this year.

Additional new-term growth will come from further expansions at Cerrejon which will reach the 32Mtpa rate this year, with further growth to a whopping 40Mtpa being assessed.

The addition of a second dragline at the Rolleston operation last year has boosted production from Queensland; however, the operation was affected late last year by flooding.

Pre-feasibility studies are also underway into the massive 1 billion tonne Wandoan resource in the Surat Basin in Queensland, which is expected to deliver more than 15Mtpa and could begin production around 2011.

The company has also continued with expansions at Blakefield South, which will replace Beltana from 2010; a new third washery module at Mount Owen which will allow the Glendell reserves to be developed; and expansions at Liddell, including a washery upgrade. Together the Liddell and Mount Owen expansions will add output of 5Mtpa.

Looking ahead, Xstrata was confident commodity demand from China would override a downturn in the US.

“While a slowdown in the United States now seems highly probable, with likely negative consequences for the short term in the OECD countries, I expect any impact on Chinese GDP growth and emerging market demand for commodities, including metals, to be muted," said Xstrata chief executive Mick Davis.

He further pointed out that already China accounts for over 70% of growth in global mined commodity demand.

Xstrata has high expectations for contract negotiations for 2008, with spot coking coal prices currently at record levels with trades being settled above $300 per tonne.

With thermal coal prices rising steeply in the final quarter, with spot prices soaring to well in excess of $130/t, significant price increases are being forecast for 2008 contract settlements.