Illawarra Coal's slim sums

A $US2 a tonne fall in thermal coal prices, or a $4/t fall in metallurgical coal prices, can wipe out profitability at BHP Billiton’s Illawarra Coal subsidiary, according to BHP Billiton’s recently unveiled South32 roadshow presentation.
Illawarra Coal's slim sums Illawarra Coal's slim sums Illawarra Coal's slim sums Illawarra Coal's slim sums Illawarra Coal's slim sums

West Cliff Colliery, New South Wales Illawarra region.

Blair Price

Illawarra Coal will be run from a Perth headquarters under the plan to include this division as part the South32 spin off that is targeting a June listing and which requires shareholder approvals in May.

Figures in the roadshow presentation revealed that Illawarra Coal, which houses the Appin (25-year mine life), West Cliff (2-year mine life) and Dendrobium (9-year mine life) longwall operations, has an estimated, underlying earnings before interest and tax of $US20 million ($A26.2 million).

However, the same document also had an insightful table on commodity price and currency sensitivities.

It was here that a $1/t change of energy coal prices was expected to impact South32’s underlying EBIT by $15 million while $1/t change in metallurgical coal price equated to a $6 million impact on South32’s underlying EBIT.

This indicates that a $2/t fall in energy coal prices will become a $30 million hit to South32’s estimated underlying EBIT while a $4/t fall in metallurgical coal would slice $24 million off – with both of these figures exceeding Illawarra Coal’s annual estimated EBIT (of $20 million).

To add more mystery, in a disclaimer BHP enigmatically wrote that the commodity prices and exchange rates used to estimate the economic viability of reserves were based on asset-defined or South32 “long-term” forecasts.

The roadshow presentation also confirmed that the Appin Area 9 project to replace production at the West Cliff mine was on schedule for commissioning in 2016, and will improve coking coal yield.

The three mines have combined run of mine capacity of 12 million tonnes per annum and product coal capacity of 9Mtpa with low volatile hard coking coal accounting for about 80% of the product mix.

Fiscal year 2014 operating costs for Illawarra Coal were revealed to be $99/t – down 11% from $111/2 in FY2012.