Hogsback and Australian coal's time to put-up or shut-up

AUSTRALIA’s coal industry has reached a point which Hogsback thinks of as “put-up or shut-up time” because that’s what big players, and potentially big players in coal, have to do with Adani, X2, Glencore and Rio Tinto the companies on top of the list.

Staff Reporter

Adani, the Indian company behind the giant Carmichael project in Queensland has cleared the last of its regulatory hurdles and now has the challenge of actually proceeding to develop a new mine at one of the worst times in the commodity-price cycle.

X2, the private investment fund led by the former chief executive of Xstrata, Mick Davis, has reached a point in its negotiations with Rio Tinto to either put up the cash and buy a portfolio of mines which Rio wants to sell, or retreat and hope for a cheaper price sometime in the future.

Rio Tinto is facing the flipside of X2’s challenge, because it has to decide whether the deal being offered is the best it’s likely to get for some time.

Glencore, the company which once thought it could merge with Rio Tinto, faces the challenge of trying to match X2’s offer for Rio Tinto’s coal mines, or admit that its expansion days are over until coal prices recover, and that means it risks being sidelined by bigger, newer coal producers such as Adani or face a future with X2 as a neighbour.

The companies behind the latest developments in Australian coal are not alone in reaching the point of put-up or shut-up. Governments at the State and national level are being asked how they proceed with treatment of coal, as are critics of the industry, and bankers to the industry.

It’s not exaggerating the situation to say that coal has reached a tipping point in Australia. It will either move forward with a fresh wave of expansion and fresh investment, or stagnate under the weight of low prices and pressure from its political opponents.

The starting point for a look at what’s happening is Adani’s because its position is the most interesting.

After years of promoting Carmichael as a mine which will feed India’s fast-growing demand for electricity it now needs to invest the $16 billion required to turn it into a project which will export up to 60 million tonnes of coal a year.

Opponents from the Green Left are maintaining their rage against Carmichael, promising to re-start their protests though in a curious way they too have reached a put-up or shut-up moment because if they don’t rally again their momentum will fade.

The same can be said of the Queensland and Australian Governments, as well as bankers to the Carmichael mine. Now that the regulatory hurdles are clear it’s time to fully support the mine, or find excuses for a change of mind.

X2, which has been lurking around the fringes of the resources sector for two years is at a point where it needs to actually do something.

Armed with an estimate $5 billion in capital from rich supporters and big investment funds X2 was set up by Davis for the express purpose of buying assets at the bottom of the commodity-price cycle.

If, as seems likely, the bottom is not far away, or has even been passed, then X2 will soon have to make its move, while also deciding whether coal is the place to start – as it was when Xstrata was launched the last time the cycle reached its low point.

Rio Tinto’s position is the most comfortable of the coal players because it has the mines and is in no rush to sell, but would like to because it has better investment opportunities in other assets, especially in copper and iron ore where it is the world’s low-cost leader.

The decision ahead for Rio is the price it is offered by X2, and possibly be Glencore if it is still in the hunt after its financial troubles of the past few weeks.

That leaves Glencore as the coal player facing a put-up or shut-up moment because on one hand it could achieve considerable benefits from integrating its mines with those being offered for sale by Rio Tinto, while on the other it hasn’t got the cash to do a deal.

And that leaves The Hog with a final observation about these interesting times, the potential for a reconciliation between Davis and Glencore’s boss, Ivan Glasenberg.

Both men know that integrating the Rio Tinto mines with those of Glencore makes business sense and while Glencore would struggle to raise the cash to complete a deal X2 does have the cash and would almost certainly benefit from integrating the operations.

It’s a very long shot but there must be a chance of X2 doing a deal with Rio Tinto before turning to Glencore for a second leg in a process to build a bigger and more profitable business.

Stranger things have happened, and these are strange times.