NSW government to mine Cobbora

THE New South Wales government will return to coal mining and develop the $A1.3 billion Cobbora mine near Mudgee after hitting a dead end with negotiations over price with preferred tenderer Whitehaven Coal.
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The Cobbora project area.

Lou Caruana

The move would be the first time NSW government has mined coal since selling its Powercoal assets to Centennial Coal eight years ago, and comes as the state’s $8 billion electricity privatisation processes is threatening to stall once again.

The NSW government granted a two-week extension of the deadline for bids for its power stations, for which AGL Energy, Origin Energy and TRUenergy are seen as the most likely purchasers.

“The NSW Electricity Reform Project office today confirmed it would be providing detailed information to bidders on future fuel supplies for the NSW state-owned generators in the week commencing Monday, 11 October, 2010,” according to statement released today from the NSW Treasurer’s office.

“The Reform Office said this followed a decision by the Budget Committee of the NSW Cabinet on Friday afternoon endorsing arrangements to secure future fuel supplies for the generators from Cobbora.

“After testing a range of options, the NSW government has elected to retain ownership of the Cobbora coal resource and pursue alternative development strategies in order to deliver greater certainty of long-term fuel costs for electricity generation.

“The NSW government has also agreed to bidder requests to extend the deadline for the submission of binding bids until November 15.”

Whitehaven was seeking $55 per tonne of coal which would have made it economically unattractive for the state government to privatise its power generation assets, analysts believe.

The Cobbora open cut mine contract is expected to produce 30 million tonnes of coal per year and provide the coal for the state’s medium-term energy needs.

State-owned utilities Macquarie Generation, Delta Electricity and Eraring Energy had formed an unincorporated joint venture to back Cobbora, but originally had aimed to secure a mining company to develop and operate the mine.

The JV is seeking state government approval to mine 30Mtpa of raw coal and produce 20Mtpa of product coal. Open cut mining is slated to start in 2013 for a life of 21 years.

The negotiations failed at a time when NSW private coal companies are increasingly coming under foreign ownership and focused on increasing shipments of thermal coal to more lucrative export markets.

The strong prices being offered for export coal are making the prospect of locking into long term sub-market priced contracts less attractive for coal miners, who are seeking to diversify their revenue base.

Whitehaven Coal is being widely tipped as a foreign takeover target after one of the few remaining independent coal producers – Centennial Coal – was recently taken over by Thai energy group Banpu for $2 billion.

At the company’s recent results announcement, Centennial Coal managing director Bob Cameron said: “I think they [NSW government] accept the reality that coal pricing will be reviewed not just by us but by all suppliers as long-term domestic contracts roll off.”

The government not only needs to negotiate a low cost per tonne of coal to make the assets attractive to buyers of the power assets but also keep a lid on energy prices in NSW which are tipped to rise by up to 42% by 2013.

The uncertainty over supply will affect “gentrader” contracts, which are the trading rights of the generator’s electricity output.

The Keneally government’s failure to negotiate a key coal supply contract is another blow as it faces the polls in March with a depleted ministry and a legacy of failed projects.

Keneally’s government would be the third Labor government to try to privatise following unsuccessful attempts by former premiers Carr and Iemma.

NSW Shadow Treasurer Mike Baird said the government could not achieve a maximum sale price for the electricity assets if bidders have no idea how much they would be paying for coal.

“The collapse of a new coal supply contract for the generators are another nail in the coffin in Labor’s doomed power sale,” he said.

“The Treasurer needs to abandon this process rather than selling these once-in-a-generation assets at any price. It is clear this power sale is being rushed through to prop up the state Labor government’s election campaign.

“Market analysts have confirmed that the uncertainty around coal supply will lead to lower prices for gentrader contracts, as coal is the critical cost component.

“The doubts about Labor’s gentrader model delivering value for money for taxpayers are now increasing by the day.”