Metallurgical coal

Financial highlights
US$ million (unless otherwise stated)
2010 2009
Operating profit 783 451
EBITDA 1,116 706
Net operating assets 3,918 3,407
Capital expenditure 217 96
Share of Group operating profit 8% 9%
Share of Group net operating assets 9% 9%
Callide mine environmental officer Grant Staff

Callide mine environmental officer Grant Staff examines a monitor that records dust levels created as part of normal mining activities.

Group strategy actions

Investing – in world class assets in the most attractive commodities

Our Metallurgical Coal business, with top class assets and resources of well over 3 billion tonnes, is in a strong position to capitalise on the demand for coking coals in the burgeoning Asia-Pacific markets.

Organising – efficiently and effectively

Longwall productivity programmes and other asset optimisation initiatives have helped increase operational effectiveness, reducing longwall move times by 50% and boosting headcount productivity by around 32% over the past two years.

Operating – safely, sustainably and responsibly

Metallurgical Coal is constantly exploring ways to attain zero harm in its operations; similarly, it is seeking new ways to benefit the community and the environment, such as supplying methane-rich seam gas to utilities rather than flaring it, and making the Dartbrook mine a vital component of the Hunter River Restoration Project.

Employing – the best people

Activities such as the award winning apprentice programme at the Moranbah mine, the Operating Crews proficiency programmes assisting to deliver record productivity across Metallurgical Coal, or our flexible working arrangements are examples of our commitment to creating a business where people do make a difference.

Business overview

Through our Metallurgical Coal business unit, we are Australia’s fourth biggest coal producer and in 2010 we became the country’s number two exporter of metallurgical coal.

Our coal operations in Australia are based on the east coast, from where Metallurgical Coal serves a range of customers throughout Asia and the Indian subcontinent, and as far afield as Europe and South America.

Metallurgical Coal operates six mines, one wholly owned and five in which it has a controlling interest. Five of the mines are located in Queensland’s Bowen Basin: Moranbah North (metallurgical coal), Capcoal (metallurgical and thermal coal), Foxleigh (metallurgical coal), Dawson (metallurgical and thermal coal) and Callide (thermal coal). Drayton mine (thermal coal) is in the Hunter Valley in New South Wales.

All of the mines are in well established locations and have direct access to rail and port facilities at Dalrymple Bay and Gladstone in Queensland or Newcastle in New South Wales.

Moranbah North is an underground longwall mining operation with a mining lease covering 100 square kilometres. Coal is mined from the Goonyella Middle Seam, approximately 200 metres below the surface. The mine produces around 3.9 Mt (attributable) of high fluidity, hard coking coal for steel manufacturing. Metallurgical Coal supplies methane-rich seam gas to a power station at Moranbah North, thereby reducing the mine’s carbon dioxide equivalent (CO2e) emissions by around 1.3 Mtpa.

Capcoal operates two longwall underground mines and an open cut mine. Together, they produce around 5.5 Mt (attributable) annually of hard coking coal, pulverised coal injection (PCI) and thermal coal. Capcoal also supplies methane-rich seam gas to Energy Developments Limited’s power station, thereby contributing to Queensland’s power grid, while eliminating 1 Mt of methane emissions per annum.

Foxleigh is an open cut operation with an annual output exceeding 1.7 Mt (attributable) of high quality PCI coal. Currently, the mine is engaged in an asset optimisation process to raise attributable production to 2.2 Mtpa.

Dawson is an open cut operation, which in 2010 produced 7.0 Mt in total (3.6 Mt attributable) of coking and thermal coal.

Metallurgical Coal owns an effective 23% interest in the Jellinbah and Lake Vermont mines in Queensland, both metallurgical coal producers.

In 2010, Metallurgical Coal’s mines produced 14.7 Mt (attributable) of metallurgical coal, all for export, and 14.5 Mt (attributable) of thermal coal, of which 44% was exported.

Metallurgical Coal’s resource base totals some 3.4 billion tonnes of coal. This includes high quality greenfield metallurgical coal reserves close to existing infrastructure.

Seaborne metallurgical coal demand by country

Operating profit
(2009: $451m)

$783m

share of group operating profit
(2009: 9%)

8%

EBITDA
(2009: $706m)

$1,116m

Industry overview

Produced in relatively few countries, metallurgical coal is primarily used in, and is a key raw material for, nearly 70% of the world’s steelmaking industry. It includes hard coking coal, semi-soft coking coal and PCI coal. The chemical composition of the coal is fundamental to steel producers’ raw material mix and product quality.

Primary underlying demand for coking coal is driven by steel, cement and other sectors of industry. In 2010, global hard coal production exceeded 6.0 billion tonnes, most of it being used in the country of origin. A small amount is traded across land borders such as those between the US and Canada, China and Mongolia, and between the countries of the former Soviet Union. In 2010, the international seaborne metallurgical coal market accounted for just 240 Mt of metallurgical coal, of which Australia supplied two-thirds.

Strategy and growth

Metallurgical Coal’s strategy is to increase significantly the value of the business by optimising existing operations and developing new operations to supply high margin export coal. Three specific programmes have been developed to implement this strategy. First, a structured programme of asset optimisation is designed to deliver industry-best operational performance over the existing asset base. Secondly, the business unit’s attractive and well-developed organic growth pipeline aims to double high value metallurgical coal production over the next decade. With a resource base of approximately 3.4 billion tonnes(1), four future projects, including two high quality metallurgical coal opportunities in Queensland; Grosvenor and Moranbah South, and the Dartbrook and Drayton South thermal, semi-soft and PCI prospects in New South Wales, have been mapped out to position the company for growth. Thirdly, in line with increasing demand from the steelmaking industry in both existing and emerging markets, Metallurgical Coal is realising increased value from developing superior specialised product offerings to customers in that sector. Emerging markets, particularly in the Asia-Pacific region, are likely to remain the driving force behind metallurgical coal demand both in the short and the long term.

Early in 2010, we undertook a review of our portfolio of coal assets in Australia in order to assess their alignment with the Group’s overall strategy. As a result of this review, in July we announced the sale of the Bylong and Sutton Forest undeveloped coal assets in New South Wales and the three open cut coal deposits at Collingwood, Ownaview and Taroom in Queensland. In November, we instituted a divestment process for Callide, which primarily supplies domestic power stations in Biloela and Gladstone. This follows on the disposal of the Dawson Seamgas assets earlier this year.

(1) Comprising: 1.6 billion tonnes Measured Resources, 1.6 billion tonnes Indicated Resources and 0.2 billion tonnes Inferred Resources. The Measured and Indicated Resources are in addition to reserves. All resources are reported on a 100% basis and have been estimated in accordance with the requirements of the JORC code.

Financial overview

Metallurgical Coal generated an operating profit of $783 million, a 74% increase, primarily due to higher average benchmark coking coal prices and record production of high margin export products. The business delivered record export sales growth of 30% for metallurgical coal, with production increases of 16% compared with the prior year, 12% higher than the previous record in 2008. This offset the impact of the strong Australian dollar, which had the effect of increasing unit costs by 17% in US dollar terms. Adverse weather and flooding had a significant impact on production, initially with Cyclone Ului in the first quarter and subsequently record spring and summer rainfall from the third quarter onwards in the regions where the business operates.

Markets

Anglo American
weighted average achieved
FOB price ($/tonne)
2010 2009
Export metallurgical coal 176 141
Export thermal coal 87 74
Domestic thermal coal 30 27
Attributable
sales
volumes (‘000 tonnes)
2010 2009
Export metallurgical coal 14,948 11,542
Export thermal coal 6,384 6,239
Domestic thermal coal 8,342 8,604

In 2010 there was a significant increase in demand for metallurgical coal from the global steel industry, with a return to levels last seen in 2008 in the traditional Asian markets and sustained growth in China and India. Demand increased in the first quarter as steelmakers started to restock, which resulted in a temporary oversupply of steel mid-year as steel producers drew down stock again. In the third quarter, this trend reversed and the industry has subsequently seen a strengthening in coal demand and prices. European demand continues to recover, albeit at a slower pace than in Asia. Unseasonal record rainfall in Australia has limited supply from Queensland mines since September, a trend which continued throughout the fourth quarter and will continue to impede production in early 2011. Industry stock levels reached record lows and this is expected to result in a further increase in metallurgical coal prices in 2011.

The market for metallurgical coal has traditionally priced coal through annual price negotiations providing for fixed pricing for a 12 month period. Since the second quarter of 2010, a move to quarterly pricing has occurred. In parallel with this shift, multiple coking coal indices have been developed with the aim of creating a liquid spot market with transparent pricing, though no reliable index has yet been determined. Metallurgical Coal is well placed to continue to supply its customers under the new pricing mechanisms as they evolve.

Operating performance

Attributable production
('000 tonnes)
2010 2009
Export metallurgical coal 14,702 12,623
Thermal coal 14,461 14,052

Metallurgical Coal delivered record production and sales of metallurgical coal. The business increased the sales of its high quality metallurgical coal by 30% to 14.9 Mt, driven by a strong supply response from the Capcoal and Moranbah North complexes. The production increases were achieved despite the negative impact of Cyclone Ului in the first quarter and record rainfall in the second half of the year in Queensland. The rainfall experienced in 2010 was more than double the historical average for areas in which the business operates. Successful stock management, dewatering capacity, relocation of assets and the quick mobilisation of additional production capacity were key to ensuring that the open cut production recovered as quickly as possible. Combined with improved coal logistics chain management, this enabled the business to deliver record sales volumes in response to stronger demand.

Productivity improvements at the underground operations were a major focus during the year, particularly in response to the rain disruption at the open cut operations. Unit costs were negatively affected by the adverse weather conditions, mitigated by the benefits from the increased production volumes, with export cost per tonne in local currency 1% lower than the previous year. A comprehensive rain loss mitigation plan aimed at reducing the impact of rain at the open cut operations has been initiated.

Port and track expansions for the Dalrymple Bay Coal chain were completed in 2010 to address immediate seaborne market growth. The business has flexible arrangements in place to assist in logistics planning and weather mitigation. To meet the continuing industry growth, rail and port throughput will be addressed through the 25 Mtpa Abbot Point expansion and the 30 Mtpa Wiggins Island project, scheduled for 2012 and 2014 respectively, and a number of conceptual projects currently under way.

Projects

Metallurgical Coal took further steps to focus its business on high margin export products by progressing the Grosvenor and Drayton South feasibility studies and by divesting non-core assets, including the sale of five undeveloped exploration assets and the Dawson Seamgas assets. The proposed divestment of the Callide mine has also been announced. Callide primarily supplies domestic power stations in Queensland and produced 8.5 Mt of thermal coal in 2010 and has expansion potential from its resource base of more than 800 million tonnes.

At the Greenfield projects of Grosvenor, Moranbah South, Dartbrook and Drayton South, studies continue in order to meet expectations of growing demand for both metallurgical and export thermal coal. Approval of the 4.3 Mtpa Grosvenor metallurgical coal project is targeted for the second quarter of 2012.

Outlook

A continued focus on longwall productivity and other asset optimisation programmes to improve operational effectiveness are expected to further increase sales of high- margin export products in 2011.

The positive industry trends seen in 2010 are expected to continue as the European market recovers and new steel plants come on stream in India and Asia. The demand outlook for both metallurgical and export thermal coal is stimulating expansion of supply from new and existing mines to meet demand over the medium term. Prices are forecast to remain strong as Australia, which provides two-thirds of the world seaborne metallurgical coal market, has experienced severe weather related supply constraints in the first quarter of 2011, while Europe and China experience another cold winter.

Seamus French
CEO

Seamus French

Metallurgical coal's resource base

3.4 bn tonnes

2010 export metallurgical coal production

14.7 Mt

Projected output of metallurgical coal from Grosvenor project

4.3 Mtpa