Rio Tinto's coal interests

From Global Energy Monitor

Rio Tinto has major coal operations in the United States and Australia. The company's Australian operations are conducted through the wholly-owned subsidiary Rio Tinto Coal Australia (RTCA). In the U.S. Rio Tinto spun the most significant of its Powder River Basin coal assets off into Cloud Peak Energy, a company in which it has a 48.3% stake.[1] Prior to the spin-off, Rio Tinto's operations were held by the wholy-owned subsidiary, Rio Tinto Energy America (RTEA).

In its 2009 Annual report Rio Tinto stated that it's share from its coal mining operations amounted to 140.1 million tonnes.[2]

Rio Tinto's U.S. coal interests

Cloud Peak Energy owns and operates the following mines:

Cloud Peak Energy also holds a 50% stake in the Decker Coal Company which operates the Decker Mine in Montana.

As a result of the float of Cloud Peak Energy in late 2009, Rio Tinto now indirectly holds a 48.3 per cent interest in the Antelope, Cordero Rojo and Spring Creek mines and a 24.1 per cent interest in the Decker mine.[3]

Rio Tinto also has a wholly owned subsidiary, the Colowyo Coal Company, which owns the Colowyo Mine in Colorado. In its 2009 annual report Rio Tinto states that the "Colowyo Coal Company produces thermal coal in north west Colorado. The company intends to fulfil long term contracts with two power generators located in north west Colorado until 2017, with the intention to cease production in 2018."[4]

Rio Tinto, through it former subsidiary, Rio Tinto Energy America, owned and operated that the Jacobs Ranch Mine in Wyoming. The mine was transferred to Cloud Peak Energy. However, the month before the November 2009 float of the new company, the mine was sold to Arch Coal for US$764 million.[5][6]

Rio Tinto Coal Australia

Rio Tinto Coal Australia (RTCA) manages coal operations in both Queensland and New South Wales.[7]

In Queensland the company operates:

  • the Blair Athol mine (Rio Tinto has a 71 per cent interest in the mine);
  • the Kestrel mine (Rio Tinto has an 80 per cent interest in the mine);
  • the Hail Creek mine (Rio Tinto has an 82 per cent interest in the mine); and
  • the Clermont mine which is currently being developed. (Rio Tinto has a 50.1 per cent interest in the mine).

"Blair Athol produces thermal coal and sells principally to the Japanese market generally on annual agreements. Kestrel and Hail Creek sell mainly metallurgical coal to customers in Japan, south east Asia, Europe and Central America, generally on annual agreements," Rio Tinto states on the website.[7]

In New South Wales "RTCA also provides management services to Coal & Allied Industries (Coal & Allied) for operation of its four mines located within the Hunter Valley in New South Wales."[7] Coal & Allied is 75.7% owned by Rio Tinto.

Coal & Allied, Rio Tinto states, operates three mines in the Hunter Valley in New South Wales. These are:

Potential new coal mines

Coal and Allied also notes that it has a number of other projects under consideration including:[8]

Coal & Allied "also has a 37 per cent interest in Port Waratah Coal Services coal loading terminal ... Coal & Allied produces thermal and semi soft coal. Most of its thermal coal is sold under contracts to electrical or industrial customers in Japan, Korea and elsewhere in Asia. The balance is sold in Europe and Australia. Coal & Allied’s semi soft coal is exported to steel producing customers in Asia and Europe under a combination of long term contracts and spot business."[7]

In its 2009 Annual report Rio Tinto also lists a number of potential coal projects in Queensland in its coal resource base. These are:[9][10]

  • the Lake Elphinstone coal project; Rio Tinto states that the project has 162 million tonnes of reserves of which 120 million tonnes are indicated and 42 million tonnes are inferred. Rio Tinto has a 82% interest in the project;[9]
  • the Mount Robert coal project;[10]
  • the Kestrel Mine West project. Rio Tinto states that the project has 139 million tonnes of reserves of which 106 million tonnes are indicated and 33 million tonnes are inferred. Rio Tinto has a 80% interest in the project;[9][9]
  • the Valeria coal project. Rio Tinto states that the project has 762 million tonnes of reserves of which 698 million tonnes are indicated and 64 million tonnes are inferred. Rio Tinto has a 71.2% interest in the project;[9]
  • the Winchester South coal project. It states that the project, in which it has a 75% interest, has a total resource of 192 million tonnes (of which 17 million tonnes was indicated and 175 million tonnes was inferred). Rio indicated that, following a reassessment of the deposit in the 2009 financial year, the size of the coal reserves had been upgraded from the previous years estimate of 97 million tonnes.)[9]

Rio Tinto's growth plans

In the presentation of its 2010 mid-year report, Rio Tinto's Chief Economist, Vivek Tulpule, noted that the price differentials between coal supplied from South Africa, Australia and Colombia into the European and Asian markets was narrowing. For example, he noted that "the large Atlantic-Pacific differential has also significantly reduced from $13/t to less than $5/t." In particular, he noted that part of this was due to a decline in freight rates. "The impact of this," he wrote, "has been to bring the Atlantic and Pacific markets closer together as longer distance trades become viable and regional arbitrage opportunities increase. In particular Colombian coal delivered to China has become profitable in the low freight environment and in June 2010 China imported nearly 700kt of Colombian coal, compared with the previous June when no Colombian coal was shipped to China."[11] (Rio Tinto has no Colombian coal mines. The Cerrejon coal mine in Colombia is owned by subsidiaries of BHP Billiton plc, Anglo American plc and Xstrata plc.)[12]

Tulpule also noted that China "continues to set the scene for the seaborne thermal coal market" with imports of thermal coal at the start of the year running at an annualised rate of 92 million tonnes compared to 39 million tonnes in 2009. However, he warned that there had been s sharp drop in Chinese imports in May as higher imported coal prices compared unfavourably with domestic production. However, a decline in freight costs saw a partial rebound in import volumes in June.[11]

In assessing the prospects for continued growth of the companies commodities, Tulpule cautiously stated that "increasing prosperity in developing countries including China and India, with associated industrialisation and urbanisation will continue to drive underlying growth in demand for commodities. At the same time, it is apparent that global imbalances will take many years to resolve. The implications is a high average growth setting for our markets but also one that will be characterized by elevated volatility and scope for discontinuities - a pattern we have dubbed as the ‘sawtooth economy’."[11]

Rio Tinto's Australian coal strategy

In a June 2010 briefing for investment analysts, senior Rio Tinto staff were bullish about the prospects for Rio Tinto Coal Australia's growth prospects. They outlined that the company's coal operations in the Bowen Basin in Queensland, which produce both thermal coal and metallurgical coal, controlled a resources which "is large and expandable". They stated that the company's share of reserves from its various operations is 544 million tonnes with additional resources of 1,422 million tonnes. In New South Wales Coal & Allied, which is 75% owned by Rio Tinto and produces both thermal and semi-soft coking coal, also has substantial reserves. In the presentation the company stated that Coal and Allied's share of reserves amounted to 1,048 million tonnes with additional resources of 2,941 million tonnes.[10]

The company also expressed optimism about the export coal market, arguing that "even with the emergence of energy substitutes, coal will remain the dominant power generation fuel for China and India" and that "strong demand and supply/cost issues in China and India will likely drive increased demand for seaborne thermal coal". In particular, the company cited the 2009 World Energy Outlook which projected that from 2007 to 2030 the share of electricity derived from coal in China would decline only marginally whilst production could increase from 2,685 terawatt hours to 6,639, a compound annual growth rate of 4%. Within China, the company noted that the ability of coal-fired generators to source domestic coal was constrained by bottlenecks in transport infrastructure and that any disruptions or spikes in demand "will result in increased seaborne thermal coal demand".[10]

As for India, Rio Tinto expects that the country's "thermal coal imports will likely double over the next 5 years to meet power generation demand." The company cited the 2009 World Energy Outlook which projected that from 2007 to 2030 the share of electricity derived from coal would increase only marginally from 68% to 71%. However, the World Energy Outlook suggests that coal-fired generation could increase from 537 terawatt hours in 2007 to 1,935 terawatts in 2030, a compound annual growth rate of 5.7%. In particular, the company pointed to plans by the Indian government to double generation capacity by 2017 such as with the "ultra-mega" projects.

The company was also optimistic about the prospects for metallurgical coal with demand underpinned by its assessment that "urbanisation and industrialisation in developing countries will drive steel consumption growth" and that supply "is unlikely to keep pace with demand, creating a demand-supply gap which will push developers into new regions". Rio Tinto's executives told the analysts that it was their expectation that "prices are likely to remain high relative to historical levels given the lack of substitutes and rapid demand growth." In particular, the increased demand growth is anticipated to come from China and India. Citing McKinsey data, Rio Tinto expects that by 2020 69% of steel production would be produced in via basic oxygen furnace plants with the remainder from electric arc furnace plants. (Basic oxygen furnaces are fed with coke - derived from hard coking coal - while the electric arc furnace is a mini-smelter fed with steel scrap and powered by electricity.) While the percentage share of steel produced from basic oxygen furnace plants and electric arc furnaces is projected to remain relatively unchanged, Rio Tinto executives suggested that demand for hard coking coal would increase by approximately 55% from 2005 to 2020. They also argued that "prices are likely to remain high relative to historical levels, supported by strong demand and the lack of supply and substitutes."[10]

Rio Tinto's executives argued that the company would be well placed to supply the increased demand for both thermal and metallurgical coal. The company's Queensland operations were from low-cost, long-life mines producing both thermal and hard coking coals "with a range of growth options". They were also keen to assure the analysts that they were pursuing "initiatives to resolve infrastructure challenges".[10]

In particular, they identified key bottlenecks and the changes underway. These were:[10]

  • that the expansion of the Abbot Point Coal Terminal from 20 million tonnes per annum to 50 million tonnes per annum is under way. They also pointed out that an upgrade of the Newlands rail system to the port and the construction of a new rail link, referred to as the GAPE project, would provide increased access for mines in the Goonyella area. They also noted that "further port expansion options exist in the Abbot Point area";
  • the Dalrymple Bay Coal Terminal (DBCT) has a total contracted capacity of 85 million tonnes per annum. Rio Tinto Coal Australia, the company executives stated, "has matching rail and port contracts to provide for Hail Creek, Blair Athol and Clermont." They also noted that "further expansion options at DBCT being studied by owner Prime Infrastructure"; and
  • that the port of Gladstone has total contracted capacity of 76 million tonnes per annum with the production from the Kestrel mine railed via the Blackwater rail corridor to the export terminal. The company also noted that there is "potential for construction" of a new export terminal at Wiggins Island.

Rio Tinto executives singled out the Goonyella area transport infrastructure as "performing well below contracted levels" and complained that there was "system underperformance resulting in lost sales and increased demurrage" costs. They also complained that "rail expansions lag port expansions", there is a "lack of coordinated and integrated strategic and operational planning and execution" and that there is a "transfer of economic rents to infrastructure owners without performance obligations." Having flagged the issues, Rio Tinto representatives were quick to offer reassurance. The GAPE project, they stated, would "open up access to Abbot Pt relieving Goonyella system" while the bid by a coalition of coal companies to buy part of a privatised Queensland Rail operation "will address rail-side delivery, planning and performance issues." They also flagged that the "establishment of coal chain coordination organisations" would assist facilitate higher export volumes as would "facilitating more options in the rail haulage market."[10]

Coal & Allied's NSW coal operations faced some similar issues. The company stated that "over the last 3 years, the industry has agreed a new Long-Term Commercial Framework that facilitates industry growth – both by producers and infrastructure providers." In particular, this involves the re-negotiation of access rights to the Port Waratah Coal Services terminals in Newcastle and expanding the amount of available land to facilitate the construction of a fourth terminal. The company is also lobbying for changes to rail track access to allow for better matching with the export terminal capacity. These changes, the executives stated, are designed to "move the coal chain towards a fully integrated system – behaving as if it has a single owner". The company anticipates that increased transport and export terminal capacity will enable its existing Hunter Valley Operations and Mount Thorley mines to expand production to match their rated capacity and lower the cost per tonne of coal mined.[10]

The company also flagged that a review of the Bengalla mine was underway with the possibility of production being increased from its current 5.5 million tonnes to 7.5 and, in a second stage expansion, to 8.5 million tonnes per annum. A pre-feasibility study into the Mt Pleasant project, with an anticipated 8.5 million tonnes of production, is currently being reviewed.[10]

Move into Mozambique

In December 2010 Rio Tinto announced that they had offered $16 cash for each share in Riversdale Mining. In a media release the company stated that "acquisition provides Rio Tinto with a substantial tier one coking coal development pipeline in the emerging Moatize Basin in Mozambique, in line with Rio Tinto's strategy of developing large, long-life, low operating cost assets to grow shareholder value." The company stated that the offer would be sent to shareholders in January 2011. It stated that "the Offer is subject to a number of conditions including Rio Tinto acquiring a relevant interest in excess of 50 per cent in Riversdale, Foreign Investment Review Board approval as well as no material adverse change occurring and Riversdale conducting its business within certain specified parameters."[13]

Riverdale recommended that shareholders accept the offer. The Board nominee of Tata Steel abstained from voting on the proposal. In the announcement, Riversdale stated that "the Benga coal project is expected to commence production of coal in September 2011 and is expected to reach full capacity in 2013, while production from the Zambeze coal project will not commence before 2014. The development of both projects will require a substantial commitment of time, resources and capital including for the development of the rail, port and barging infrastructure which is needed to take the coal to market. The Recommending Directors consider a fixed cash amount of A$16.00 now to be an attractive alternative for Riversdale shareholders. Rio Tinto is a world class mining house with a very strong track record in development and production and has access to the funding and the project management skills and expertise which are required for projects of the size and calibre of Benga and Zambeze. Rio Tinto is well placed to support Riversdale through to the development stage of these exciting projects."[14]

Riversdale is developing the Benga coal mine and the adjoining Zambeze Project in Mozambique.[15] The absence of any mention by Rio Tinto of Riverdale's Zululand Anthracite Colliery in northern Kwa-Zulu Natal, South Africa, suggests that it is likely to be sold off is the takeover is completed.

Rio Tinto and China

Chinalco Rio Tinto Exploration is a joint venture between Rio Tinto and Chinalco which was announced in June 2011 at a joint signing ceremony in Beijing. In a media release Rio Tinto stated that "the immediate priority for CRTX will be copper exploration, with coal and potash among other commodities potentially considered at a later date."[16]

Rio Tinto announced that Chinalco will hold a 51 per cent interest in the JV and Rio Tinto will hold a 49 per cent interest. "Chinalco will nominate three directors including the chairman plus the chief financial officer, deputy general manager and compliance supervisor. Rio Tinto will appoint two directors and the general manager, who will be responsible for day-to-day operations. It is expected the CRTX headquarters will be in Beijing," Rio Tinto stated.[16]

Offloaded Coal Assets

In the wake of the Global Financial Crisis, Rio Tinto sought to reduce its portfolio of projects, including some held by its coal subsidiaries. Projects that were sold were:

  • Maules Creek coal project in New South Wales. In its 2009 annual report Rio Tinto stated that it "sold its 75.7 per cent interest in the Maules Creek property with transfer being effective on 18 February 2010";[9] and
  • the Vickery coal mine in New South Wales. In its 2009 annual report Rio Tinto stated that it "sold its 75.7 per cent interest in the Vickery property with transfer being effective on 4 February 2010."[9]

The Chapudi coal project in South Africa is currently slated for sale.[17]

Rio Tinto and 'Clean coal'

On its website Rio Tinto states that "for coal to remain a valuable long-term energy source, coal producers and users need to minimise the impact of burning coal and reduce the amount of carbon dioxide emissions from power plants. Technology breakthroughs are required to find new ways of using coal that will supplement existing efficiency improvements. These initiatives range from improving the performance of existing boilers, to promoting the adoption of more efficient, advanced boiler designs, to coal gasification and, eventually, to carbon capture and sequestration."[18]

As of July 2010 RTEA is still listed as a member of the FutureGen Alliance, though it is unclear whether this is current information.[19]

Rio Tinto's lobbyists

In Australia

Articles and Resources

References

  1. ↑ Rio Tinto, 2009 Annual Report: Production & reserves: Group mines: Energy", Rio Tinto website, 2010.
  2. ↑ Rio Tinto, 2009 Annual Report: Summary", Rio Tinto website, accessed July 2010.
  3. ↑ Rio Tinto, "Key Achievements", Rio Tinto 2009 Annual Report, 2010.
  4. ↑ Rio Tinto, "Review of Operations", Rio Tinto 2009 Annual Report, 2010.
  5. ↑ Rio Tinto, "Key Achievements", 2009 Annual Report, 2010.
  6. ↑ Cloud Peak Energy, "Cloud Peak Energy Inc. Announces Results for Full Year and Fourth Quarter 2009", Cloud Peak Energy website, March 16, 2010.
  7. ↑ 7.0 7.1 7.2 7.3 Rio Tinto, "Rio Tinto Coal Australia", Rio Tinto Operations & Financial Report, 2008.
  8. ↑ Coal & Allied, "Our projects", Coal & Allied website, accessed July 2010.
  9. ↑ 9.0 9.1 9.2 9.3 9.4 9.5 9.6 9.7 Rio Tinto, 2009 Annual Report: Mineral resources", Rio Tinto, 2010.
  10. ↑ 10.0 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 Rio Tinto, "Rio Tinto Coal Australia Financial Community Presentation", June 2010 – Sydney, page 14.
  11. ↑ 11.0 11.1 11.2 Vivek Tulpulé, Rio Tinto Chief Economist, "Outlook for Metals and Minerals - mid year results 2010", August 5, 2010, page 7. (Pdf)
  12. ↑ BHP Billiton, "Cerrejon Coal Company", BHP Billiton website, accessed June 2010.
  13. ↑ Rio Tinto, "Recommended A$16 per share cash offer by Rio Tinto for Riversdale", Media Release, December 23, 2010.
  14. ↑ Riversdale Mining, "Riversdale announces a recommended takeover offer by Rio Tinto for A$16.00 cash per share", Media Release, December 23, 2010.
  15. ↑ Riversdals Mining, "Riversdale Mining Limited: Developing a Successful Mining House", Riversdale Mining website, accessed January 2011.
  16. ↑ 16.0 16.1 Rio Tinto, "Rio Tinto and Chinalco form joint venture for exploration in China", Media Release, June 1, 2011.
  17. ↑ "Rio Tinto considering SA coal asset sale - report", Rueters, July 12, 2010.
  18. ↑ Rio Tinto, "Coal", Rio Tinto website, accessed July 2010.
  19. ↑ FutureGen Alliance, "Alliance Members", FutureGen Alliance website, accessed July 2010.
  20. ↑ "Lobbyist details: The Trustee for Endeavour Consulting Group Unit Trust", Department of Premier and Cabinet, June 30, 2010.

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