The impact of the Glencore-Xstrata merger on proposed coal projects

GlencoreXstrata is the merged company following the May 2013 takeover of Xstrata by Glencore. On its website the company states that -- in addition to numerous other interests -- it has "interests in over 30 operating coal mines in Australia, South Africa and Colombia" and coal "development projects in Australia, South Africa and the Americas." However, during the course of discussions over the proposed merger it was made clear that company operations would be rationalised.

2012 annual report

In its 2012 annual report Xstrata detailed the "Developments/Projects" for its coal division as comprising:

• the expansion of the Ravensworth North and Ulan West mines: "When complete, these projects will increase annual production by 8 million tonnes and 7 million tonnes respectively. Both projects are on time and on budget and are expected to be completed during 2013 and 2014, respectively."

• "At Rolleston in Queensland’s Bowen Basin, phase one of the expansion project to increase annual production from 9 million tonnes to 12 million tonnes commenced in 2012. The project is on track to be completed during the second half of 2013.

• "In South Africa, work continues to progress on the expansion of Tweefontein open cut mine from 4 million tonnes to 7 million tonnes per annum. The project is on track for completion in 2015.

• "Prefeasibility studies on the expansion of Goedgevonden commenced in 2012, with completion of feasibility studies expected in late 2014";

• "In Colombia, work on the Cerrejón P40 expansion continues, with handover of the second shiploader expected in late 2013."

• "In Canada, prefeasibility studies commenced in 2012 for the Sukunka open cut and Suska open cut projects in British Columbia"

Post merger cutbacks

Ahead of the merger the company had already announced cutbacks to its coal operations. In March 2013 it announced that it would close its Brisbane office, with the loss of approximately 100 jobs. In September 2012 the company had announced that it would cut 600 jobs in its coal mines.</ref>"Xstrata to close Brisbane office, cut jobs in Australia", Reuters, March 19, 2013.</ref>

Following the completion of the merger, GlencoreXstrata issued an update for investors. In it the company some of the general key statements -- though not specifically made in relation to coal projects were:

• "Strong near-term growth from brownfield projects and recent M&A activity" (p10)
• "Immediate priority will be the optimisation of the combined asset portfolio" (p13)
• "avoidance of too many high risk and high capital cost projects" (p15)
• "brownfield project focus for faster payback and more reliable development process" (p15)
• "avoidance of projects which have material and protracted negative cash flows" (p15)
• "minimise cash outflow/maximise value in respect of non-approved projects" (p17)
• "optimisation of project pipeline and capex commitments; brownfield opportunities prioritised" (p18)

The company also pledged a detailed update in the 3rd quarter of 2013

Projects scrapped

One of Xstrata's potential coal projects -- but not mentioned in its 2012 annual report -- is the 30 million tonne a year Wandoan Coal Project in Queensland.

Two weeks after the GlencoreXstrata merger it was announced that the company had stopped work on the proposed 35 million tonnes per annum Balaclava Island Coal Terminal. In a statement the company stated that "this decision has been made as a result of the poor current market conditions in the Australian coal industry, excess port capacity in Queensland, specific shipping limitations and concerns about the industry's medium-term outlook. The proposed terminal was one of the export terminals being investigated to cater for the Wandoan coal project. "It's further confirmation Wandoan's status as being well and truly on hold is certainly unchanged in the current environment," said Tom Sartos, an analyst with RBS in Brisbane.