The Hume Coal Mine: A stranded asset in the Southern Highlands

IEEFA has undertaken a financial review of POSCO of Korea’s Sutton Forest underground coalmine proposal in the Southern Highlands, NSW, and finds the project financially unviable and unlikely to proceed. POSCO’s wholly-owned subsidiary, Hume Coal Ltd, proposes to invest capital of A$1.28bn over the 19-year project life to produce 39 million tonnes (Mt) of export coal (2Mtpa, 80% coking, 20% thermal).

Key Features

• The Hume Coal proposal is for 50Mt of run of mine coal. On an assumed yield of 78%, this equates to 39Mt of product coal. With three years of construction starting 2018, first coal is assumed in 2021, with production of 2.0Mtpa and mine life of 19 years.
• The total capital cost over the project life is estimated at A$1.28bn. This assumes A$720m initial capex including the associated Berrima Rail Project plus a 10% contingency, $339m of sustaining capex during the mine life, $80m for exploration and admin over 2016-2020, $40m of property purchases and a $30m rehab bond.
• The mine plan involves an innovative technique called pine feather mining, an Australian first, aimed at limiting land subsidence and water impacts. The downside is a coal deposit recovery rate Hume Coal estimates at only 35%.
• Assuming 20% thermal coal at US$60/t and 80% hard coking coal at US$90/t (2016 dollars, indexed for inflation), and maintaining the current A$/US$0.753 gives a current product value of US$84/t or A$112/t.
• South32’s Illawarra Metallurgical Coal unit produces 7-8Mtpa of coal (80% coking and 20% thermal). Illawarra’s A$/t cash cost of production has been cut 18% since FY2014.
• Assuming Hume Coal can replicate South32’s dramatically reduced cash cost before sustaining capex for Illawarra Coal of A$79/t, adding A$8/t royalties & A$30/t of depreciation, IEEFA calculates a total cost of A$117/t product coal.
• Total costs of A$117/t plus financing costs of $13/t are A$130/t (2016 dollars), well above likely revenues of A$112/t.
• No corporate tax is likely without a sustained, sizable lift in coal prices in real terms.
• No price on carbon nor cost of water is factored in, two key financial risks.

IEEFA concludes that with a total cost (including interest) of coal of A$130/t, absent a sustained recovery in coking coal prices and / or a collapse in the A$/US$ currency rate, this project will lose money with every tonne of coal produced. The negative net present value for the project of –A$384m means the probability of this proposal proceeding is remote. POSCO is an integrated steel company, but would be commercially better off sourcing a long term supply agreement or buying one of the many distressed coal mines readily available on the market.

BHP Billiton is reported in July 2016 to have offered Anglo-American just US$1bn for >10Mtpa of coking coal capacity at Grosvenor & Moranbah North: US$100 per tonne of coking coal capacity, just over one quarter of Hume Coal’s proposed total capital cost US$0.7bn (A$0.9bn for 2Mtpa) or US$350/t.

Please view full report PDF for references and sources.