Australia | Jul 02 2019
Brokers acknowledge the effort made by South32 to turn around the Illawarra Coal operations. Nevertheless, a return to three longwalls requires a substantial lift in development rates.
-New enterprise agreements helping to optimise operations
-Higher coal prices have enabled South32 to address issues at Appin
-Dendrobium extension likely to consume considerable capital
By Eva Brocklehurst
South32 ((S32)) is motivated to improve its Illawarra Coal asset at Appin, NSW, conducting a site visit and showcasing plans to return to a three-longwall operation. The asset has a high fixed cost base and its success will be predicated on an ability to restore production levels to a targeted 8mtpa by FY21.
A key feature of the showcase was new enterprise agreements, as costs remain high, with labour contracts accounting for 50%. Ord Minnett notes the company intends to continue optimising its operations, which may take time given the importance of the mine to the community and a heavily unionised workforce.
Illawarra Coal's quality is sound but the assets are ageing and there is extensive infrastructure to maintain, both underground and on surface. Citi also notes management/labour relations have historically been difficult but South 32 has worked hard to finalise new enterprise agreements that have improved its right to manage.
Deutsche Bank, overall, was pleased with the turnaround in operations at the Appin underground coal mine although remains disappointed about the outlook for costs and capital expenditure.
The mine has a long production history but has been volatile over recent years. Peak production of 9mt was achieved in FY15 but had fallen by more than -50% by FY18. This reflected the problems with the ramping up of the Appin 9 longwall mine, as the company was unable to operate both longwalls in parallel, largely because of elevated gas levels.
South32 has now reconfigured Appin's operations to reduce its footprint and complexity. UBS was disappointed with the Appin mine after the decision to run two longwalls, as low coal prices exacerbated the problems with the simultaneous operation. However, higher coal prices have now allowed management to address the issues and production over FY19 exceeded original expectations. Guidance has been lifted to 6.5mt.
Five development units are currently operating and Citi envisages this is the biggest risk for a two-longwall operation at Appin, given historical development rates. Macquarie agrees. The ability of the company to return to a three-longwall operation requires a material lift in development rates and the broker's production forecasts remain below guidance until this is achieved.
The Dendrobium project expenditure, which extends the mine by 12 years, is budgeted at US$650-800m, well ahead of most broker estimates. UBS calculates the extension could mean capital expenditure is closer to US$250-300m per annum. Studies will continue for another year.
Citi assesses sustaining capital expenditure of around US$30/t. The broker considers this is high for an 8mtpa production outcome, as the company is running substantial service infrastructure and a large workforce.