New Frontier in Australian Mining Under Threat
By REUTERS
Published: September 5, 2012


PERTH, AUSTRALIA — Tumbling coal prices and financing difficulties threaten to derail tens of billions of dollars of planned investments in the Galilee Basin, an untapped reserve in northeast Australia that has the potential to turn the country into the world’s leading exporter of thermal coal.

Emboldened by record coal prices in recent years, some of the biggest Australian mining companies teamed up with Chinese and Indian partners to develop mines in the Galilee Basin of Queensland. The companies planned to develop a total of five projects that would increase Australia’s annual production of thermal coal to more than 180 million tons by the end of the decade, doubling the country’s current exports of the coal.

The projects also required the construction of new rail lines and ports to transport the coal, most of which was expected to go to Asia.

But efforts to develop mining in the Galilee Basin have been shaken by a 20 percent slide in benchmark Australian coal prices since the beginning of this year, to little more than $90 per ton, as demand from China has cooled.

A delay of the projects would mean that Australia would not overtake Indonesia any time soon as the world’s leading exporter of thermal coal. It would also most likely fan fears that the decade-long boom in resources that has helped Australia escape a recession has ended, even though $270 billion worth of investments have been announced.

Bandanna Energy, which had announced plans for mines in Galilee, concedes that the new mining frontier is dead for now. “Galilee Basin will have its time, thanks to rising China demand,” Michael Gray, the managing director of Bandanna, said at a recent conference in Queensland. “But not in the next four to five years.”

Bandanna and AMCI Capital were joining forces for a project in South Galilee and planned to produce as much as 20 million tons of coal there annually starting in 2015, documents from Australia’s Bureau of Resources and Energy Economics show.

Companies seeking to develop mining in the area had already faced a difficult financing environment because of the effects of the European sovereign debt crisis. Those difficulties are being exacerbated by the fall in coal prices.

Coal is Australia’s second-largest source of export income, after iron ore, representing 47 billion Australian dollars, or $47.8 billion, in 2011. About 15.6 billion dollars of that came from exports of thermal coal for power stations.

The Galilee plans included a 10 billion-dollar Alpha Coal project by Hancock Coal, a joint venture by GVK Power & Infrastructure of India and Gina Rinehart, the wealthiest person in Australia. Production was scheduled to begin in 2015.

Waratah Coal, which is owned by the Australian mining magnate Clive Palmer, has provided financial backing for a project with China First Coal worth 8 billion dollars. The companies had hoped to begin exporting thermal coal in December 2014, but that now seems unlikely. Resourcehouse, another company owned by Mr. Palmer, failed in its fourth attempt to raise billions of dollars to help develop China First when it tried to list on the Hong Kong stock exchange last year.

“The key question today is how to attract capital” said Mike Roche, chief executive of the Queensland Resources Council, an industry body. “ With the European situation, money is scarce.”

Even projects that do not require adding infrastructure like railroads and ports are under threat. BHP Billiton said last month that it was delaying a 28 billion-dollar expansion of the Olympic Dam copper mine in South Australia. Meanwhile BHP, Rio Tinto and Xstrata, the top producers of thermal coal for export, have announced cuts in staff or contractors.

Adding to doubts about the prospects of Galilee development, a proposed expansion of the Abbot Point coal port in Queensland, which all five Galilee projects planned to use, was scaled back by the state government in May because it was deemed “unrealistic and undeliverable.”

But there is hope for the developments in the long term, especially those that are being underwritten by companies in China, where demand for coal is strong. “There is still going to be a huge amount of thermal coal required over the next 10 to 15 or 20 years, it’s got to come from somewhere,” said Mark Pervan of ANZ Research in Melbourne.

But Mr. Palmer, whose Waratah Coal company is building the China First mine, shrugs off the decline in coal prices. “It’s not about the price for coal,” he said. “Our partners are about getting the coal because they need the heat.”