Xstrata Coal
Operations
Increased volumes across the business contributed $115 million to EBIT and enabled consolidated sales to grow by 7% in 2006. Production volumes and sales increased as a result of capital projects to improve existing operations and the commissioning and ramping up of new projects. In addition, in March 2006 Xstrata Coal announced the acquisition of a one-third interest in Cerrejón in Colombia, one of the world’s largest open-pit coal mines. This acquisition contributed $153 million to EBIT in 2006, on a pro forma basis. Together, increased volumes and the contribution of Cerrejón more than offset the impact of lower received prices for thermal coal and, to a lesser extent, semi-soft coking coal compared to the prior year, which impacted EBIT by $231 million.
Overall, EBIT fell by 25% to $937 million, due to the impact of lower sales prices and ongoing increases in prices for key mining materials, in addition to consumer price index inflation. In particular, the mining industry continues to be heavily affected by increasing costs for labour, fuel and explosives. Nonetheless, increased volumes at existing operations, the commissioning of new projects and the ramping up of the Rolleston coal mine, commissioned in April 2006, enabled the business to contain real unit costs at a similar level to the prior year. Despite South Africa’s increased costs year-on-year, real unit costs remained flat due to improved unit costs in Australia, primarily from coking coal.
Australian thermal coal
Consolidated saleable production in 2006 rose to 41 million tonnes, an increase of 7% compared to the previous year, however lower average thermal coal prices and the impact of coal mining sector inflation resulted in EBIT falling by 34% to $436 million.
Export sales increased by 1.3 million tonnes over 2005 and domestic sales of thermal coal increased by 2.6 million tonnes, the latter assisted by the commencement of the Ravensworth West domestic dragline operation in New South Wales and the ramp-up of the Rolleston mine in Queensland. In February 2006, longwall production commenced at Newlands Northern Underground, replacing production from the now closed Southern Underground. The full ramp up of Rolleston resulted in achieving its planned production level of five million tonnes for the first full year of operation. Export growth was primarily driven by the Rolleston operation, offsetting decreases in other operations.
Dragline at Bulga thermal coal operation, Australia
| Financial and Operating Data: Coal $m | Pro forma year ended 31.12.06** | Pro forma year ended 31.12.05** |
|---|---|---|
| Revenue: operations† | 3,626 | 3,649 |
| Coking Australia | 598 | 537 |
| Thermal Australia | 1,887 | 1,935 |
| Thermal South Africa | 688 | 736 |
| Thermal Americas | 453 | 441 |
| Revenue: other | 131 | 192 |
| Thermal Australia | 105 | 138 |
| Thermal South Africa | 26 | 54 |
| Total revenue | 3,757 | 3,841 |
| Coking Australia | 598 | 537 |
| Thermal Australia | 1,992 | 2,073 |
| Thermal South Africa | 714 | 790 |
| Thermal Americas | 453 | 441 |
| EBITDA | 1,320 | 1,588 |
| Coking Australia | 300 | 278 |
| Thermal Australia | 622 | 812 |
| Thermal South Africa | 175 | 256 |
| Thermal Americas | 223 | 242 |
| Depreciation & amortisation | (383) | (332) |
| Coking Australia | (50) | (34) |
| Thermal Australia | (186) | (155) |
| Thermal South Africa | (77) | (78) |
| Thermal Americas | (70) | (65) |
| EBIT (before exceptionals) | 937 | 1,256 |
| Coking Australia | 250 | 244 |
| Thermal Australia | 436 | 657 |
| Thermal South Africa | 98 | 178 |
| Thermal Americas | 153 | 177 |
| Net assets | 6,342 | n/a |
| Australia | 3,269 | n/a |
| South Africa | 1,299 | n/a |
| Americas | 1,774 | n/a |
| Capital employed | 6,709 | n/a |
| Australia | 3,497 | n/a |
| South Africa | 1,438 | n/a |
| Americas | 1,774 | n/a |
| Share of Group EBIT | 11.2% | 31.9% |
| Australia | 8.2% | 22.9% |
| South Africa | 1.2% | 4.5% |
| Americas | 1.8% | 4.5% |
| Return on capital employed* | 14.2% | n/a |
| Australia | 20.5% | n/a |
| South Africa | 6.6% | n/a |
| Americas | 8.6% | n/a |
| Capital expenditure | 530 | 518 |
| Australia | 307 | 404 |
| South Africa | 159 | 65 |
| Americas | 64 | 49 |
| Sustaining | 235 | 226 |
| Expansionary | 295 | 292 |
| †Includes purchased coal for blending with mine production | ||
| *ROCE % based on average exchange rates for the period | ||
| **Pro forma including Cerrejón acquisition from 01.01.06 and 01.01.05 for 2006 and 2005 respectively | ||
| EBIT variances (pre exceptionals): Coal | $m |
|---|---|
| EBIT 31.12.05 (Statutory) | 1,079 |
| Sales price* | (231) |
| Volumes | 115 |
| Unit cost - real | (2) |
| Unit cost - coal mining sector inflation | (34) |
| Unit cost - CPI inflation | (89) |
| Unit cost - foreign exchange | 59 |
| Foreign currency hedging | (56) |
| Corporate social involvement | 2 |
| Other income and expenses | (5) |
| Depreciation and amortisation (excluding foreign exchange) | (54) |
| Acquisitions | 153 |
| EBIT 31.12.06 (Pro forma†) | 937 |
| *Net of commodity price linked costs | |
| †Pro forma EBIT includes the acquisition of Cerrejón from 01.01.06 | |
After excluding the impact of coal mining sector inflation and revenue-related costs (primarily Government royalties), and despite increased demurrage at the port of Newcastle particularly during the last quarter of the year, real unit cost savings were again achieved in 2006, following on from savings in the two previous years.
Australian coking coal
Production from Xstrata’s coking coal business increased by 15% in 2006, reaching 5.6 million tonnes, with sales volumes increasing to 5.4 million tonnes. Increased volumes were primarily driven by new production from the low cost Wollombi deposit at Newlands which commenced production in June 2006, continued growth from the Oaky Creek underground operations and increased coking coal production from Collinsville. Production at the higher cost Oaky Creek open cut operation was curtailed in 2006, benefiting unit costs.
Higher volumes, together with stable sales prices for premium hard coking coal, offset higher mining sector inflation to increase EBIT by 2% to $250 million in 2006.
Excluding coal mining sector inflation and revenue-related costs, real unit cost savings were achieved in the coking coal business in 2006, largely as a result of increased productivity at the Oaky Creek underground operation and new lower cost production at Wollombi.
Operator at the Rolleston coal mine, Australia
South Africa
Saleable production increased by 10% to 20.5 million tonnes in 2006, mainly due to additional domestic product from the Tweefontein complex and improved production across operations in the second half of the year. Export thermal coal sales were down slightly year on year (13.3 million tonnes compared to 13.5 million tonnes), due to difficult operating conditions, principally in the first half. These included the impact of high rainfall and difficult geological and mining conditions. Domestic thermal coal sales increased from 6.9 million tonnes in 2005 to 7.1 million tonnes in 2006.
Significant increases in real unit costs in the first half due to difficult operating conditions were largely offset by productivity improvements in the second half, resulting in an overall real cost increase of 7% year-on-year, excluding the impact of mining sector inflation.
Americas
On a pro-forma basis, Xstrata Coal’s one third interest in Cerrejón contributed 9.5 million tonnes of saleable product and $153 million to EBIT, slightly ahead of expectations made at the time of the acquisition.
EBIT for 2006 fell by 14% or by $24 million compared to the prior year, due to slightly lower realised sales prices, compounded by the impact of inflation, predominantly as a result of rising global fuel prices. Cost pressures were partially offset by increased export sales volumes. Xstrata’s share of sales increased from 8.5 million tonnes to 9.2 million tonnes, in line with planned production expansion.
In January 2007, a two-year collective agreement was signed with the Sintracarbón union at Cerrejón, with no labour disruptions.
Developments
Australia
Capital expenditure for Xstrata Coal’s Australian operations decreased to AUD407 million ($307 million) in 2006, with the majority of expenditure incurred in Queensland. Key capital expenditure projects in 2006 included:
- completion of Rolleston Coal mine (AUD67 million in 2006);
- replacement of the existing Newlands coal handling and preparation plant with a new dense medium cyclone plant, enabling the production of additional coking coal product (AUD48 million);
- the upgrade of the fines treatment circuit at Oaky Creek coal handling and preparation plant to increase recoveries of coking coal product (AUD9 million).
Conceptual studies were completed at Wandoan during the year, where the coal resource delineated to date comprises 1.13 billion tonnes of export potential thermal coal in the Surat Basin in Queensland. In addition, Xstrata Coal has taken a 25% interest in the Surat Basin Rail joint venture, a consortium comprising Queensland Rail, Anglo Coal, Australian Transport and Energy Corridor Pty Ltd, and Industry Funds Management. In December 2006, the Premier of Queensland awarded the joint venture consortium a Conditional Exclusive Mandate to develop a 210 kilometre rail link between Wandoan and Banana, allowing access for coal exports from the Surat Basin to the Port of Gladstone.
In June 2006, Xstrata Coal announced the signing of a Heads of Agreement with Caledon Resources plc for the partial sale of its Cook Colliery for a purchase consideration of AUD46 million ($34 million). Located in Central Queensland’s Bowen Basin, Cook Colliery produces hard coking, semi-soft and thermal coal products primarily for the export market. The colliery’s operating company, Cook Resource Mining Pty Ltd (CRM), is owned by Xstrata Coal. Under the terms of the agreement, Caledon has been granted a sub-lease to mine the Southern region and accepts responsibility for the rehabilitation of the area. CRM retains exclusive ownership of the Northern Region for exploration. The transaction was completed in December 2006.
Sarah Jeffrey, environmental graduate, conducts a flora survey at the Collinsville coal operations, Australia
South Africa
In February 2006, Xstrata and African Rainbow Minerals Limited (ARM) announced an agreement to establish jointly a new, majority black-owned coal mining company, ARM Coal, owned 51% by ARM and 49% by Xstrata Coal. The new company has a 51% interest in the Goedgevonden joint venture. Following the direct acquisition of an additional 10% interest (excluding the Goedgevonden joint venture) by ARM in the South African coal business in August 2006, ARM now (directly and indirectly) holds a 30% interest in Xstrata’s South African coal business. This represents meaningful and sustainable black economic ownership and management involvement in Xstrata’s South African coal assets and provides a platform for further growth for both partners. ARM Coal has subsequently applied for Richards Bay Coal Terminal port entitlement to support the future development of the Goedgevonden mine.
The Goedgevonden joint venture between Xstrata Coal South Africa and ARM Coal is a major new greenfield, open cut, thermal coal mine at a total investment of ZAR2.9 billion ($392 million). The project will commence upon receipt of the remaining new order mining lease rights. At full production, the Goedgevonden mine will produce 3.1 million tonnes per annum of export thermal coal and 3.6 million tonnes per annum suitable for the domestic thermal markets and will have a mine life in excess of 30 years. The mine is located in the Witbank coalfield, in the Mpumalanga province.
The mine will be developed through a majority black-owned joint venture, the "Goedgevonden JV", in which ARM Coal owns a 51% share. Xstrata Coal South Africa owns the remaining 49%. ARM will appoint the majority of representatives on the Goedgevonden JV management committee, in line with its majority interest. Xstrata will manage the Goedgevonden Project on behalf of the Goedgevonden JV and Xstrata Coal Marketing AG will market all export coal produced by the mine.
Capital expenditure in South Africa increased significantly by 145% compared to 2005 to ZAR1,079 million ($159 million), of which ZAR675 million was incurred on expansionary projects. Major items included ZAR83 million on Southstock 5 seam development and ZAR68 million on initial works at the Goedgevonden open cut project.
Expansionary capital expenditure also included the purchase of Total Coal South Africa’s 50% share of the ATC and ATCOM operations, in conjunction with a three-year supply agreement, announced in December 2006. The acquisition enables Xstrata Coal South Africa to mine a single large complex in the Witbank coalfields, benefiting from synergies across various Xstrata Coal sites.
Americas
In May 2006, Xstrata completed the acquisition of one-third of the Cerrejón thermal coal operation in Colombia from Glencore International AG for a cash consideration of $1.7 billion. Cerrejón is a privately-owned, independently-managed joint venture in which BHP Billiton plc, Anglo American plc and Xstrata Coal each own a one-third stake. The acquisition has provided Xstrata Coal with a meaningful interest in one of the world's largest and lowest-cost export open-pit coal mines, with a reserve base in excess of 900 million tonnes.
An expansion is under way to increase Cerrejón’s production from 26 million tonnes in 2005 to an annual production capacity of 32 million tonnes in 2008, with further incremental brownfield expansions currently being assessed.
In February 2006, Xstrata Coal purchased a 9.8% interest in Erdene Gold, a Toronto-listed junior Canadian exploration company with interests in Georgia, USA and Mongolia. The investment provides an option to acquire 75% of coal or other mineral tenements based on investing in exploration and feasibility activities in Mongolia. Xstrata Coal’s shareholding has been diluted to 6.6% in the past year, following a rights issue.
During 2006, Xstrata Coal undertook exploration and pre-feasibility work on the Donkin coal resource in Nova Scotia, Canada. This included the acquisition of the Donkin lands, dewatering of two 3.7 kilometre tunnels that access the underground coal resource, resource assessments, mining assessments, and environmental studies at a capital cost of $4 million. Feasibility studies will continue throughout 2007.
To manage these interests, a new divisional office has been established in Toronto, Canada.
Jim Young at Oaky Creek underground coal mine, Australia