New analysis from the Institute of Energy Economics and Financial Analysis (IEEFA) shows that the Hume Coal project in the Southern Highlands of New South Wales will find it hard to compete with higher-quality coking coal mines in the region.
The analysis is part of the IEEFA’s submission to the New South Wales Department of Planning and Environment as part of the project’s Environmental Impact Statement process.
Hume Coal, a subsidiary of South Korea’s largest steel maker POSCO, has promoted the new mine as a producer of coking coal. The developer would have hoped to take advantage of higher prices after the spikes in coking coal prices occurred over the past year, caused by curbs in domestic coal production in China and a cyclone that tamped down production in Queensland, Australia. But prices are now starting to moderate.
Simon Nicholas, Energy Analyst said: “In the course of IEEFA’s assessment, it was discovered that the Hume project is also planning to produce a much higher percentage of thermal coal than we assumed in our previous report published in August 2016.
“IEEFA understands that around 46 percent of the coal produced from the mine would be low-quality, high-ash thermal coal. This means that about 54 percent of the coal the mine produces would be coking coal.
“Hume’s product would therefor be inferior to the higher-quality hard-coking coal produced at other mining operations in the Southern Coalfield. This lower-quality semi-hard coking coal would attract a lower price than its competitors, further eroding the financial viability of the proposal.
“The product split of the proposal exposes Hume Coal to the long-term decline in global thermal coal markets. Meanwhile, coking coal is forecast to see further price declines as world production increases, along with the prospect of declining demand in China.
“IEEFA’s modelling, based on publicly disclosed information in the project Environmental Impact Statement and associated economic study, finds that the project has a negative net present value (NPV) of -A$344m despite highly conservative capex assumptions. With no profits to tax, the proposal’s economic contribution as laid out in the economic study seems highly questionable. The assumption of zero debt funding in the economic study also seems improbable—more likely, debt funding will result in interest deductions and lower taxable profits (if any).
“Meanwhile, the ongoing development proposal process is being overtaken by events back in POSCO’s home nation of South Korea. New president Moon Jae-in has initiated strong policy reforms to permanently lower the country’s reliance on imported coal amid increasing concerns about emissions and pollution. Investment in a high-cost greenfield mine that produces such a high percentage of thermal coal would appear to be in conflict with this policy change.
“Although the proposal may have seemed financially attractive at the beginning of the development process when coal prices were significantly higher, the energy markets of South Korea and the world are changing rapidly.
“This coal project proposal seems to have been left behind in a similar way to those of Adani and GVK in the Galilee Basin, Shenhua’s Watermark, and Lanco Infratech’s now insolvent WA Griffin coal project.
“Given the financial risks and cost associated with the development of a greenfield mine project, it would seem prudent for POSCO to consider the alternative to developing the greenfield Hume proposal: the purchase of an existing, operating coking coal mine.”