Albanese's parting gift to BHP

Rio Tinto's somewhat bungled plan for its Mozambique coking coal has handed BHP Billiton and Australia an opportunity to get back into the coking coal game.

BHP Billiton is surely Australia’s luckiest big company. Had it succeeded in buying Rio Tinto in 2008 it would have bought a $30 billion Alcan writedown; and had the South Australian government not delayed BHP Billiton at Olympic Dam it might have hit further writedowns.

Now it has dodged another bullet – Mozambique coking coal. BHP Billiton is the world’s largest coking coal producer, but BHP Billiton has become a high cost miner, and the cost of constructing new mines and ports in Australia has sky rocketed to uneconomic levels.

Sacked Rio Tinto chief executive Tom Albanese had an ambitious low cost plan to turn Mozambique into the new major force in the coking coal market to eventually challenge BHP Billiton.

Albanese’s vision was that Rio’s Mozambique coking coal would be barged down the Zambezi River and shipped offshore. It was a brilliant low-cost idea, but Africa is not easy. The Mozambique government blocked the Albanese plan supposedly on environmental grounds. I suspect a more 'flexible' operator than the highly ethical Rio Tinto may have achieved the goal, although the Mozambique government wants the coking coal to pay for a massive $12 billion plus rail and port infrastructure plan rather than use the barges. The rail project cannot be justified on present coking coal prices although the Mozambique government is trying to raise the capital.

The proposed high-cost infrastructure made Rio Tinto’s $4 billion purchase of the Mozambique coking coal reserves uneconomic. There also appears to be a question mark over the extent of the reserves. Currently Rio Tinto is mining coking coal in Mozambique then trucking and railing it 600 kilometres to a shallow port. The coal is then loaded on small vessels, which transport it to a floating, loading terminal – it’s high cost.

India’s Tata Steel pocketed $1 billion by selling its stake in the Riversdale company that owned the Mozambique coking coal to Rio Tinto. But Tata also joint-ventured the initial mine and looked to Rio’s Mozambique reserves as a major source of coking coal to satisfy its expansion aims. Tata must now look elsewhere, which will be good for the long-term coking coal price and therefore BHP Billiton.

For BHP to suddenly have a huge low-cost rival sidelined is a massive boost to potential long-term profits.

Of course if Rio Tinto sold its Mozambique coking coal to a group that could deal with the Mozambique government and barge the coal down the Zambezi, then the threat would be renewed.

Meanwhile, if Queensland could reduce its construction costs we might use the current window to get back in the game. To do that will require a break-up of the agreements between the unions and the big construction companies, which see unions effectively, control building sites and who can be sub contractors. Victoria and New South Wales have started on the process and expect to slash construction costs by 25 per cent but Queensland has yet to join the battle (States rise up against Canberra's thumb, December 14, 2012; High stakes in Queensland's emergency rescue, December 18, 2012).

Elsewhere, the Indian consortium GVK and its Australian partner, Gina Rinehart, have won federal government approval to expand the existing Port of Abbot Point for the planned Alpha coal project.

The project is now awaiting a mining lease from the state.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles