Coal prices put brakes on Wesfarmers division
Mr Goyder said the wholly owned Curragh metallurgical and thermal coal mine in Queensland's Bowen Basin was highly competitive on the cost curve and "if we're hurting, there are a lot of others hurting as well".
Wesfarmers announced cost-cutting measures in October, including a shift from seven-day to five-day rosters and enforced staff leave during a planned shutdown of its Curragh mine, blaming low coal prices and the high Australian dollar.
Finance director Terry Bowen said Wesfarmers was not making money on the lower-grade metallurgical coals at current prices, after state and private royalties were factored in, and in the current environment for many operators "profitability would be very questionable".
At the former state-owned Curragh, in addition to state government royalties, Wesfarmers is obliged to pay a substantial trailing royalty to government-owned generator Stanwell Corporation, linked to export coal prices and akin to a profit-sharing arrangement.
The royalty was still being paid on the basis of higher coal prices a year ago, due to the lagging effect.
In a swipe at the Queensland government, which increased coal mining royalties in 2012, Mr Goyder said: "A lot of costs have been added, state government royalties have increased, there are a lot of fingers in the pie at the moment."
But Mr Goyder denied coal was a problem division, saying Curragh was a "very, very good asset". Producers could not continue to supply coal below cost, he said: "Ultimately I think there will either be a demand or supply-side response."
Analysts said there was no doubt coal producers were doing it tough, but one said that while Curragh was efficient, after the Stanwell royalty was factored in, "we wouldn't consider Curragh a low-cost operator".
Wesfarmers lowered its production guidance for 2012-13 to 7.5-8 million tonnes, down from 8-8.5 million tonnes, partly due to the Curragh shutdown and partly due to recent high rainfall and localised flooding in the aftermath of ex-tropical cyclone Oswald, which affected mine site production and rail and port availability.
"This revised forecast is subject to no further significant wet weather and the satisfactory recommencement of rail and port operations," said Wesfarmers Resources managing director Stewart Butel.
Wesfarmers said it had concluded price negotiations with most export customers for the March quarter for metallurgical coal and the weighted average price across all grades (hard coking, semi-hard coking and PCI) would rise about 2 per cent, after falling 26 per cent in the previous December quarter.
But the price Wesfarmers obtains for its best hard coking coal fell in the quarter, from $US165 a tonne to $US160 a tonne.
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Wesfarmers' managing director Richard Goyder and finance director Terry Bowen said low coal prices, a high Australian dollar and substantial royalties (including a trailing Stanwell royalty) have squeezed margins. After state and private royalties are factored in, lower‑grade metallurgical coals are not making money at current prices, so profitability across many operators is questionable.
Curragh is Wesfarmers' wholly owned metallurgical and thermal coal mine in Queensland's Bowen Basin. Management describes it as a competitive and valuable asset, but profitability has been hit by weak prices, royalties (including a trailing royalty paid to Stanwell Corporation) and recent operational shutdowns.
Wesfarmers pays state government royalties and a substantial trailing royalty to government‑owned Stanwell Corporation that’s linked to export coal prices. Because the Stanwell royalty is lagged, Wesfarmers was still paying royalties based on higher prices from a year earlier, which reduces current profitability when prices have fallen.
In October Wesfarmers announced measures including moving from seven‑day to five‑day rosters at its operations and enforcing staff leave during a planned shutdown at the Curragh mine, specifically citing low coal prices and a strong Australian dollar.
Wesfarmers said weighted average metallurgical coal prices across grades would rise about 2% for the March quarter after falling 26% in the prior December quarter. However, prices for its top hard coking coal slipped from US$165/tonne to US$160/tonne in the quarter.
Wesfarmers cut production guidance to 7.5–8 million tonnes from 8–8.5 million tonnes due to a planned shutdown at Curragh and disruptions from heavy rainfall and localised flooding following ex‑tropical cyclone Oswald, which affected mine output and rail and port availability.
Analysts acknowledged Curragh is efficient, but when the Stanwell trailing royalty is included they said Curragh would not be considered a low‑cost operator, which undermines margins when coal prices are weak.
Wesfarmers' management defended the longer‑term value of Curragh and Bengalla, calling Curragh a 'very, very good asset' and suggesting producers cannot sustain selling below cost so supply or demand adjustments should occur. Nonetheless, near‑term profitability is pressured by low prices, royalties and operational disruptions—factors investors should watch.
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