Rio Tinto’s (RIO) Energy segment reported an underlying loss of $210 million—compared to underlying earnings of $33 million in 2013. Production records at Hail Creek, Hunter Valley Operations, and Bengalla were driven by significant productivity gains, cost improvements, and benefits from a weaker Australian dollar. They were more than offset by lower prices. This reduced earnings by $434 million.
Focus on lower cost curve position
The Energy segment continued to focus on positioning its assets further down the cost curve through a range of cost, productivity, and revenue enhancements. An aggressive program of cost and productivity improvements delivered $795 million in pre-tax cash savings in 2014 and 2013—compared to 2012. This contributed to the segment’s cash flow generation in 2014.
Other coal producers include Peabody Energy (BTU), Walter Energy (WLT), and Arch Coal (ACI). They reported earnings in January and February. These companies also reported good cost controls. This is important in the weak energy price environment.
Peabody Energy forms 4.53% of the VanEck Vectors Coal ETF (KOL).
Depressed energy prices
In 2014, thermal and coking coal prices continued the declining trend that started in 2011. The trend started after the recovery from the global financial crisis—reaching five and seven-year lows, respectively. This low price environment resulted in a large share of industry production being cash negative. It also resulted in the closure of some higher-cost Australian mines.
During the call, management admitted that it’s a very difficult industry environment. The key focus for 2015 will be progressing the Hunter Blend Project. This is a plan to operate its Hunter Valley assets. It has a fully integrated network of mines, rail, and port.
The aim is to drive network productivity by improving yields and volumes. At the same time, it blends production across mines and pits. It does this in order to enhance the consistency and value of its products. These steps will deliver more cost and production efficiencies. This will further optimize the assets that Rio has in the spine of the Hunter Valley.
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