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Weak Coal Performance: South32 Might Need to Cut Costs

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Apr. 17 2015, Updated 1:09 a.m. ET

Coal performance weak

The energy and metallurgical coal industry is going through a very rough patch due to the increased supply and weaker demand growth from China and other markets. In March alone, Arch Coal (ACI) lost 23%, Alpha Natural Resources (ANR) dropped 16%, and Peabody Energy (BTU) fell more than 34%. Even Cloud Peak Energy (CLD) lost 27% of its value. Cloud Peak Energy forms 2.8% of the SPDR S&P Metals and Mining ETF (XME).

The outlook for metallurgical coal doesn’t seem very bright going forward. As a result, South32’s coal segment might have to focus on cutting costs to weather the downturn. Now, we’ll look at its assets.

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South Africa Energy Coal—90% interest

South32 will operate four energy coal mines in the Witbank region in South Africa. Out of the total production, about 55% is sold in the domestic market. The rest is exported through the Richards Bay Coal Terminal, mainly to India and China. South Africa Energy Coal is the third largest export energy coal producer in South Africa. It’s in the second cost quartile based on its 2013 production.

Its mines include Khutala, Klipspruit, Wolvekrans, and Middelburg. They have resource lives of 103, 12, 42, and 34 years. They have reserve lives of six, six, 21, and 23 years, respectively.

Illawara Coal—100% interest

Illawara Coal operates three underground metallurgical mines and two preparation plants in New South Wales, Australia. Coal is trucked to BlueScope Steel Limited’s Port Kembla steelworks. Illawarra Coal is in the second quartile of the industry margin curve—based on fiscal 2013 production. Its mines have resource lives of 41, 15, and 43 years. They have reserve lives of 25, two, and nine years for Appin, West Cliff, and Dendrobium, respectively. In fiscal 2014, Illawarra Coal produced a total of 6 million tons of metallurgical coal and 1.5 million tons of energy coal.

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