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Why Rio Tinto’s Kestrel Ramp-Up Keeps Coal Volumes Going

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Coal volumes

Along with iron ore and manganese, metallurgical coal is a key input in steel production. A sustained rise or fall in coal shipments is a significant indicator that affects the stock value of coal producers (KOL) such as BHP Billiton (BHP)(BBL), Rio Tinto (RIO), Peabody Energy (BTU), Alliance Resource Partners (ARLP), Arch Coal (ACI), and Cloud Peak Energy (CLD). RIO forms 1.7% of the SPDR S&P Natural Resources ETF (GNR).

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Coal production

  • RIO’s hard coking coal production was up 10% YoY to 4 million tons in 9M15 due to improved production rates at Kestrel, which continues to ramp up to its nameplate capacity of ~6 million tons. However, production in 3Q15 was lower than in 2Q15 due to a scheduled longwall changeover at Kestrel.
  • Semi-soft coking coal production was also 15% higher YoY in 9M15, owing to production sequencing at RIO’s Hunter Valley operations.
  • Rio also announced that it had reached a binding agreement for the sale of its interest in the Bengalla joint venture to New Hope Corporation Limited for $606 million.

Coal guidance unchanged

  • RIO expects its share of production to come in at 18 million–19 million tons for thermal coal, 3 million–3.4 million tons of semi-soft coking coal, and 7.1 million–8.1 million tons of hard coking coal. The guidance is unchanged from the previous guidance

Management also commented that coal will be an important part of the overall energy equation for 50 years, and there’s no substitute for coal in the mix in terms of power production at the moment. Though there are many alternatives coming, before they can be viable, they need to reduce their capital costs and operating costs significantly.

For more on coal and coal producers, visit Market Realist’s Coal page.

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