Overview of Macarthur Coal Company - Case Study Example

Table of contents Table of contents 1 Australia coal industry 2 Overview of Macarthur Coal Company 4 Table 7: MCC joint venture participants 5 Moorvale mine overview 5 Overview of Coppabela mines 6 Macarthur coal company community relation policies 6 Macarthur coal company safety scope 7 Complications in the coal mining industry 7 Works Cited 11 Appendix 11 Table 1: exports markets for Australian Coal by destination for the year 2006-2007 11 Table 2: major coal exporting countries by % 13 Table 3: substantial shareholding of Macarthur coal limited 14 Table 4: share price returns of MCC 14 Table 5: MCC ratio comparison 14 Table 6: MCC comparison with other mining companies 15 Table 7: Macarthur Coal time line 15 Table 8: MCC joint venture participants 5 Australia coal industry Coal mining is the key economic activity in Australia (Tucker, T. & Janis, M. ( Australia Coal Association) 2002). At the moment, the mining of coal in Australia is carried out by many companies like Idemitsu Kosan, Centennial Coal, RAG Australia Coal, Power Coal Limited, Wesfarmers Coal Limited, MIM holdings, Anglo Coal Australia, Rio Tinto Limited, Xstrata PLC, and BHP Billiton Limited. The major coal mining companies in Australia are Anglo Coal Australia, Rio Tinto Limited, Xstrata PLC, and BHP Billiton Limited. The current major coal mining companies in Australia arose as a result of company mergers and change of company management. For instance, BHP Billiton initially was known as BP Australia and over the years has changed business management to BHP Australia, BHP Coal PTY Limited, Coal PTY Limited, BHP Coal PTY Limited and now it is known as BHP Billiton Limited. When BHP Billiton Limited was under the management of BP Australia, there were companies such as Shell Coast Australia, Power Coal, MIM Holdings, Cyprus Amax Coals, Peabody Resources, ARCO coal, Exxon Coal and Oceanic Coal Australia limitedi. Coal mining mergers played a great role in restructuring the Australian Coal industry that was geared towards streamlining management of the Coal industry in order to achieve a reduced operating cost and ensure there was prevalence of remarkable growth through concentration of coal mining and operations. The coal mining mergers strategy was also meant to address declines of coal process. This was streamlined with formation of Australia Coal Association. Mining of coal in Australia has many economic advantages. Some of the economic advantages of coal include first, creation of job opportunities to the Australians directly and indirectly. The Coal industry employs more than 30,000 Australians directly. The coal industry is the greatest foreign exchange earner of Australia. Australia earned $A 22.5 billion in foreign exchange in the year 2006-2007 that was 8% lower than the previous trading year 2005-2006 that saw Australia earn $A 24.5 billion in foreign exchange (table 1). Black Coal accounts for 19 % of Australian total exportsii. Her main export markets are mainly Asia countries that import up to 80% of her total coal exports. The main coal exported is coking coal and steaming coal. The main Asian coal importers are Japan that accounts for 44% coal exports, china, Republic of Korea, Malaysia, Thailand, Turkey and Taiwan (table 2). Coal is used in generation of electricity and as fuel. Burning of coal produces greenhouse gases that significantly contribute to global warming. Australia takes part in reforming world climate change by adopting measures that would eventually lead into decrease of emission of green house gases into the atmosphere. Australia has set up a National Clean Coal Fund to the tune of $A 500 million. She has also set up a National objective for clean coal generated electricity that is expected to enter the National grid by 2020. She also funds CSIRO by $A 25 million that is spread over four years in order to strength her leadership role in research and development of clean coal technologies that will ensure Australia secures her $A 24.5 billion Coal export industry and protects the employment opportunities of her citizens. There is Australian coal industry research program (ACARP) that is a regulatory body that ensures prevalence of high efficiency in the coal mining and makes follow up to ensure all companies operations satisfy and subscribe to occupational health and safety legislation of Australia. It is responsible for ensuring social impacts of coal mining are addressed through appropriate measures in order to rehabilitate the mining sites and reclaim back the land. This milestone is achieved through community partnership in the land rehabilitation process. The research firm has developed diesel driven engines that are used in underground mining because of safety reasons and need for compliance with occupational health and safety legislation. Overview of Macarthur Coal Company Macarthur Coal Company was found by Ken Talbot (table 7). It is an international public company that is based in Queensland and operates at Queensland Bowen basin. She was listed in the Australian Stock Exchange on 1st July 2001. She carries out coal mining with specific specialization in coal production and coal exploration. The principle product of Macarthur Coal Company is low volatile pulverized Coal Injection (PCI) that is a raw material in the steel industry. She also produces metallurgical coal and thermal coal. Macarthur Coal Company has two major mining assets that are Coppabela and Moorvale mines. The other coal mining asset is located at Middlemount mines. Macarthur has a coal exploration tenement holding which is a project pipeline for development of new mines. Her coal exploration tenements are held in unincorporated joint ventures. Table 7: MCC joint venture participants Parent company Joint venture participant % interest Macarthur coal ltd Coppabela coal Pty ltd 73.3 CITIC CITIC Australia Coppabela Pty ltd 7.0 Sojitz Corporation Winview Pty ltd 7.0 Marubeni Corporation Mapella Pty ltd 7.0 JFE shoji trading corporation KC Resources Pty ltd 3.7 Nippen Steel Trading Co ltd NS Coal Pty ltd 2.0% Moorvale mine overview Her coal mining tenements are ML 70290, ML 70291 and MLA 70319. Moorvale mines are located 156 Kilometres southwest of Mackay. The main coal types mined are low volatile PCI coal and thermal coal. Her mining lease was granted in December 5th 2002 and overburden removal was started in December, 2002. She completed her Greenfield development prospects into a coal producing mine within 12 months. The first coal was mined in March 2003 and on December 6th; the first coal train left the mine. Between December 6th and March 2003, coal was trucked to Coppabela mines. This awaited completion of Moorvale mine rail loop. Mining operations at Moorvale mines are carried out by Leighton contactors Pty ltd while coal handling and preparation plant are carried out by Sedgman Limited. Overview of Coppabela mines The Coppabela coal mining tenements are ML 70161, ML 70163, ML 70164, ML 70236 and ML 70237. Coppabela is located 140 kilometres southwest of Mackay. There are two types of coal that are present at Coppabela mines. These are low volatile PCI coal and ultra low volatile PCI coal. Coppabela mines mining operations are carried out by Macarthur Coal Ltd while her coal handling and preparations are carried out by Sedgman Coppabela joint venture. Coppabela mining lease was granted on June 1st 1998. She completed her Greenfield development prospects into a coal producing mine within 12 months. Overburden removal at Coppabela mines started in July 1998 and the first coal was mined in October 1998. Macarthur coal company community relation policies Macarthur coal mine makes significant contributions to the community through sponsorship and donation programs to the community where she operates as well as paying her royalties, taxes and providing employment opportunities to the community members. Macarthur Coal Company is very open in her operations and has responsibility attitudes towards company’s impact to the environment by setting up a climate change policy in order to align herself with efforts towards reduction of greenhouse effect. All staff at Macarthur Coal Company enjoy environmental awareness training program as an induction course. The induction training course covers waste management, water management, weed and pest management, cultural heritage issues as well as environmental incident reporting guidelines. Macarthur coal company safety scope Mining operations at Coppabela and moorvale are carried out according to site specific environmental impact statements, environmental management overview strategies, plans of operations and management plans. Each of her operating plans are approved by the environmental protection Agency (EPA). EPA also approves any changes that Macarthur Coal Company makes before they are finally implemented. Complications in the coal mining industry Although coal mining is a key economic activity in Australia, it struggles through many challenges that negatively affect the coal industry. Coal is transported to main ports through railway network. The main rail network, Hunter Rail Network is overstretched to full capacity because it serves the coal freight, passengers’ freight, grain freight as well as non-coal freights. Priority of use of the Hunter rail network is given to passenger freight, grain freight and non-coal freight. The demand for rail network exceeds rail capacity (CEDA 2005:25). For instance New Castle port, that is the largest export outlet for coal is served by Hunter Rail Network that serves passenger, grain and general freight is always operating at full capacity. At the same time, the existing ship loading has exceeded capacity and this causes delays. This calls for an extra shipping facility and development of infrastructure to support the new shipping facility. There is also a challenge of draughts that makes the ships to leave the New Castle port less full. At the same time, ship movement is restricted and this could be addressed by dredging the port. Port Kembla that is the exit port for the highly valued coking coal is characterized by limited rail paths. Port Kembla handles all exports from southern and western coal mining fields and traverses Sydney Metropolitan passenger network. The coal freights have restricted times when they cross the Sydney Metropolitan network and this affects movement of coal to the port. The coal that is railed via port Kembla also faces access charges when the freight traffic is low as compared to other ports like New castle. The cost of haulage into the Kembla port is very high when it is compared to other ports. The rail network serving port Kembla need review in order for expansion to be implemented. The review of the railway networks should identify deficiencies in the rail infrastructure and help to ease coal transition in road to rail transportation network. This will help to revitalize the decreasing coal exports that have occurred recently due to congestion of the Hunter rail network. There are also concerns from the community for the coal to be transported through the rail network owing to coal dust that can lead to respiratory illness. The coal industry also faces the challenges of costs incurred as the products move from one jurisdiction to another that is very high and reduces the profits of the coal companies. There is also decreased common wealth funding of rail network especially regional and inter-state rail infrastructure. Funding priority is given to inter-state and intra-state roads. This means development of the rail infrastructure has not kept pace with the development of road infrastructure. This therefore calls for review of the railway infrastructure capacity and railway logistics in order to improve the rail networks and solve the delay issues that are caused by reliance on the Hunter rail network. Expansion of rail network would therefore lead into faster movement of coal products to the port and vice versa. A freightline that is being laid down by Australian Rail Track Corporation (ARTC) from Macarthur to Metropolitan freight will help to minimize coal transport disruption that arise as a result of more priority on non-coal freight. The coal mining companies also pay road upgrade levies and road development costs that increases cost of production of the coal and reduce their profits. The pricing levels for the rail is controlled by an independent pricing and regulatory tribunal; of New South Wales. The coal industry also faces truck and train load restriction. This measure is meant to ensure the roads are durable as roads wear out fast if they are subjected to higher weights of trucks. There is also decreased steel that is needed to manufacture dump trucks. The industry also faces supply challenges in terms of accommodation facilities of workers on the mine sites. There is also skilled manpower shortage that is affecting the coal industry. This means new and upcoming coal industries may fail to take off due to lack of skilled personnel. This trend of skill finite has made coal companies to increase fresh graduates’ entry salary and has seen many coal companies strategize towards staff retaining through enhanced employee benefits like training, less working hours and insurance costs. The coal industry is at cross roads of high prices of labor in the spirit of getting right candidates. There is also high demand for engineers, laboratory technologists, supervisors and specialists in occupation health and safety. The industry faces the challenge of environmental activists who are concerned about environmental; impacts of coal mining as responsible for fueling global warming via her greenhouse gas emissions into the atmosphere. The Kyoto protocol on environmental management to combat greenhouse emissions considers that the economic cost of climate change is far greater than the cost of reducing green house effect and this affects negatively Australian economy. Rains and floods also reduce the exploration efforts of coal and also affect rehabilitation schedules. Macarthur coal limited also faces infrastructure limitations in its aspirations to export her coal via the rail network. Her shipping programs are therefore distorted especially Bowen basin. This is because Macarthur’s coal limited proposed shipping requirements far exceed the rail network and port capacity and this is responsible for demurrageiii. Macarthur coal limited faces challenges of flooding of her mines especially Coppabella and Moorvale. This phenomenon made her to declare Force Majeure following QLD flood (Macarthur Coal limited 2007). Works Cited CEDA. (2005, April). infrustructure: getting on with the job. pp. 25. Macarthur Coal limited. (2007, January 25). Macarthur declares force Majeure after QLD flooding. Asiapulse news . Tucker, T. & Janis, M. ( australia Coal Association). (2002, November). Consolodation in the Coal Industry. Appendix Table 1: exports markets for Australian Coal by destination for the year 2006-2007 Destination Metallurgical Coal Thermal coal Total % Total Asia Countries Japan 49.3 58.9 108.2 44.2 Korea (Rep. of) 13.5 14.7 28.1 11.5 Taiwan 6.7 17.4 24.1 9.8 China 2.3 3.7 6.0 2.4 Malaysia 0.0 3.5 3.5 1.4 Thailand 0.0 3.1 3.1 1.3 Turkey 1.6 0.0 1.6 0.6 Other Asia 1.0 1.3 2.3 0.9 Total Asia 94.4 102.9 197.3 80.6 Europe Netherlands 6.6 0.5 7.1 2.9 France 4.1 1.1 5.5 2.1 United Kingdom 4.3 0.8 5.1 2.1 Spain 2.9 0.8 3.7 1.5 Italy 3.1 0.0 3.1 1.3 Germany 2.1 0.0 2.1 0.9 Belgium/Luxemburg 1.6 0.0 1.6 0.7 Sweden 1.0 0.1 1.2 0.5 Other Europe 0.6 0.6 1.2 0.5 Total Europe 26.4 4.0 30.4 12.4 Other Brazil 5.8 0.4 6.2 2.5 Mexico 0.5 5.6 6.1 2.5 South Africa 1.5 0.0 1.5 0.6 Chile 0.6 0.7 1.3 0.5 other 1.7 0.4 2.1 0.9 Total other 10.1 7.1 17.2 7.2 Total 2006-2007 130.9 114.0 244.9 100.0 Total 2005-2006 117.8 114.8 232.6 Change % 11.1 -0.7 5.3 Total value $A Millions Total 2006-2007 15,399 7,084 22,483 Total 2005-2006 16,806 7,668 24,474 Change % -8.4 -7.6 -8.1 Average value $A tone 2006-2007 117.64 62.14 91.80 2005-2006 142.70 66.79 105.23 Change % -17.6 -7.0 -12.8 Source: Coal services PTY Limited Table 2: major coal exporting countries by % Country % share index in 2004-2005 Australia 28.9 Indonesia 14.2 China 11.5 South Africa 8.7 Russia 8.6 Colombia 6.9 United States 5.7 Canada 3.6 Kazakhstan 2.9 Poland 2.6 Rest of the world 6.4 Source: IEA key world energy statistics-2004-2005 edition Table 3: substantial shareholding of Macarthur coal limited CITIC Australia coal PTY limited 20.3900 % holding Accelormittal S.A. and its controlled 19.9000 % holding POSCO Australia PTY limited 10.0000 % holding Source: Aegis Equities Research PTY limited; CAN 085 293 910 Table 4: share price returns of MCC 3 months share price returns % 6 months share price returns % 12 months share price returns % MCC -62.0915 -57.6042 -14.0741 Sector -36.8561 -40.0766 -42.2629 Market -22.2650 -28.4411 -41.7252 Source: Aegis Equities Research PTY limited; CAN 085 293 910 Table 5: MCC ratio comparison Year MCC Sector Market P/E (x) FY 07 19.0 10.8 12.5 FY 08 21.5 9.2 11.5 Yield (%) FY 07 3.1 2.4 5.2 FY 08 2.9 3.1 5.4 EV/EBIT (x) FY 07 15.5 8.6 8.2 FY 08 14.7 6.6 7.3 EV/EBITDA (x) FY 07 12.8 7.2 7.0 FY 08 12.0 5.6 6.2 Source: Aegis Equities Research PTY limited; CAN 085 293 910 Table 6: MCC comparison with other mining companies Company Code Last price share($A M Market capitalization($ millions P/E (x) EPS change (%) Dividend yield 07A 08F 07A 08F 07A 08F BHP billiton ltd BHP 27.74 155,483 9.2294 6.1280 4.4484 50.6097 2.7639 4.4074 Rio Tinto RIO 73.00 93,688 6.6993 5.7126 61.5395 17.2738 2.7368 3.0656 Fortescue Metals Group FMG 2.68 9,264 -14.4976 3.7588 N/A N/A 0.9328 8.0224 OZ Mineral ltd OZG 1.02 3,824 8.7107 3.5338 -39.3226 146.4973 9.8522 9.8522 Macarthur Coal ltd MCC 5.80 1,421 21.4538 3.4231 -11.2951 526.7376 2.9310 13.1897 Source: Aegis Equities Research PTY limited; CAN 085 293 910 Table 7: Macarthur Coal time line year Month Event description 1996 December Ken Talbot and ANICI entered into tenement EPC %#! 1997 April 10 metre thick coal seam that is currently called Macarthur seam was discovered 100 metres deep 1997 October Mining lease application (MLA) and EMOS lodged with department of mines and energy 1997 October Coppabela Joint venture(JV) was formed 1998 June Coppabela mining lease was granted 1998 1st October The first Coal was mined at Coppabela mines 1998 6th November The first shipment of 18,293 tonnes of Coal took lace to Nippon steel 1999 Financial Year Total production of 7,000,000 tones reported 2001 22nd February Macarthur Coal limited was incorporated into Australian Stock Exchange 2001 July 1st IPO offered 2002 December Moorvale mining lease was granted 2003 March First Coal mined from Moorvale mines 2003 11th December Coppabela and Moorvale JVs unified 2006 Financial Year Total production 7,000,000 tones reported 2006 1st December Acquisition of peter champion mining assets took place 2007 January Nicole Hollow was appointed CEO Source: Macarthur Coal Company Reports Read More