Wesfarmers big Curragh coal mine in Queensland continues to lose sales and production, thanks to the continuing big wet.
The mine is predominantly a producer and exporter of hard coking coal for the steel industry in Asia, but it also produces and ships a substantial quantity of lower priced steaming (thermal) coal for the power and cement industries, also in Asia.
It is Wesfarmer’s second most profitable business (thanks to very high prices and strong demand) after the Coles Group and Bunnings.
After cutting production estimates two months ago because of the first round of the big wet, the recent heavy rains across central Queensland yesterday forced Wesfarmers to reveal a second cut to forecast production for 2010-2011 from the mine.
The first production cut estimate was made in early October after heavy rain in September.
That saw the company cut estimated production from the 6.5 to 7.0 million tonnes (announced with the final 2010 profit statement) to a lower range 6.2 to 6.7 million tonnes.
That has now been cut further, according to a statement from Wesfarmers yesterday to the range 6 million to 6.5 million tonnes.
This is on top of the force majeure declaration remaining in place since it was announced on December 2.
Xstrata, Macarthur Coal and Aquila Resources and Vale have also been forced to declare force majeure because of the impact of the rain and flooding on their mines.
Wesfarmers said yesterday :
"Recent heavy rain in central Queensland has affected operations at the Curragh mine.
"Heavy rain in the region on 2 December resulted in operations being temporarily suspended due to flood water cutting access roads to the mine.
"Limited mine operations recommenced on 4 December including construction of the new coal handling and preparation plant.
"Mine operations at Curragh, Curragh East and Curragh North progressively returned to normal following the flood peak in the Mackenzie River on 7 December.
"Further heavy rain on 11 December has affected operations, however, all access roads remain open and operations are continuing.
"Production of metallurgical coal from Curragh for 2010/11 financial year will be reduced as a result of the extreme weather conditions in recent weeks."
Wesfarmers Resources managing director Stewart Butel said that while mining operations were returning to normal the rain has had an impact on coal production.
"Curragh’s full year metallurgical coal sales volume is now in the range 6.0 to 6.5 million tonnes, subject to a return to more normal weather conditions for the remainder of the year," said Mr Butel.
"The revised sales volume compares to the recent forecast of 6.2 to 6.7 million tonnes."
Curragh declared force majeure on all export and domestic contracts on 2 December which remains in force.
Mid-year Wesfarmers said Curragh was forecast to produce 6.5 to 7.0 million tonnes of coal (mostly high value hard coking coal)
Early last month, Mr Butel said in a presentation that the October production cut estimate would have cut first half results for the mine by "$80 -$100 million EBIT"(Earnings Before Interest and Tax).
On that basis, the latest cut will be worth a minimum of a further $80 million or so off the bottom line.
The force majeure has so far cost the company at least two weeks exports, or more than 200,000 tonnes of coal, worth more than $30 million at least, and more, depending on the type of coal shipped and to which customer.
All up the impact of the rain on production and exports could be of the order of $200 million before tax.
Wesfarmers’ shares rose 5c to $31.69 yesterday then eased to close down 3c at $31.61 after the update on Curragh was issued.
Footnote: Although the recently floated QR national said last week the recent rain had not hurt its 2010-11 profit forecasts, the cuts by Curragh and other producers because of the force majeure declarations will eventually take their toll.
Customers will be trying to buy replacement coal elsewhere, especially the Japanese steel mills.
If the tonnage can’t be shipped by the end of next June, it might carry over into the new financial year (the steel and coal companies actually work on a quarterly and or March 31 year shipping year).
QR National should really be preparing to make another statement to the ASX, updating the commentary from last week.
