On the pure figures of higher production and prices for coking and thermal coal, Wesfarmers is looking at a big rebound for its resources business for the year to June 30, but there are couple of small bombs that could see the business incur a smaller than expected profit, or even a loss.
Tonnage and prices for the year to June 30 will be higher than the depressed 2015-16 financial year – we saw that at the December halfway mark with a surge back into the black.
The improvement will be despite the impact of Cyclone Debbie on production and exports from the Curragh mine in central Queensland in late March and through April.
The Resources business recorded an operating loss of $310 million for 2015-16 compared to earnings of $50 million reported in the previous year. At December 31 2016 halfway mark, that had turned round decisively with the division reporting earnings of $138 million, $256 million higher than the prior corresponding period, with revenue increasing 24.1%.
The increase in earnings to $138 million was primarily due to significantly higher export sales revenue. Mining and other costs were 14.3% lower, driven by higher inventory drawdowns in the prior corresponding period, and rebate and litigation provision releases of $35 million relating to the Stanwell litigation which was settled during the (December) half.
“Metallurgical coal sales volumes of 4.1 million tonnes were in line with the prior corresponding period despite lower metallurgical production volumes. Steaming coal sales volumes of 1.9 million tonnes were 3.8 per cent higher due to higher contracted deliveries to the Stanwell Power Station,” Wesfarmers said in its interim report in February.
"Curragh continues to be negatively affected by its obligations to the Stanwell Corporation. For the half, these obligations represented a net cost of $74 million, including $30 million of export rebates and $44 million relating to contracted domestic coal that is supplied at below cost. The obligations to Stanwell Corporation will adversely impact earnings through export rebates of $90 million to $110 million,” the company added.
For the 12 months to June 30, coal production rose sharply with a surge in the six months to June (despite the delays associated with Debbie). Metallurgical coal production increased by 12.5% to 8,227,000 tonnes and steaming coal production increased by 16.5% to 3,801,000 tonnes (much of it from the 40% owned Bengalla mine in the NSW Hunter Valley (with New Hope owning another 40%).
For the 12 months to June 30 2017, Wesfarmers’ share of coal production from Bengalla rose 1.6% to 3,437,000 tonnes. Coal prices for the year will be significantly higher than in 2015-16 (as we have seen with the interim figures. Hard metallurgical (coking coal) coal prices hit a peak of $US308 a tonne and then eased to around $US170 a tonne by the end of June.
That compares to just around $US100 a tonne for 2015-16. Thermal coal prices also bounced from around $US45 as tonne to over $US150 a tonne and are now back around $US50 a tonne ex Newcastle (a key global coal pricing point) for coal shipped into China, but contract prices for Japanese buyers are around $US20 to $US30 a tonne more.
In the June quarter Wesfarmers saw a 3.2% drop in coal production during the June quarter, mainly due to the impact of Cyclone Debbie on the rail network in Queensland. Metallurgical coal production fell 10.1% from the previous quarter to 2.04 million tonnes, while thermal coal production – mostly from the Bengalla mine in the Hunter Valley – rose 14.4% to 1.015 million tonnes.
The two small bombs in the results will be the cost of the Stanwell subsidy referred to higher in the story. “For the 2016 financial year, this represented a cost of $148 million, comprising $65 million of export rebates and $83 million related to contracted domestic coal that is supplied at below cost prices,” Wesfarmers said in February.
“For the (December) half, these obligations represented a net cost of $74 million, including $30 million of export rebates and $44 million relating to contracted domestic coal that is supplied at below cost… The obligations to Stanwell Corporation will adversely impact earnings through export rebates of $90 million to $110 million,” fort the year to June 30.
Wesfarmers also said in February it was still reviewing options for the coal business (sale or retain). With coal on the nose, especially after the price surge, Wesfarmers could be a reluctant owner.
The other problem for the bottom line is $72 million of hedging losses that will be taken in the 2016-17 financial year after Wesfarmers stopped hedging its resources revenues in the 2015-16 financial year. The combination of these losses and the Stanwell subsidy will reduce the bottomline to what looks like a smaller profit than first thought.
Wesfarmers shares were up 0.04% at $40.29.
