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Merger cuts $576m costs out of GlencoreXstrata coal

11 Sep 2013

The synergies created by the merging of the coal divisions of the merged GlencoreXstrata would reduce the costs of the combined entity by $567-million in 2014, coal head Peter Freyberg said on Tuesday.

The merger creates the world’s leading seaborne thermal coal business, combining a multi-region, multi-quality production base of more than 120-million tons marketed through the group’s global support infrastructure.

Speaking during a webcast investor day, Freyberg said $65-million of the $576-million saving was the result of corporate restructuring.

“We see a cost reduction of 15% across the business and we are targeting a cost of $50/t free on board (FoB) on average across the thermal business globally,” he added.

The coking coal business aims to reduce its FoB cash cost by 28%.

Backing the business is a strong resource base with close on 35-billion tons of resources on a measured, indicated and inferred basis and 3.9-bilion tons of reserves on a proven and probable basis.

The company will bring on additional production capacity if the returns are right, but focusing on brownfield projects ahead of greenfield projects.

Projects in the pipeline that are being allowed to go ahead include the eight-million-ton-a-year Tweefontein life-extension project in South Africa, which is running ahead of schedule for a 2015 start and is on budget.

South Africa’s black-controlled African Rainbow Minerals is a 30% shareholder in Tweefontein.

With the Zonnebloem project, also in South Africa, right next door to the now integrated Optimum colliery, a tremendous opportunity exists to bring another six-million tons a year on stream without having to invest in wash plants and infrastructure.

South Africa’s 3.6-million-ton-a-year Wonderfontein project will begin producing next year, allowing the combined entity to continue growing over the next few years.

The merging of two operating divisions into one, in Australia, saved $26-million a year, and restructuring businesses in South Africa and Colombia saved a further $20-million-plus.

All underground and virtually all opencast operations now have different rosters and shifts, contributing to the $511-million saving in operating restructurings.

The combined entity is being run out of three operating geographies – Australia, South Africa and Colombia – underpinned by a global marketing footprint.

“We’ve been able to increase our output across our business with far fewer people,” Freyberg told the investor day.

Some 2 700 employees have been retrenched in Australia, where the largest margin crunch was faced.

The net result is that the group has reduced people and increased tons, with the average productivity per employee in Colombia and Australia increasing 21% year-on-year.

“It’s not only about taking out expensive production but also about keeping our focus on operating efficiencies. We’re making sure that our major excavators in our openpits are used to the maximum and are increasing output. We have seen these levels rise 18% in use and 15% in output,” Freyberg added.

GlencoreXstrata coal marketing head Tor Peterson said the current oversupply of coal in the market should be seen against the planned coming on line of 1 600 more coal-fired power stations in 59 countries by 2020.

The oversupply has arisen as a result of take-or-pay commitments in Australia, where there has been an over-building of logistical infrastructure.

“Thirty per cent of world production is cash negative at current spot prices. We believe that’s unsustainable and that the key in coal is going to be quality, arbitrage and an understanding of customer needs,” Peterson added.

The integrated GlencoreXstrata is managing 155-million tons of production a year, 80-million tons out of Australia, 46-million tons out of South Africa and 29-million tons from Colombia.

The company expects to be managing 179-million tons by 2016.

In Australia, 60-million tons of consolidated production is exported with only 5% sold domestically.

Some 48.5-million tons of the exported coal is thermal coal and the rest coking coal or semi-soft coal.

In South Africa, 25-million tons of thermal coal is sold into the domestic market while 20-million tons is exported.

With 30% of global thermal coal being loss-making, the company has been forced to change its growth focus to a margin focus.

All of the operations of the combined entity are in the black in terms of earnings before interest, tax, depreciation and amortisation, except for the Collinsville operation in Australia, which is being mothballed.

The project pipeline has been refined and every single contract and consultant reviewed.

“Also, portions of mines have been stopped where there is uneconomic coal and we’ve had to pull back on expensive production,” Freyberg said.

The implementation of the SafeCoal initiative is expected to yield a 24% safety improvement over last year.

Source: www.miningweekly.com