MAY 2015 - VOLUME 24 NUMBER 5 · MAY 2015 - VOLUME 24 NUMBER 5 ... MineSight is built for your...
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JoyGlobal.comSurface and Underground Mining Solutions
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MAY 2015 - VOLUME 24 NUMBER 5
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03 Comment
05 Coal News
10 Industry View: Threat Or Opportunity?Dr Thomas Hillig, THEnergy, Germany.
Regional Report: Russia and the CIS
12 A Game Of RiskAmy Gibbs and Daisy Jackson, JLT Specialty, UK, consider whether there is an opportunity to be seized if mining investors are prepared for political risks in Russia and Kazakhstan.
Longwall Mining
17 An Objective SelectionDavid McMillan, RungePincockMinarco, Australia, outlines an objective approach to optimising longwall panel width.
23 The Automation ConnectionJim Haughey, Joy Global, USA, examines the link between integrated longwall systems and increased safety and productivity.
29 Roadheading In SafetyA group of five companies led by IBS Mining and Tunnelling have developed a new roadheading system designed for use in mines prone to gas outburts. Jonathan Rowland visited Bischofsheim to find out more.
Underground Mine Ventilation
35 Reliable Ventilation ModellingThomas Imgrund, Axel Studeny and Artem Zitzer, DMT GmbH & Co. KG, Germany, explain how merging geotechnical assessment and ventilation planning is the key to reliable ventilation modelling.
Mine Dewatering
40 Water: Nuisance, Hazard Or Opportunity?Gareth Digges La Touche, Golder Associates UK, and Peter Lemke, Golder Associates Inc. (USA), discuss coal mine dewatering options.
Dust Control
45 When Dust StrikesDaniel Marshall, Martin Engineering, considers the best dust prevention methods in coal handling operations.
49 Fog And Fence: Capturing Fugitive DustRichard Posner, Dust Solutions Inc., USA, examines how coal mine operators can use dry fog systems and wind screen systems to control fugitive dust.
Flow Control
53 Intelligent ActuationMark Clark, Rotork, UK, discusses the application of intelligent valve actuators in the coal mining industry.
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Jonathan Rowland – [email protected]
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Michael King Ng Weng Hoong
CommentAs I write this, millions on Britons are voting in the
UK General Election. Final opinion polls have placed the two biggest parties – the Conservatives, who have been in power with the Liberal Democrats for the last five years, and Labour – neck and neck. But the biggest feature of this election has been the rise of smaller parties that has fractured the UK’s traditional two-party system.
The result is thus difficult to call and I’m not going to try to do so here. But whatever the outcome, the new government will be faced with difficult decisions to make over the UK’s energy future – particularly with COP21 coming up in Paris later this year. Unfortunately, little detail had emerged from the campaigns as to what the various political parties plan in this area.
There have been some broad outlines of policy. All of the main parties support meeting the existing climate change agreements, for example. But Labour and the Liberal Democrats would push that further with a commitment to decarbonise the electricity sector by 2030. The Conservatives, meanwhile, would end the public subsidy for onshore wind farms and allow local people to have a final say on wind farm applications – a sop to their traditional voters in Middle England who have a NIMBYish dislike for such installations.
In terms of coal, Labour have said they would create an Energy Security Board to plan and deliver a diverse energy mix, including both carbon capture and storage and clean coal. But that is the extent of coal’s role in the party manifestos. Add this however to the pledge signed by the leaders of the Conservatives, Labour and the Liberal Democrats earlier this year “to end the use of unabated coal for power generation” and it seems the death knell is being sounded for traditional coal-fired power generation in its spiritual homeland. Only the right-wing populists of the United Kingdom Independence Party remain open in their support of coal.
Yet energy bills have been a feature of the election with Ed Milliband, Labour’s leader and pretender to the keys of 10 Downing Street, promising a freeze on energy bills until 2017. This reflects the widespread disdain the British public has for energy firms – only bankers come in for more ire – but how Labour would balance this desire to reduce bills while building a low-carbon economy is far from clear. Meanwhile the Conservatives’ idealisation of fracking as some sort of panacea to the UK’s energy problems is only marginally better thought through.
And there is the rub. The UK energy industry needs more than acts of gross populism mixed with dreamy green ideals. But for too long, this is what has counted for energy policy here. It would be great if this election was to change that. But I’m not holding my breath.
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5 | World Coal | May 2015
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Coal NewsCoal production at the world’s
largest mining companies remained strong in 1Q15 despite the continued low prices. According to their quarterly production reports, BHP Billiton, Rio Tinto and Glencore all saw y/y increases in output, while Anglo American’s thermal coal production was also up. Vale was the only one of the Big Five to announce a fall in production.
Record metallurgical coal output for BHP BillitonThe world’s biggest mining company, BHP Billiton, led the way with metallurgical coal production spiking 14% y/y to a record 38 million t for the three quarters to March 2015. The company also raised its production forecast for the 2015 fiscal year (ending June 2015) to 49 million t – 4% higher than its original guidance.
On the thermal side, output grew by 2% to 56 million t with guidance for the full year remaining at 73 million t. “Our teams continue to exceed expectations and deliver strong operating performance,” said BHP Billiton CEO, Andrew Mackenzie, in response to the production report. “Our commitment to sustainably improve productivity and lower costs is helping mitigate the impact of subdued commodity prices and supporting returns for our shareholders”.
BHP Billiton shareholders also approved the demerger of South32 at simultaneous shareholder meetings in London, UK, and Perth, Australia, voting 98.05% in favour of the move.
Jac Nasser, BHP Billiton’s Chairman, welcomed the overwhelming support for the demerger plan, saying it would “create two successful companies in BHP Billiton and South32.” Shares in South32 are expected to begin trading on
the Australian Securities Exchange (ASX), Johannesburg Stock Exchange (JSE) and London Stock Exchange (LSE) on 18 May.
Rio Tinto and Glencore also raise production Rio Tinto also announced an increase in metallurgical and thermal coal production. Hard coking coal output stood at just over 2 million t for 1Q15, 10% higher than the same period in 2014 and 22% higher than 4Q14. Semisoft and thermal production was up 4% y/y at 5.7 million t.
The company expects production for the year to stand at 7.1 – 8.1 million t of hard coking coal, 3 – 3.4 million t of semi-soft coking coal and 18 – 19 million t of thermal coal.
Rounding out the top three, Glencore announced a 4% y/y increase in thermal coal output as the newly commissioned Tweefontein Optimisation and Wonderfontein projects in South Africa were ramped up. This new production saw the company’s output in the Rainbow Nation jump 10%, more than offseting the closure of higher-cost operations.
Elsewhere, the Swiss-based company’s production was steady with Australian hard coking coal production of 1.5 million t and thermal/semi-soft coking coal output of 14.3 million t – both in line with 1Q14. In Colombia, output at Prodeco rose 4% to 5.4 million t, while the company’s share of Cerrejon production was slightly up at 3 million t.
Anglo American drops output and looks to sell assetsAnglo American’s metallurgical coal production dropped 17% in the quarter on the back of the closure of its
Peace River operations in Canada and disruption to its Dawson operations in Australia caused by tropical storm Marcia. Ongoing equipment design issues also continued to hit output at the Moranbah mine with the company hoping that these will be resolved following a planned longwall move in 3Q15.
In South Africa, production of thermal coal for export grew 5% y/y to 4.3 million t, but production for Eskom – South Africa’s state-owned utility – dropped by 6% to 7 million t due planned output reduction at the Kriel mine and decreased demand for New Vaal coal.
The company’s full year production guidance remains the same at 20 – 21 million t of metallurgical coal and 28 – 30 million t of export thermal coal.
Meanwhile, the company’s CEO, Mark Cutifani, said that it remained in talks with Eskom and the South African government over the sale of some of its South African coal assets. Outlining the company’s divestment strategy at its annual general meeting, Cutifani also said it was “making progress” on the sale of a number of its Australian coal assets.
Mozambique rainy season hits Vale’s Moatize mineFinally, Vale – which has the smallest coal business of the large diversified miners – announced a drop in coal production of 5.1% on 1Q14 and 26.6% on 4Q14. This followed the closure of its Integra and Isaac Plains operations in Australia and an abnormally wet rainy season in Mozambique, which prevented access to certain sections of the Moatize mine. Overall, the Brazilian company produced 1.7 million t of coal in 1Q15 at a loss of US$128 million – which was still an improvement on the US$204 million loss it suffered in 4Q14.
INTERNATIONAL Global mining companies announce strong coal production in 1Q15
6 | World Coal | May 2015
DIARY DATESAustmine 2015
19 – 20 May 2015Brisbane, Australia
www.austmine2015.com
Coal Transportation Africa Summit19 – 20 May 2015
Johannesburg, South Africawww.intelligencetransferc.co.za
Coaltrans Poland25 – 26 May 2015
Gdansk, Polandwww.coaltrans.com/poland
Asia Mining Congress 201525 – 27 May 2015
Singaporewww.terrapinn.com
Aachen International Mining Symposium27 – 28 May 2015Aachen, Germany
www.aims.rwth-aachen.de
Coaltrans Asia7 – 10 June 2015
Bali, Indonesiawww.coaltrans.com/asia
Longwall USA 201516 – 18 June 2015
Pittsburgh, USwww.longwallusa.com
Mining on Top: Africa24 – 26 June 2015
London, UKwww.miningontop.com/africa
AIMEX 20151 – 4 September 2015
Sydney, Australiawww.aimex.com.au
The Bluefield Coal Show16 – 18 September 2015
Bluefield, West Virginiawww.bluefieldchamber.com
Coal Association of Canada Conference16 – 18 September 2015
Vancouver, Canadawww.coal2015.ca
The Australian Mine Ventilation Congress30 September – 2 October 2015
Sydney, Australiawww.austminevent.com.au
Coal News
Co
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G VK Hancock has criticised the latest court bid to halt
development of its Alpha coal project in Queensland, claiming it is putting thousands of potential jobs at risk.
“Our Galilee Basin projects will create around 7000 jobs during construction and around 4000 direct operational jobs for the 30+ years of operations,” the company said in a statement.“Through flow-on economic benefits, these projects represent the creation of over 20 000 direct and indirect jobs and over AUS$44 billion in taxes and royalties to state and federal governments. Delaying or seeking to stop the development of the Galilee Basin will not
change global demand for thermal coal, it will only push developments and benefits offshore to other countries.”
The latest challenge has been brought by conservation group, Coast and Country, which is challenging last year’s Land Court recommendation that the state government either reject the mega-mine outright or approve with strict conditions. According to Coast and Country lawyers from the Environmental Defender Office, the Land Court should not have recommended both refusal and approval with conditions, but should have recommended the mine be refused outright “on the basis of its impacts on groundwater”.
The Prospectors & Developers Association of Canada (PDAC)
welcomed 23 578 attendees from over 100 countries to its annual convention, which took place in Toronto in March. The crowd included investors, analysts, mining executives, geologists, government officials and students, who all made the annual pilgrimage to the Metro Toronto Convention Centre (MTCC) for the largest exploration and mining event in the world.
“We consider this a very successful year, attendee feedback has been extremely positive and the number of attendees is similar to last year,” said PDAC President, Rod Thomas. “The quality of networking and learning opportunities continues to be a prime attractor for attendees.”
The PDAC 2015 Convention started with a series of positive announcements supporting Canada’s mineral exploration and mining industry, including the federal government’s renewal of the Mineral Exploration Tax Credit (METC) and the appointment of Jeffrey Davidson as
Canada’s Corporate Social Responsibility (CSR) Counsellor for the extractive sector. The federal government, in partnership with the Ontario government, jointly announced the study of an all-weather transportation corridor in the Ring of Fire region. In addition, the government of Canada signed a memorandum of understanding with the government of South Africa during PDAC 2015.
“The provincial and federal governments in Canada are important partners in creating conditions that allow the mineral industry to flourish nationally and internationally,” said PDAC Executive Director, Andrew Cheatle. “We look forward to further building upon the constructive activities that occurred at PDAC 2015.”
Now in its 83rd year, the PDAC Convention is more diverse than ever before, including events such as the CSR Event Series, the Aboriginal Programme and the Investors Exchange. The convention will be back in Toronto next year from 28 February to 2 March.
AUSTRALIA Alpha coal project faces further court challenge
CANADA PDAC Convention attended by over 23 000
5001764A AEL Mining World Coal FA.pdf 1 3/27/15 1:59 PM
Coal News
The monsoon and coal demand
in India
A strong El Niño could negatively impact monsoon rains in India, hitting hydropower generation and increasing the country’s reliance on imported coal this summer, according to analysis from global commodities broker, Marex Spectron.
A call for five-point plan to facilitate
a low-carbon economy Peabody Energy’s Executive Chairman, Gregory Boyce, has proposed a five-point plan to help resolve the US electricity crisis, put energy policy back on track and accelerate a transition toward a low-carbon economy
A second Cat EL3000 in
Narrabri North mine
After setting a new production record of 5.659 million t last year, Whitehaven Coal’s Narrabri North mine ordered a second Cat® EL3000 longwall shearer and a second Cat BSLPF6 stage loader for delivery in August this year.
Martin Engineering explains the
benefits of its external wear liner Martin Engineering has redesigned an integral conveyor transfer point component to eliminate worker entry into the chute box for safer replacement, easier maintenance and reduced downtime.
Siwertell shipunloaders delivered
to Port of Immingham
Siwertell has completed delivery, installation and commissioning of two Siwertell shipunloaders at the port of Immingham, UK. The ABP-owned port will use the unloaders to discharge wood pellets and coal to supply the Drax power plant.
South Africa’s coal mining industry
A new country analysis brief from the US Energy Information Administration provides an overview of the South African energy market with its heavy dependence on coal to meet its growing electricity demand, as well as its sophisticated coal-to-liquids industry.
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10 | World Coal | May 2015
Ind
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Industry ViewA t first glance, coal is the antithesis of
renewable energy; however, some coal companies are starting to embrace the opportunities offered by solar and wind energy. In India, Neyveli Lignite Corp. has said it will invest US$82 million to build 25 MW of solar photovoltaic (PV) and 55 MW of wind capacity, while Coal India Ltd has announced that it will invest US$1.2 billion in solar projects. Meanwhile in South Africa, Exxaro Resources and Tata Power have formed Cennergi, a joint-venture backing two major wind projects.
Mining companies face strong opposition, which is facilitated by internet communication: ‘Move Your Money UK’ is a national campaign that calls on depositors to move their savings away from five UK banks that support assets in oil, gas and coal extraction. On the investment side, the Rockefeller Brothers Fund has recently joined the divestment movement that has pledged not to invest assets worth US$50 billion into fossil fuels. The direct effect of such divestment is normally limited, but it brings along a significant threat of further stigmatisation of certain segments of the mining sector, making it more difficult to receive credit, reducing the demand for shares, triggering new legislation and complicating permits.
Furthermore, in leading renewable energy markets, such as Germany, solar and wind power cause a severe threat to coal-fired plants. Solar and wind energy are characterised by a high CAPEX and a very low direct costs. In most electricity market designs, this gives renewable energy priority at periods with strong wind or sun. As the share of renewable energy in the energy mix is constantly growing, it will become more difficult to operate baseload power plants profitably. The German utility E.ON has been the first to announce that it will spin off its coal and nuclear activities to focus on
renewable energy; other German utilities are also in a much worse economic position than only a few years ago.
Even though developing countries create a constant appetite for coal, in the medium term, many coal mining companies could lose some of their most important and reliable markets in mature economies. It stands to reason that they are preparing for these tremendous industry changes and reconsidering the definition of their business activities. Does it have to be narrowed down to coal mining or can it be expanded to energy? We see this downstream expansion of the value chain in many other industries.
In other mining disciplines, we already see solar and pilot plants that contribute to power mines. At the beginning of this year, two major announcements triggered huge interest in the topic of renewable energy and mining. Sandfire Resources declared its intention to build a 10.6 MW PV plant at its DeGrussa copper mine in Western Australia. The project would be approximately ten times as big as the largest existing solar-diesel hybrid power plant in the mining sector. Just a week later, South African-focused Sibanye Gold announced plans to build a 150 MW solar plant to gain control of its energy costs, which make up 20% of total costs. It can be expected that this is only one step in a major shift toward renewable energy application in the mining sector.
Renewable energy is indeed a chance for many coal mining companies. It might be for investing into renewable energy or for consuming renewable energy onsite. However, coal mines are normally easily accessible, given that huge volumes have to be transported to their final destination. In the case of lignite, electricity is usually produced onsite. Both factors affect the business case for onsite power generation by renewable energy in a rather negative way. In comparison to other mining
disciplines, the relative consumption of diesel is rather low – or the diesel is rather inexpensive – as transportation costs tend to be low. Nevertheless, coal mining companies can regularly identify interesting business cases for renewable energy pilot projects. Pilot projects are probably the best way to gain knowledge about new energy development, as well as limiting risks.
A recent THEnergy study found that mining companies that actively move towards renewable energy show an awareness that the world around them has changed and that there are threats regarding energy costs and environmental movements. The financial markets reward companies that do not remain captive to the past but instead actively seek new solutions. In this regard it does not matter whether this is about renewable energy investment or solar or wind self-consumption. The use of renewable energy is interpreted by the financial markets as a sign of a flexible and forward-looking decision-making process; mining companies that are first movers in actively integrating renewables into their energy mix are therefore considered as progressive and better managed.
In the medium term, aspiring management can make use of the changed framework conditions if it acts quickly, comes up with greenhouse gas mitigation and renewable energy targets, sets other non-financial performance indicators regarding energy and conceives a comprehensive renewable energy strategy. Ambitious targets and transparency grant first movers many advantages in communication. If substantial measures are taken and financial markets are targeted with the sustainability communication strategy, a positive effect on the market evaluation and stock prices can be expected
AuthorDr Thomas Hillig is the founder of THEnergy.
THREAT OR OPPORTUNITY? Dr Thomas Hillig, THEnergy, Germany
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12 | World Coal | May 2015
May 2015 | World Coal | 13
GAMEAmy Gibbs and Daisy Jackson, JLT Specialty, UK, consider whether there is an opportunity to be seized if mining investors are prepared for political risks in Russia and Kazakhstan.
Since 2014, Russia has been making headline news. The fall in the international oil price, combined with the impact of sanctions, has levelled the economy and dented the country's
GDP growth outlook. Kazakhstan, with its own economic fortunes indelibly linked to Russia, has also suffered. Both countries have recently committed to developing their respective coal industries.
During the commodities supercycle that began in the mid 2000s, a number of countries benefitted from the export of metals and oil, as high international demand continued to be coupled with long-term supply availability. Now, with the supercycle having come to an abrupt close, with prices for metals and oil having fallen dramatically, those countries with an over-reliance on revenues from the extractive industries sector will soon encounter severe economic stress.
The fall in prices for metals and minerals has seen global mining CAPEX reduce significantly. In 2013, when the price of gold began to fall, global mining CAPEX fell by 1%. Last year, that figure rose cumulatively to 2.2%. Those miners with a diversified metals and minerals portfolio have been particularly impacted, resulting in the freezing of projects, asset shedding and the axing of new investments, particularly in countries with heightened levels of political risk. While political risk is commonly accepted by mining
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investors as a routine part of operating in the most high-risk, high-return territories, the fall in prices, combined with the dips in share price that many mining majors have experienced, has made some countries a bet that is no longer worth taking. South Africa fell out of the world's top ten mining investment destinations in 2014, on account of the strikes in the platinum industry. This year will likely see further CAPEX cutbacks, shedding of assets and industry consolidation.
With the price of coal having steadily dropped from peaks in May 2008 to price points previously seen in 2001, coupled with cooling Chinese demand for lower grades of coal, coal exporters, especially those with insufficient domestic demand to offload excess supply to counter falls in global demand (including Australia and Indonesia), have been impacted. Coal mining in Russia and Kazakhstan, however, offers a glimmer of hope. Both the Russian and Kazakh governments are making a concerted effort to put coal mining at the forefront of their investment agendas. With oil prices remaining far below both countries' fiscal and production break-even points, coal mining is set for a revival.
Time for Russia's Plan BBlessed with an abundance of oil, natural gas, coal and gold, Russia was always set to capitalise whenever the global commodities price cycle shifted to an upwards trajectory. As such, Russian economic growth hit new highs when oil prices rose during the supercycle, with energy dominating exports and delivering approximately 50% of government revenue. Coal, traditionally the force behind Russian industry, remained important to the economy both domestically for power generation and as an additional source of export revenue. However, despite vast reserves, Russian production did not outstrip coal export rivals Australia and Indonesia.
Oil and gas were the new gold and Russia was highlighted as one to watch when the term BRIC economies was coined in 2001. However, the global financial crisis in 2008 and the re-election of Vladimir Putin to the presidency in 2012 both exposed governance and economic problems. The Medvedev presidential era failed to usher in modernisation of the economy or a strengthening of the rule of law. As such, Russia has entered a post-BRIC phase, as the economy remains stagnant due to an over-reliance on oil
and gas exports. Efforts to promote economic diversification to buffer against external shocks were not forthcoming and the government did not address investors’ concerns about political risk. Government interference was rife in the energy sector, with the TNK-BP dispute a prime example.
Between 2000 and 2009, although Russia retained its share of the coal export market, it is important to note that coal production had been in decline since the fall of the Soviet Union. Despite a concerted effort to ramp up production since the late 1990s – and despite having proven reserves of 173 billion t, second only to the US’s 263 billion t – Russia fell behind in the coal export race. From 2000, Australian and Indonesian coal exports increased dramatically as China's appetite for coal boomed. Investors raced to invest in both countries, enabling Australia to increase exports from 200 million t in 2000, to 300 million t in 2009. Indonesia boosted exports from 60 million t in 2000, to 260 million t in 2009. Russia meanwhile, only reached 140 million t for export in 2009, an increase of only 95 million t in eight years.
By 2015, with the global price of oil having collapsed, the Russian coal mining industry is set for resurgence. Last year, sanctions were imposed on account of Russia’s role in escalating and prolonging the Ukrainian conflict. In March 2014, the US authorised sanctions on individuals and entities involved in the annexation of Crimea and the seizure of Ukrainian assets. Then, in July 2014, sanctions were ramped up to include Russia’s largest banks and energy companies with sanctions affecting Gazprombank and Vnesheconombank, as well as commodity titans Novatek and Rosneft. While large corporations and financial institutions have borne the brunt of the sanctions, the coal mining sector has taken less of a hit. Securing finance remains a challenge, since the domestic banking market has weakened under the weight of sanctions. However, owing to the dominance of domestic Russian mining players and the strength of domestic demand, the coal industry can weather the storm.
Figure 1. Risk ratings for Russia and Kazakhstan: risks to the mining sector.
14 | World Coal | May 2015
If there was not already sufficient reason for a Russian ‘pivot east’ towards Asia, given that the continent accounts for 67% of coal global consumption, sanctions, the freezing of US and European trade with Russia will simply accelerate this trend. A large number of Asian economies require power infrastructure upgrades to secure sustainable GDP growth over the next decade. Increasing volumes of coal will be required as a result. In addition, despite the fact that Chinese GDP growth has slowed in recent years and that the Chinese government has indicated its long-term commitment to reduce the country's reliance on coal (particularly lower grades), Chinese demand for high-grade Russian coal will increase in the next 10 years. Cleaner energy supplies take time to materialise and, with the global oil price having collapsed, investments in fledgling industries such as shale or renewables, become less palatable. Coal will continue to power China for some time.
With China unaffected by Western sanctions on Russia, the country has an opportunity to significantly increase trade and investment with its neighbour. This trading relationship is further bolstered by the dramatic fall in value of the Russian rouble, which fell by approximately 50% in value over 2014. While the rouble's collapse has severe repercussions across the economy on account of its connection to inflation and given Russia's reliance on imported goods, for the coal mining sector, with the rouble at a low, exports have become more competitive – particularly compared to US coal exports. Russian coal producers have already increased output for export and are likely to increase these volumes further to capitalise on the weakened currency. Between January and November 2014, Russian exports of coal jumped by 8.8%, with Macquarie Bank attributing the jump in exports to an estimated 40% reduction in local currency mine operating costs. As such, it is unsurprising that Chinese-Russian relations have highlighted the coal sector as a key area for future collaboration.
While traditionally the Russian government has prioritised the position of its own coal miners – to the extent that
foreign investment in Russia's coal mining industry is almost negligible – Russian-Chinese joint ventures (JVs), and perhaps Russian-Indian JVs, may start to emerge. With Russian coal producers such as Kuzbassrazrezugol (KRU/UGMK) and Siberian Coal Energy Co. (SUEK), which together account for approximately 40% of Russian coal production, struggling to raise additional capital since the imposition of sanctions, Chinese investment should be welcomed. In September 2014, China’s Shenhua Group and Russia’s Rostech signed a deal worth approximately US$10 billion that will include the construction of coal-fired power plants across the Siberia region. Meanwhile, in February 2015, India's Tata Group announced plans to invest alongside SUEK to develop a range of energy opportunities. In a clear indication of Russia's changing attitude toward foreign investment in its strategic industries, in March 2015 Russia announced that it would consider allowing majority Chinese ownership in Russia's strategic oil and gas fields. Even six months ago, such an about-face on policy for Russia's fiercely guarded energy assets would have seemed near impossible. If Russia is willing to court Chinese and Indian investment in its oil and gas projects, further investments in the coal industry will surely follow.
In addition to foreign investment, the Russian government has also announced its own commitment to invest in the coal mining industry. This is in a bid to free up more of the country’s natural gas reserves for export and to instead use coal to satisfy 31 – 38% of domestic electricity demand by 2020, as well as to capitalise on Asian coal demand. The Russian government has outlined investment plans totalling US$123 billion until 2020 to develop the country’s coal industry, with a focus on developing infrastructure. Mine-to-market infrastructure and the supply chain are increasingly important factors in the success or failure of projects, while coal prices remain relatively low. Russia is geographically well placed for exporting coal to Asian markets, yet infrastructural weaknesses have long weighed on export potential.
Russia’s coal transportation costs are currently some of the highest in the world (between US$80 – 90/t), which has previously prevented Russian exporters from making lucrative spot sales. Upgrades on ports, including Serverniy (which is receiving US$190 million of funding from the Chinese Bank of Development), Primorye and Vostochny, as well as intermodal infrastructure, such as upgrades to highways and the Trans-Siberian railway, will help reduce transport costs and cement Russia's pivot to the east.
The plan will help attract new investment and trade partners across Asia; however, for those coal mining investors that do wish to partner with Russian coal companies, significant political risks remain. While the government has indicated that it is willing to further open up strategic sectors to foreign investment, Russia has a long history of government interference in high profile projects. As a result vital changes to the regulatory environment will also need to be made. For mining investors, the government's insistence of refusing to clarify its definition of what constitutes a ‘strategic mineral deposit’ has been a significant barrier for many Western investors in the past. Investors from China and India will need to be mindful that new projects could be derailed by the government's assignment of reserves as strategic, promoting expropriatory action or contractual agreement repudiation. While such risks can be transferred to the private political risk insurance market, issues such as corruption are more challenging to manage, with the awarding of licences being notoriously opaque and therefore subject to later government interference.
Central Asia: time for a rethink? Kazakhstan and Uzbekistan's coal industries, while not of the same scale as Russia's, still afford opportunities for investors. Kazakhstan's output is expected to hit 150 million t by 2030, as foreign investors are drawn in by the lifting of the moratorium on new mineral exploration licences in April 2013, a stabilisation in the
May 2015 | World Coal | 15
investment code governing the natural resources sector and a falling local currency. Meanwhile, Uzbekistan's US$500 million investment programme in its coal sector is beginning to pay dividends: output increased by 7.5% in 2014 to 4.4 million t. Chinese investment to improve Uzbek coal transport infrastructure has also assisted here.
Kazakhstan, like Russia, has been impacted heavily by the falling global oil price. Given the historic trading ties between the two countries, sanctions on Russia have also had a local impact. Kazakh GDP growth is expected to drop from 4.3% in 2014 to 1.5% in 2015, while government revenues are expected to fall by US$7 billion in 2015. In response, the Kazakh government has made a concerted effort to encourage foreign investment, unveiling a new investment campaign called ‘Invest in Kazakhstan’. Investors can reap the benefits of exemption from land tax, property tax and corporate income tax for the first decade. For the coal sector, the goal will be to boost output. Essential to this will be improvements in the country's transport and power infrastructure.
Mining investments in Kazakhstan can be lucrative, yet have typically been classified as high risk on account of past incidences of contractual agreement repudiation. While the government has recently made a concerted push recently to encourage foreign investment, previously the government has pressurised foreign investors to cede stakes in projects and has implemented higher taxes and royalty payments. The notorious issues surrounding the Kashagan oil project, which took decades to develop and was nearly US$30 billion over budget when it started production in 2013, was indicative of how political risk can derail strategic, high profile investments. For Western investors in particular, growing ties between Astana and Beijing also present possible risks of government interference. In April 2014, exploiting its automatic right to contractual pre-emption, the government pre-empted the sale of Conoco Phillip’s 8.4% stake in the North Caspian Operating Co. to India’s Oil and Natural Gas Organisation, and opted to re-sell it to China National Petroleum Corp. (CNPC). With coal accounting for 74% of
Kazakh electricity generation – and with the possibility of coal becoming an export earner as oil prices remain suppressed – government oversight and scrutiny of the sector will not abate.
All change for risk? While Russia and Kazakhstan are keen to attract new foreign investment, investors must be mindful that both countries have histories of high levels of political risk in strategic sectors, including mining. Political risk insurance offers an effective safety net against license cancellation, selective discrimination (such as tax hikes), currency inconvertibility and transfer risks, expropriation, forced abandonment and loss of equity or default of debt as a result of strikes. While both governments are currently being pragmatic, this is more down to severe economic pressure, as opposed to a genuine shift in attitude towards foreign investors. Investors will therefore need to be wary of a resurgence in resource nationalist tactics, either when commodity prices rise or if either country's economic outlook deteriorates further.
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