Anglo American's (AAL) coal operations are divided into two segments: thermal (based in South Africa with operations there and in Colombia) and metallurgical (based in Australia). Each business contributed roughly 10% of group revenue in the 12 months to June 30, excluding operations Anglo intends to sell. While the firm is coping with currency headwinds that are likely to swell US dollar-denominated unit costs in the back half of the year--both the rand and the Australian dollar have appreciated versus the US dollar in the second half of 2010--strong export market pricing for both thermal and metallurgical coal should offset some of the ill effects of currency movements.
The South African thermal coal industry is fairly concentrated on the supply side, with the top five producers accounting for 81% market share. Anglo ranks as the largest producer, accounting for about one fourth of the country's roughly 260 million tons of annual output. Anglo is followed in the league table by large-cap notables like BHP Billiton (BLT), Xstrata (XTA), and Sasol (SSL). Anglo's South African thermal coal business primarily serves the domestic market. Of the roughly 60 million tons Anglo produces annually, about 60% are sold to Eskom, the country's state-owned power utility, about 10% to other domestic buyers (Sasol and other industrial customers), and 30% to export markets. Owing to differences in coal quality (higher-grade export coal commands higher prices) and less-than-ideal contractual arrangements (all Eskom volume is priced on a cost-plus basis), Anglo's South African export volume tends to be much more profitable than its domestic volume.
Europe has historically been the primary destination for Anglo's export volume from South Africa, although the Continent's share has been dropping because of a number of factors, including competition from Colombian producers, weak European natural gas prices, and rising Asian demand, particularly from India, which now accounts for roughly 30% of Anglo's export volumes. Given India's geographic proximity to South Africa and favourable economic growth trajectory relative to Anglo's European customer base, the subcontinent's seaborne coal demand will be a key driver of Anglo's thermal coal results in the coming years.
Perhaps the most valuable single asset in Anglo's South Africa-based thermal coal business doesn't reside in South Africa at all. This is the Cerrejon operation in Colombia, in which Anglo holds a one-third stake, along with joint venture partners BHP Billiton and Xstrata. While Cerrejon accounts for only a modest share of Anglo's consolidated thermal coal volume (10 million tons of the unit's total 69 million tons in 2009), it generates an inordinate share of the segment's profits because of its export-only orientation: 42% of the total in 2009.
In contrast to some of its other business units, Anglo has less ambitious growth plans for thermal coal for the next few years. At present, the only notable approved project is Zibulo in South Africa, which will add 6.6 million tons to annual volume--half sold to Eskom, half for export. Zibulo is expected to reach full capacity in 2012. This is not to say, however, that the company is lacking attractive internal growth opportunities. Potential projects might include New Largo in South Africa, which would add 14 million tons to annual Eskom sales, and an expansion at Cerrejon, taking the already massive operation from its current 32 million tons (100% basis) per year to 40 million tons per year. At present, neither has board approval, and associated production, if approved, would only arrive many years down the road.
Anglo American's Australia-based metallurgical coal segment is, despite the name, primarily a thermal coal operation in volume terms. In 2009, the business produced 14.8 million tons of thermal coal versus 11.5 million metric tons of metallurgical coal. Given the massive value difference between the two coal categories (metallurgical coal average selling prices averaged $141 per ton FOB in 2009 compared with $74 for export thermal coal and $27 for domestic thermal coal), metallurgical coal sales typically constitute the majority of the top line--roughly 70% in 2009--and are the primary driver of the business' value.
While Anglo is not the largest player in the currently lucrative seaborne metallurgical coal market--it ranks behind BHP Billiton, Teck (TCK), Xstrata, and Rio Tinto--its assets are relatively low-cost (the company estimates 95% of its hard coking coal production resides in the first half of the industry cost curve) and have attractive growth potential. In the near term, this growth will come from the Grosvenor project, which is expected to add 4.3 million tons of annual metallurgical coal capacity by 2013. Beyond that, Anglo has a slew of projects in the pipeline but not yet approved by the board, which would more than double current metallurgical coal volumes within the next 10 years.
See our analysis of Anglo American’s copper, platinum and coal operations.
