FORBES ASIA
ENERGY BOOST
16 | FORBES ASIA NOVEMBER 2016
Despite the expected flip from
loss to profit, it’s likely Wesfarm-
ers will sell its coal business given
the uncertainty of future profits,
which hinge on volatile prices and
the actions of the Chinese govern-
ment. Beijing played a key role in
triggering a coal-price revival by
imposing production restrictions
on mining.
Those restrictions, which limit the
number of days mines can operate,
are already being eased after the sharp
price increase hurt electricity genera-
tors and steel mills, adding to a belief
that the recent rise in prices could
prove to be as unsustainable as the low
prices early in the year.
Citi analysts, separately, expect the
coking-coal boom to fade, with the
price retreating to around $118 a ton in
the March quarter and then back to $
a ton in the June quarter.
This could be a perfect time for
Wesfarmers to get out of coal if a buyer
can be found for Curragh and Bengalla,
and while Scott demurs on the ques-
tion of a sale, there are hints that the
coal division is prepared for a “value
creation” event.
“We see a number of opportunities
to enhance shareholder value from
operational initiatives at Curragh,” he
says. “We’re targeting costs and have
recently secured development rights
to an adjacent coal deposit that will ex-
tend mine life and create some interest-
ing possibilities in terms of expansion.
If other parties see strategic value in
our assets, we always consider those
options.”
Wesfarmers likely would need to
commit more capital to expand its
coal interests, though by creating
the potential for mine expansion the
value of the asset has been increased,
as has its appeal to a potential new
owner.
The coal revival for Wesfarmers
was a factor in the company’s hitting a
12-month share-price high in mid-
October, up 25% from its low of $27.
reached in November last year.“The previous level of pricing of
around $90 a ton was unsustainable,
and that led to marginal producers exit-
ing the market, such as some American
and Chinese miners,” he says. “We saw
a reduction in investment and a run-
down in inventory which coincided
with wet weather in key mines and
Chinese government policy changes
that led to a shortage of high-quality
coking coal. In my mind it all goes back
to the unsustainable prices of earlier
this year.”
Scott is managing director of the in-
dustrials division of Wesfarmers, a grab
bag of assets that includes chemicals,
energy, fertilizer, safety equipment and
coal, with coal seen as the business least
likely to survive a cull of poor perform-
ers given its operating loss last financial
year of $230 million, a separate entry
in the accounts from that of the $
million asset-value writedown.
Speculation about the future of coal
at Wesfarmers was heightened when
the company’s chief executive, Richard
Goyder, announced in May a review of
the company’s coal assets, which are led
by the 8.5 million-ton-a-year Curragh
coking coal mine and also include a
40% stake in the 8.3 million-ton-a-year
Bengalla thermal coal mine in New
South Wales.
Last year’s coal loss capped a dread-
ful year for Wesfarmers, whose profit
fell 83% fto $305 million, owing largely
to asset value writeofs—including $
million of its Target discount retailing
business. Wesfarmers was a top-per-
forming Fab 50 company in FORBES
ASIA as late as 2011.
Shareholders and management
shared the pain of the profit fall. The
annual dividend was trimmed by 7% to
$1.40, while management took pay cuts,
with Goyder’s the heaviest of all, a 45%
drop to $4.1 million.
Goyder expects better financial
results from Wesfarmers this year, a
view shared by outside analysts includ-
ing Morgan Stanley and Citigroup. Both
tip a profit of $2.1 billion, with Morgan
Stanley expecting a profit from coal of
$220 million.
“It’s hard to forecast the future, but
we would expect better earnings out of
Target and resources [coal] than we’ve
had—we won’t be restructuring Target
and lower depreciation and hedging
losses will help us on resources,” Goy-
der said when the company released its
annual profit result. FKING COAL STIRS
PRICES FOR COKING, USED IN STEELMAKING, HAVE ENJOYED A PARTICULAR LIFT.
50100200300$PREMIUM LOW VOL HARD COKING COAL
FOB AUSTRALIA MONTHLY AVERAGEFOB NEWCASTLE THERMAL COAL
MONTHLY AVERAGE$ METRIC TON10/10 12/11 12/12 12/13 12/14 12/15 9/SOURCE: S&P GLOBAL PLATTS.