Mining giant Glencore is the apparently unwilling recipient of a mining lease for its proposed thermal coal development in Queensland's untapped Surat Basin.
The approval has been 10 years in the making, after the company applied for the leases in 2007 and late yesterday the Queensland government approved three 27-year leases for Glencore's proposed 22 mt/y thermal coal mine.
Development of the Wandoan project was frozen in 2013, Glencore blaming low prices and potential over-supply at the time for the controversial decision, which essentially killed near-term aspirations for other coal developers in the basin.
Due to its planned scale, the Wandoan mine was then and is still today seen as the key to unlocking the Surat Basin as a major coal producing hub, but still requires a rail link to the Port of Gladstone.
Most industry sources who spoke to IHS Energy are skeptical Glencore will actually look to bring the mine into production, even with the granting of the mining leases.
"The talk is rubbish, the economics don't stack up," one industry source said.
"They [Glencore] just spent so much on Rio's Hunter Valley operations, which will make them money from the day they own it, but with Wandoan, it would take them eight years to make their money back, and if something goes awry or the coal price tanks then they don't."
This notion was supported by a senior source within Glencore, who recently told IHS Energy the company's CEO Ivan Glasenberg no longer had any appetite for greenfield coal developments.
Officially Glencore was quick to quash any suggestion that it will rushing to bring the project into development soon.
"We have been transparent with governments and the community since 2013, when the project was placed on hold, that we will continue to assess the project’s timing against the global coal market,” said a Glencore spokesperson.
"Adding significant new tonnes to the market at this time could adversely impact the profitability of existing thermal coal production, potentially putting jobs at risk as the market adjusts downwards as a result of oversupply."
Some industry sources see this latest development as being more about the government trying to wrap up the process and force Glencore to develop the project, or sell it to someone who will, unlocking the Surat Basin and its much-needed royalty streams.
To this end, before the leases were granted, government sources told IHS Energy the ML's would be accompanied by a condition to bring the mine to production within five years.
On the potential for a skive-off by Glencore, government investment sources were coy to confirm the latest development was a significant milestone for the Surat Basin.
"Significant in the sense this 'investment option' has a well advanced rail corridor (Surat Basin Rail) and two coal terminals with plenty of latent capacity available in Gladstone," the source said.
The source also noted the fact that New Hope had three projects adjacent to Wandoan.
"Not suggesting any investment triggers are imminent," the source said, "rather these ML grants will put Surat back on the map for many."
Analyst sources who spoke to IHS Energy said neither Glencore nor New Hope are likely to go into anything alone and would more likely to look to form a joint venture with the customer base to spread the cost.
Most analysts IHS Energy spoke to said any development in the Surat would need coal prices for Newcastle 6,000 KC NAR material to be around the A$95-$100 (US$75-79) range for the development to be profitable.
Despite the fact prices have been hovering around those levels since around October last year, analyst sources say those levels would need to stick for a while before there will be confidence to employ capital.
However one analyst said they saw Wandoan being incentivized into production if prices remained above $70/t based on estimated costs of around US$65-$70/t FOR. This cost analysis is dependent on infrastructure sharing at WICET and doesn't include rail transport infrastructure, which is the major hurdle for the Surat Basin.
Since Glencore applied for the ML in 2007 coal markets have changed dramatically and the company and rail provider will need to revisit previous feasibility work to assess the viability of the mine and the associated rail project, known as the southern missing link.
It is understood that the government is still in the early days of negotiations with the miner and possible rail infrastructure provider Aurizon on feasible options for a rail link.
Other options for a rail link to the Surat Basin are also being discussed, according to sources, but none have really materialized as yet.
Industry views on the merits of opening up the Surat and over time, 50 mt of new thermal coal capacity are widely divergent. Some are concerned this potential volume of coal could cause oversupply and depress prices while others argue it could provide future certainty for supply of low to mid CV coal if Indonesian production levels begin to decline in the next few years.
Others argue there is no need for the development of both the Galilee and Surat Basins.
Adani Australia CEO Jeyakumar Janakaraj dismissed this argument saying he welcomed the development and the project would not be competitors.
“Carmichael coal is destined for our super-critical power plants in India. Wandoan coal will be sold on world markets as part of Glencore’s offering.
“In fact, we are business partners with Glencore and other miners which use our Abbot Point bulk coal port to export northern Bowen Basin production” Mr Janakaraj said.
Marian Hookham is a Senior Manager with IHS Markit.
Posted 9 August 2017