Peabody targets Mongolia coal to lift China exposure

MELBOURNE Fri Oct 26, 2012 4:06am EDT

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MELBOURNE (Reuters) - Coal miner Peabody Energy (BTU.N), eager to tap Mongolia's massive coal resources, said on Friday it expects to resume talks with the government in early 2013 over acquiring a stake in the undeveloped western block of the Tavan Tolgoi deposit.

Peabody was part of a consortium that won a bid last year to develop west Tsankhi in the remote South Gobi desert, but the bid process was rejected by Mongolia's National Security Council after bidders from Japan and South Korea cried foul.

In the interim, state-owned Erdenes Tavan Tolgoi has invited Peabody to discuss infrastructure ideas to develop Tavan Tolgoi efficiently and provide management services, which Chief Executive Gregory Boyce said boded well for its prospects in Mongolia.

"There's no guarantee in these discussions, but we view it positively that they recognize our skill sets," Boyce said in an interview with Reuters in Melbourne.

Peabody held a 24 percent stake in the consortium that won the bid to develop west Tsankhi, along with China's state-controlled Shenhua Group SHGRP.UL and a group led by Russian Railways, and Boyce said there was a possibility it may win a slightly bigger stake.

"Our preference would be to have a role in mining and have an equity component in the project. We think that's the best way to align the interests of ourselves, our partners and the government, and that's still the structure that we're working towards," he said.

Peabody is targeting Mongolia to increase its exposure to its giant neighbor China, where the company sees coal imports doubling to around 425 million metric tons between 2011 and 2016.

Boyce shrugged off Mongolia's sensitivity about Chinese control over its resources, as reflected in stiff political opposition to Chinese state-controlled Chalco's (2600.HK)(601600.SS) recently scrapped plan to buy a majority stake in SouthGobi Resources (SGQ.TO)(1878.HK).

He views Shenhua's role in the west Tsankhi consortium as an advantage rather than a hindrance to the consortium's bid.

"Mongolia recognizes that the natural market for their products is China, so they seem very comfortable, as they did (in) the last go around with the consortium that we've put together. So we don't see that as an issue," Boyce said.

AUSTRALIA LOSING COMPETITIVE EDGE

While looking to expand into Mongolia, Peabody's growth outside the United States has been driven by its expansion in Australia, where it took over Macarthur Coal for A$4.9 billion a year ago.

It has since been hit by a downturn in Chinese demand and escalating operating costs and new taxes in Australia, compounded by the impact of a persistently strong Australian dollar, on top of woes in the United States, where cheap natural gas has replaced coal at many power stations.

"Australia should be ideally positioned to continue serving Asia's growing demand centers for decades to come. But the reality is that Australia has started to lose its competitive edge," Boyce said in a speech.

His remarks echoed recent comments by bigger rival BHP Billimetric ton (BHP.AX) urging the Australian government to work with the industry to find ways to ensure the resources industry remained competitive over the long term.

Like its peers, Peabody has been forced to rein in spending, and has cut its capital spending plan for this year by up to a fifth to between $1 billion and $1.1 billion and expects capital spending next year to be at or below this year's level.

It has cut its coal output target in Australia to 40 million metric tons in 2015 from an earlier target of 45-50 million metric tons as it has put on hold plans to expand its Metropolitan coking coal mine, Wambo thermal coal mine and Codrilla pulverized coal injection project.

"What we're going to have to see is the market turn back up for those capital investments to move forward," Boyce said.

U.S. coal miners have stepped up exports this year as demand slumped at home, with exports expected to reach 100-110 million metric tons this year.

Even with an expected rebound in coal demand as natural gas prices have picked up, Boyce said coal exports were likely to continue growing when Asian coal prices recover.

"If we see a return to previous price levels in the Pacific Rim for thermal coal and/or metallurgical coal, you will see an increase in U.S. exports, even though the U.S. market is starting to improve," Boyce said.

(Editing by Ed Davies)

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