Australian coal miners explore everywhere but home

Fri Sep 27, 2013 3:26am EDT

* Prospectors count on a rebound in coking coal price

* Say majors like BHP, Peabody have cornered Australia

* High costs in Australia also push prospectors to look abroad

* Places like Siberia, Kyrgyzstan offer lower cost base

By James Regan

SYDNEY, Sept 27 (Reuters) - Betting on a recovery in the price of metallurgical coal, at least a dozen Australian prospectors are scouring the globe for mines to dig, locked out of a home market by bigger rivals.

The firms listed on the Australian Securities Exchange with a combined market capitalisation of about A$800 million ($748.68 million) are opting to explore Siberian tundra, South American jungles, Mongolian deserts and other far-flung locations.

Australia has the world's biggest reserves of metallurgical, or coking, coal and is well placed to supply China and Japan, the leading importers of the fuel used in steel making. So why are Australian prospectors heading overseas?

"The coking coal industry in Australia is dominated by the mega companies -- the likes of BHP Billiton Glencore Xstrata, Peabody and Rio Tinto ," said Alex Molyeneux, managing director of Celsius Coal , which is prospecting in the Kyrgyzstan. "And the majors also sit on most new prospective deposits."

Instead of looking in its own backyard, Perth-based Celsius is mapping out a 500-million tonne project in the central Asian country, an unfathomable development in Australia for a company capitalised at only A$50 million.

"There is no high-yield coking coal deposit of a comparable size in Australia in the hands of a junior like us," Molyeneux said. "It's an opportunity that doesn't exist."

Another reason for ditching Australia: sky-high mine costs.

"Australia's got some of the highest mining costs in the world," says David Fawcett, chairman of Jameson Resources Ltd , which divested its Australian holdings in 2007 and now owns two coal prospects in western Canada. "Australia's no place for small hopefuls like us just starting out."

STEEL PRODUCTION

Western Canada is becoming a sought-after place for developing new coking coal mines, with minnows like Jameson exploring side-by-side with titans like Teck Resources Ltd , Glencore Xstrata and Walter Energy Inc

"These coalfields offer established rail and port infrastructure, a low sovereign risk environment and have moved significantly down the cost curve," said Mark Savich, a mining analyst for Black Swan Equities.

Jameson will only need to dig between eight and nine cubic meters of dirt to extract a tonne of coal from its Crown Mountain mine in British Colombia, says Fawcett. By comparison, the average in Australia is between 11 and 13 cubic meters.

"That can represent a big difference in cost," Fawcett says.

Metallurgical coal prices worldwide hit the skids as demand from steel producers dropped off, leaving up to half of all Australia coal mines running at a loss.

It costs about $160 a tonne to produce coal in Australia compared with $50-$100 in places like Mongolia and Russia.

The junior miners say they are detecting signs of a resurgence in demand as steel production increases across Asia.

China's imports rose seven-fold from 2008 to 2012 to 54 million tonnes, matching top importer Japan, trade data shows.

China's largest steel maker, Baoshan Iron and Steel , believes it will be five more years before China's annual steel output peaks at 825 million tonnes.

Meanwhile, new mega-steel mills are under construction in landlocked Central Asia, where big coal miners have no established seaborne trade routes, providing ample opportunities for upstarts.

"If it requires developing a Mongolian or a Kyrgyz asset and it's going to be land-based export to China, they don't want it," says Molyeneux. "Their models are all based on shipping to and from established ports and all the better for us."

Coking coal prices tumbled to $137 per tonne in August, a 14 percent drop since the beginning of the year.

BHP, the world's biggest exporter of coking coal, this month settled Australia contracts at $151.89 a tonne, a five-month high, suggesting the market may have bottomed.

Another telltale sign: Baltic freight rates rose 16.4 percent over last week, and are now two-thirds above August.

Not everyone is convinced.

Rating Agency Moody's sees coking coal averaging $140-$145 a tonne during the second half. Better than August but still down from an average of $158 a tonne in the first half.

But even at those prices, juniors see profit margins.

Tigers Realm Coal is hoping to mine high-quality coking coal from Soviet-era deposits found in the Chukotka Province of Siberia for around $100 a tonne.

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