CCX: Isolated Case or Stalling Industry

CCX: Isolated Case or Stalling Industry

Behind this week announcement by Eike Batista to fall back from CCX’s massive carboniferous quest, there is a reality that starts slapping us in the face from several angles:
1) Abruptly postponing the intention to produce some 130 Mtons of coal in the next 10 years speaks volumes of the evolution of coal energy demand, particularly for S. América.
2) Given that 92% of this coal was intended for PCI usage, it suggests something is not responding within the iron and steel manufacturing industry.
3) As for Colombia… let just say that CCX’s output averaged 15% of the Mines and Energy Ministry’s production targets for the country during this decade. Let aside the consequences for the regional contractors left in the air.

 

CCX was a natural resources rapid growth company that entered the market with astonishing figures since its inception: 5.3 billion tons of thermal coal, 713 million tons of reserves and a significant percentage of these resources amenable to be used as PCI coal and therefore subject to a market

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premium. In addition, it announced the arrival of high-tech technology to the coal underground mining in Colombia + the integration with a new 150 km railroad and a new dedicated port.

FROM R$9.3 TO R$1.8

The “Proyecto Integrado Minero” is located in a proven coal producer area, neighboring BHP Billiton, Drummond and yet to merge Xtrata-Glencore deposits and despite a brilliant outlook, a series of devastating blows has put CCX’s coal on “low heat”:
1) Last year, the Chilean Supreme Court denied MPX permission to build the Castilla 2,700 MW power plant, which according to our calculations accounted for 14% of CCX estimated production.
2) Coal prices for thermal coal sank below the US$100/ton mark, and based on regional cash costs between US$80-100/ton and a relatively high dependence on PCI premium marketing (estimated fair value of R$6/share for a 10% premium at San Juan and a 12% WACC) reduced the potential off-takers, in addition to the already 30% provided by MPX partner –E.ON-. Also, coal prices prevent potential investors to support such a heavy capital requiring initiative (capex estimated at US$3.5 billion for the mines only).
3) Regulation in Colombia appears to have been another road of thorns and thistles for the company. Obtaining environmental licenses for the different initiatives seems to put additional pressure on the management, as well as dealing with local communities, traditionally hard negotiators.
All this led to drastic measures and following consequences. Eike Batista announced his plan to take the company back into private hands, delisting from the Bovespa SE, with a public offering of R$4.31, twice last week value, and “readjusting” the project to fit the current economic cycle conditions.

NET/NET
This is a rail taken from the “Locomotora Minera” in Colombia. On one hand, the government has been successful is coordinating some of the major mineral projects initiatives, which include organic growth by already established companies such as El Cerrejón, Glencore’s Prodeco, Drummond as for coal, Cerromatoso as for nickel and Votorantim’s Paz del Río as for Iron ore and coal.
However, there is an apparent big challenge to develop new mineral projects in the country, raising questions on what are the designed vehicles to support regional use of these resources. While global demand for industrial commodities is under pressure, there is a now rather recurrent unhealthy hindrance to natural resources enterprise development via environmental licensing, which ultimately plays against the welfare of communities that are deprived from the benefits of new economic activities.
CCX’s retreat resulted of a combination of local and external factors, but drags along a series of regional initiatives, government and market expectations, and should the industry not manage to reverse this trend, could also send a discouraging message for new investment in the local mining industry.

 

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