Cloud Over Peabody's Reputation Lingers After Goonyella Fire

 

 

By Matthew Stevens

October 10, 2018 - A high-level coal union circular raises yet more questions over the progress of Peabody Energy's North Goonyella underground mine from near-human tragedy to the prospect of potentially permanent closure of what was the recovering US coal giant's most profitable Australian mine.

To my eyes the union note, which is rich in evidence-based conclusions about the likelihood of the long-term shut-in of North Goonyella production, stands further evidence of either frailties in the information flows between the miner's operational management and Peabody HQ in St Louis or of holes in the miner's public disclosure protocols.

Certainly, as of September 26, the leadership of the Queensland branch of the coal union was operating on a better base of evidence and the knowable options for North Goonyella than were Peabody's shareholders.

The circular was written by the North Goonyella union lodge president Luke Ludlow and it was sent as an update to a broad church of the Queensland leadership of the mining and energy division of the CFMEU.

 

While the Port of Newcastle resists ACCC intervention on channel fees, it continues to invite regulatory intervention on the "secret" cap and fee system that stands a rock block to plans to build a container terminal in Newcastle.

Photo by Darren Pateman

Ludlow's note, which carried frightening detail of massive spikes in the levels of dangerous and volatile gases and confirmed fears of a potential explosion inside the mine, warned only a "miraculous change in circumstance" in the days ahead would prevent critical mining equipment being sealed in the mine in the name of preventing further calamity.

"Our mine site has been abandoned in the sense that, in case of an explosion underground, we need to have exclusion zones," Ludlow told his union peers.

"We have seen some haze coming out of our main fan shaft but nothing of great alarm at this moment with theories around the hot and cold air mixing to create this effect but time will tell in this aspect," he said.

"To summarize," Ludlow continued, "our mine is not in a good way and the reality of sealing a 3rd longwall in our mine is right in front of us unless we have some miraculous change in circumstance in the coming days," the lodge president wrote.

To refresh here, it is now clear that miners were withdrawn from the North Goonyella coal mine a full three weeks before Peabody deemed it necessary to inform investors with a filing to the US Securities and Investments Commission that confirmed high gas levels had forced the suspension of mining.

That formal disclosure to the US regulator came just hours after The Australian Financial Review reported that higher than acceptable levels of methane and carbon monoxide had forced miners from North Goonyella.

The Financial Review coverage carried Peabody's rejection of claims that the mine had a problem with super-heated coal and that management ran the risk of losing the massive and expensive long-wall equipment that was in the process of being shifted to a new panel.

The statement Peabody lodged with the SEC in September 18 said, in part:

"Peabody is well over halfway through the two-month longwall move at this point. The longwall move, which was expected to be completed in September, is now targeted for completion in the early part of the fourth quarter.

"Prior to this time, the company had been trending to the upper end of its 2018 metallurgical coal sales volume targets, and those targets have not been revised. The company intends to provide further updates on or before its earnings release near the end of October."

The mine subsequently self-immolated, mining equipment has been substantially lost and the future of mining at North Goonyella is now a subject of considerable doubt.

On Friday, September 28, Peabody told the US SEC that there had been evidence of a fire in the mine and warned its owners and the rest of the coking coal market that they should not expect production from the mine through the December quarter.

The company subsequently confirmed the fire was burning and that a full mitigation strategy had been developed under the oversight of the Queensland Mines Inspectorate.

That disclosure triggered a 13.5 percent fall in the Peabody share price even though the company reasserted its standing guidance for Queensland coking coal production, which is that it will range between 11-12 million tonnes.

But that September 28 arrived a full two days after Ludlow warned his peers that Peabody required a miracle to prevent long-term interruption to production and that the gas mitigation plan raised serious doubts over the mine's future and a full three weeks after the Financial Review warned the company of claims that the mine risked spontaneous combustion.

For the record, the latest reports are that the fire is likely out but the cloud over Peabody's reputation lingers.

Port in a Storm

 

These are paradoxical days at the Port of Newcastle.

Here we have a port that is chaired by a former competition regulator that is hell bent on overturning a decision that left the port's shipping channel declared and thus subject to access price determinations by the Australian Competition and Consumer Commission.

On Tuesday the ACCC, in its wisdom, ruled that PoN needed to reduce the fee it charge Australia's biggest coal exporter, Glencore, by 20 percent to 61 cents a gross tonne.

That ruling stands another milestone in a battle of more than three years between the port operator and Glencore over the standing of the succession of channel fee hikes that followed the port's extremely expensive privatisation back in 2014.

The port and its relatively new equal owners, Infrastructure Australia and China Merchants, are working to have the channel's declaration overturned.

The governor of that process is the National Competition Council and given it didn't think the thing should have been declared in the first place and reforms to the Competition Act have tightened the triggers for declaration, the PoN is pretty confident of success.

The process here would be that the NCC would make a revocation recommendation to the Treasurer who would then be left to unmake the declaration. Or not. And that, as we understand it, would be that. There is no mechanism to appeal a revocation decision.

The interesting thing about revocation is that it will not change things for Glencore. The arbitration holds and the ACCC will continue to regulate prices on a five-year cycle all the way through to 2031.

So why bother with revocation? Well, because so far at least the ACCC arbitration process belongs exclusively to Glencore. So the PoN needs revocation to ensure that its other customers are not tempted to follow the Glencore path and seek arbitration on the fees they are changed.

Meanwhile, as the PoN resists ACCC intervention on channel fees, it continues to invite regulatory intervention on the "secret" cap and fee system that stands a rock block to plans to build a container terminal in Newcastle.

The issue there is that when the state government privatized its three main ports it decided to advance and protect the valuations of the dual sale of Port Botany and Port Kembla by delivering a disincentive for any future expansion of PoN into the container business. That was done by capping PoN container movements at their pre-privatization level and putting a state fee on any container shipments above the ceiling.

The ACCC is presently reviewing whether the cap and fee is a breach of the competition law. It is plain that the regulator sees the system as a constraint on competition but its obligation is to assess whether it is legal.

The really remarkable thing about that cap and fee system is that it was introduced to the sale process by one of the two final bidders for the ports Botany and Kembla. The fee effectively guaranteed that the future of ports in NSW would play out as the government had proposed, which was that Port Botany would remain the main container hub, that Port Kembla would be the future spill-over container port and that Newcastle would be sustained by coal and a car import terminal.

So why is that so remarkable?

Well, because the bidder that promoted the cap and fee was the Hastings infrastructure group and, after just missing out on securing a future in NSW containers, it went on to become the original operator for, you guessed it, the successful bidders for PoN.

So the mess that PoN is now working to clear up is the product of the very same people who were invited in by privatization. Oh, and the reason that the handcuffs on PoN are described so often as "secret" is that the terms of the sale process required utter confidentiality on the container fee. The new owners knew it existed and, ultimately, they took a bit of a punt on being able to overturn it.