Ann: Cost Review Update, page-5

This is an excellent question, with a worst-case answer being "You don't !".

Buried in a fairly grammatically-tortured sentence in the recent Quarterly was the comment:

"Contract and spot coal prices have recently declined further, such that despite falls in the broker consensus price forecasts, these are now higher than the currently achievable prices in the market. As a consequence Cockatoo is further reviewing mine plans and costs."

The relevance of broker price forecasts, which are just a tool analysts use to plug some revenue line assumptions in to their company models, escapes me ? Smoke and mirrors I guess.

The nub is, current prices have fallen below those assumed in the capital raising.

So, can we find any information about current prices, met coal not being the most transparent of markets ?

As it happens, we are in luck again, and a tad of Googling leads us to a very current market assessment from the well-regarded folk at Platts.

They do not actually mention a spot price in China for Low VM PCI ( China now being the clearing market for coal in Asia-Pacific ), but they imply that producers may cut their losses by selling unwashed low VM coals in to China as thermal coal, and save a few bucks on their washing costs. Baralaba is already unwashed, so there is no cost benefit for COK in this. That is the "low $70s/mt CFR China." they mention - thermal, not PCI.


Platts do assess prime hard coking coal selling at US$82/mt FOBT. Using a current, commonly achieved relativity of top grade Low VM PCI achieving 80% of the HC price, we get current spot LVM PCI prices of mid-US$60s FOBT. Or about A$83/mt FOBT on current exchange rates.

A lot of assumptions in this 'back-of-the-envelope' in terms of achievable prices, forward-sold prices and exchange rate cover.

On this basis, COK is probably losing A$20/mt or more on every tonne sold. And given there was not a lot of 'fallback' cash in their modelled outgoings from the capital raising, COK is probably burning cash beyond any level previously contemplated.

So jettisoning more of the crew will probably help slow the rate at which the SS "Costa Cockatoo" is flooding below the waterline, but I doubt there is $20/mt in it.

We also note the comment from the Quarterly about 'reviewing the mine plan'.

Well, if it is going to cost the business $10, $15 or $20 on every tonne mined, then maybe the forward plans get parred back even more, and you tell the rail and port providers to make a choice - forego the take-or-pays until better times, or get ready to kiss the lot goodbye.

Because at this point, especially after all the grief Noble has been copping from Iceberg Research, I would be curious as to whether the Noble board and Liberty want to keep bailing COK out for the foreseeable future ?

We can only hope for:

Noble and Liberty having deep and generous pockets; and/or

China miraculously finds a sustainable engine of growth to lift demand for locally-consumed and export re-manufactured steel - for which both the COK shareholders and Twiggy Forrest would breath a huge sigh of relief, if it lifts prices for coal and iron ore.

Failing the above - we probably have a much reduced future operation dependent on some key creditors foregoing cash calls upon the business for committed tonnes not performed.

( Peter Kane's an experienced miner - I am sure he could run the Company, run the mine AND make strong, black, coal miner's coffee at Baralaba. This assumes the Brisbane HQ also gets jettisoned ).


Or in the worst case - care-and-maintenance. In which case you probably just need Peter Kane, a few people to keep the pumps going at the pit, and a service company to bang out ASX-type stuff.

Hence with a worst-case answer being "You don't !".

For now, and with a big thanks to the nice Platts people and their timely open research, Bon Voyage the SS "Costa Cockatoo" !