Australian Export Coal Industry 2017 to 2027 a Decade of Growth The impact of China and India

1 Australian Export Coal Industry 2017 to 2027 a Decade of Growth The impact of China and India Contents 1. 2017 Strategic Context for Australian Export Coal Industry 2 2. 2017 to 2027 A Decade of Growth for Australian Export Coal Industry 4 3. Restructuring of Australian Coal Industry with New Entrants 6 4. Political, Activist and Community Opposition to New Mines 7 5. Sale of Rio Tinto Hunter Valley thermal coal business to Yancoal Australia 8 6 Timing of Development Projects 9 6.1 Timing of NSW Brownfield Expansion Projects 6.2 Timing of Queensland New Projects A HiValue Strategies Business Insight Study October 2017 Bede Boyle founded HiValue Strategies Pty Ltd in 1994 as Strategic Advisor to: Coal Industry and Government AGL Energy, BHP Steel, Bayswater Colliery, BlueScope Steel, Exxaro Coal [Australia], Genesee Wyoming Inc., GVK Hancock Coal, NSW Coal Compensation Board, NSW Department of Mineral Resources, NSW FreightCorp, Newcastle Port Corporation, Powercoal, PWCS, Vale and Xstrata Coal. Major Contractors Coffee Projects, Laing O Rourke, Leighton Contractors and Diversified Construction Corporation. Professional Service Firms Retained as Business Development Advisor by AMC Consultants, Bywater McLean, PACRIM Environmental, Synergy Management Consulting Group, Renoir Consulting and Walter Diversified Services. Bede has a long association with George Edwards who undertakes Coal Mine Valuations and Trades Coal through Edwards Global Services. George has extensive experience spanning 40 years in China and India Coal Markets. Bede was Manager Technical Services with Coal & Allied Operations and provided Technical Support to underground and open cut Project Development, Operations and Marketing. He was Project Coordinator for Hunter Valley No 1 Mine, CHPP and Loading Point and Project Leader for Liddell Longwall Project. As Manager Mining Holdings he was instrumental in securing the Mt Pleasant Coal Area for Coal & Allied. Contact Bede +61 (0) 419 213 010 boyle.bede@bigpond.com

2 1 2017 Strategic Context for Australian Export Coal Industry Dramatic changes in Industry Economics in late 2016 are being played out in 2017 In 2016 Australia exported 184Mt metallurgical coal used for steelmaking and 202Mt thermal coal primarily used in power generation, cement and chemical manufacture. The substantial US$ price upswing in both metallurgical and thermal coals in late 2016 is sustaining into 2017 to return Australian coal industry into profitability after four turbulent years where producers incurred financial losses. Prices in October 2017 Newcastle 6,300kcal Thermal Coal US$96/tonne Semi Soft Coking Coal US$116/tonne Premium Hard Coking Coal US$180/tonne By 2016 the Australian coal industry had successfully reduced its structural cost base by about 30% from 2012 levels and benefited from lower A$ exchange rate from 1.05 to 0.80. Excess global coal supply in 2012 resulted in dramatic collapse of US$ coal prices. The financial impact on Australian producers was compounded by high A$ exchange rate and escalating operating costs as a result of the mining boom. Coal companies incurred financial losses over the four years 2012-2016, precipitating idling mines, mine closures and asset sales. Divestment of ownership from multinational resource corporations, who had dominated and consolidated Australian coal assets ownership for three decades, is creating a new disaggregated industry dynamic with emerging new players. The sale of Rio Tinto - Coal & Allied Industries Limited Hunter Valley thermal coal business to Yancoal Australia in a deal with Glencore warrants examination of how China Coal Market Volatility impacts on Australia. Coal Market Volatility is primarily driven by China domestic production / demand dynamics and Government policies. Coal imports are a small margin on China s very large domestic production base. In 2016 China imported 57Mt of metallurgical coal and 156Mt thermal coal which totals only 5.7% of China domestic production of 3.7billion t. In 2016 80% of China coal producers were losing money due to oversupply. To curb financial losses China Government directed reduction in annual coal production working days to 276 to raise coal prices. To meet peak winter thermal power demand, in mid- November 2016, China Government allowed all mines that meet safety standards to produce for 330 working days in a year, an extension from the original enforced 276 days. China Domestic Costs have risen dramatically in recent years and in 2017 the Chinese government has conflicting objectives: Firstly to close unsafe coal mines which will decrease production and Secondly to lower prices to domestic users by increasing coal production. The China government s targeted range for Domestic coal mine sales of RMB500-570/t (US$72.67-US82.85/t) FOB, basis 5,500 kc NAR will determine the Import Price threshold. In October 2017 Qinhuangdao 5,500kc NAR FOB Price hit RMB735/t (US112.23/t). In October 2017 Newcastle 5,500kc NAR FOB Price was US$77/t which underpins Australia s Competitive Position. China 2016-2020 plan will lift production from 3.7billion t in 2015 to 3.9billion t in 2020. New mine developments will be located in Inner Mongolia, Western and Central China at considerable distances to Eastern China which will support imports to Eastern Ports.

3 2016 Australian Coal Exports Totalled 393Mt In 2016 Australia exported 187Mt metallurgical coal used for steelmaking and 206Mt thermal coal primarily used in power generation, cement and chemical manufacture. 2016 Coal Exports Mt Queensland Abbot Point 27 Hay Point and Dalrymple Bay 117 Gladstone 70 Brisbane 6 New South Wales Newcastle 163 Port Kembla 10 2016 Total Exports 393Mt Source: Australian Department of Industry, Tourism and Resources There is Latent Unused Capacity at All Australian Coal Export Terminals Export Terminal 2016 Exports by Terminal Mt Name Plate Capacity Mtpa Latent Unused Capacity Mtpa Abbot Point 26.7 50 23 Dalrymple Bay 68.4 85 17 Hay Point 49.0 55 6 Gladstone 70.0 95 20 Brisbane 6.6 10 3 QLD Total 220.8 295 74 PWCS 109.5 145 35 NCIG 53.3 66 12 Port Kembla 10.0 18 8 NSW Total 172.8 229 56 Australia Total 393.6Mt 524Mtpa 130Mtpa Source IHS Markit presentation to 2017 Australian Coal Conference This 130Mtpa Unused Export Terminal Capacity is a key enabler of Rapid Mine Developments in response to Market Demand for Metallurgical and Thermal Coals.

4 2 2017-2027 A Decade of Growth for Australian Coal Exports ASIA requirement for Energy Security and Economic Development provides the Demand Pull for Australian High Quality Coals for use in steelmaking, power generation, cement and chemical industries Over half the world s 7.4bn population lives in the ASIA Area in Red Seaborne demand for Australian Metallurgical and Thermal Coals are Forecast by IHS Markit Independent Analysts to increase by 44Mt over the next Decade IHS Markit Australian Coal Export Outlook 2017 to 2027 2017 Outlook Mt 2027 Outlook Mt Increase Mt Metallurgical Coal 185 215 30 Hard Coking Coal Semi Soft & PCI Thermal Coal 226 240 14 Total Exports 411 455 44 Source: IHS Markit, presentation to 2017 Australia Coal Conference Metallurgical Coal The forecast 30Mtpa increase in Metallurgical Coal Exports is underpinned by an expectation of higher demand from India. India is reliant on imports of high quality metallurgical coal and currently relies on about 50Mtpa imports of metallurgical coal mainly from Australia. India steel industry is expanding with blast furnace technology which will increase demand to over 90Mtpa. Growth in imports is expected to be underpinned by the increased need for more metallurgical coal to support local steel production, given India s very small domestic coking coal reserves. The Indian Government s plans to attract more investment in the country and improve the domestic manufacturing industry, will require better domestic infrastructure and hence higher steel consumption. Source: Resources and Energy Quarterly December 2016 George Edwards, who trades coal through Edwards Global Services Pty Ltd, observed to Coaltrans Australia delegates in August 2016 that India is seen to be a strengthening market for Australian high quality metallurgical coals. India will need to increasingly rely on imported coking coals for its steel industry requirements, which means importing about 50Mtpa in calendar year 2016 [a 14 per cent increase over 43.7Mt imported in 2015] and increasing thereafter as steel production increases, to over 90Mtpa.

5 Thermal Coal The rapid expansion of coal-fired power capacity in Southeast Asia will drive demand higher in markets including Taiwan, Thailand, Malaysia, the Philippines and Vietnam. Existing latent capacity will lead to continued export growth from Australia over the decade. The Australian Government Chief Economist advised the Australian Government in Resources and Energy Quarterly June 2015 that World energy consumption is likely to be one of the defining issues of the 21st century, particularly the way in which the world simultaneously addresses climate change and access to energy. What is often overlooked is that even in recent years the use of fossil fuels has grown by even more in aggregate terms than renewables. And highlighted in Resources and Energy Quarterly June 2017 that there were 365 advanced technology coal fired power stations planned or under construction. 135 India 117 China 15 Indonesia 14 Vietnam 13 Japan 11 Bangladesh 11 Korea 9 Pakistan 7 Poland 5 Taiwan 4 Philippines 3 Kazakhstan and Russia 2 South Africa, Malaysia, Morocco, Myanmar, Germany and Bosnia 1 Greece, Thailand, Check Republic, UAE, Turkey, Ukraine and Uzbekristan. A range of nations including China are investing in ways to achieve higher energy efficiency by using advanced technology coal-fired power plants. Some countries are also conducting research and development in areas such as carbon capture and storage, to reduce carbon emissions. In India nearly 100 new coal fired power plants currently under construction are scheduled to come online by the end of 2018 to support Prime Minister Modi s Make in India Campaign. Make in India Campaign was launched by Prime Minister Modi in 2014 and is transforming India into a Global design and manufacturing Hub. In 2015 India was the top destination globally for foreign direct investment, surpassing the United States of America as well as the People's Republic of China with US$63billion in FDI. International companies including Apple, Ford, GE, Sandvik and VW are establishing major manufacturing facilities in India.

6 3 Restructuring of Australian Coal Industry with New Entrants Divestment of ownership from multinational resource corporations, Anglo American, BHP Billiton, Peabody, Rio Tinto and Vale who had dominated and consolidated Australian coal assets ownership for three decades, is creating a new disaggregated industry dynamic with emerging new players. Stanmore Coal - Isaac Plains QLD Producing 1.1Mtpa from existing Isaac Plains Mine Stanmore Coal illustrates the successful strategic acquisition by an ASX listed junior explorer of Isaac Plains metallurgical coal resource from Vale & Sumitomo in July 2015 and rapid recommencement of production, in less than 12 months, with first shipments to Asian steel mill customers in May 2016. Source Stanmore Coal, ASX Announcement 6 April 2016 Realm Resources Foxleigh QLD Realm Resources through Middlemount South operates the 3Mtpa Low Volatile PCI Mine Australian Pacific Coal Dartbrook NSW Australian Pacific Coal acquired the closed Anglo American Dartbrook Open Cut Mine MACH Energy [Indonesia Salim Group] Mt Pleasant NSW Approvals in place for 10.4Mtpa [ROM] Open Cut Mine MACH Energy progressing development for production in Q1 2018 South 32 Illawarra Metallurgical Coal NSW South32 was formed by BHP Billiton demerger and operates three underground mines Appin Mine has challenges with Gas Levels which have caused production delays Risks There are emerging Risks with both mining companies and mining service contractors entering administration. 1. China state owned Caledon Coal is in voluntary administration following closure of Cook Colliery with large inflow of water into underground longwall. 2. Caledon Coal entering voluntary administration in May 2917 has exacerbated the failure of Bandanna Energy with around 11Mt of 27Mt WICET capacity entitlements defaulted on to potentially require Restructuring of WICET $4.3bn debt. 3. India s Jindal Steel & Power Limited owned Wollongong Coal stopped production at Wongawilli Mine with its mining services provider Delta SBD entering administration in May 2017.

7 4 Political, Activist and Community Opposition to New Mines The costly and torturous path with community, activist and political impediments to development of new coal mines in NSW and Queensland is creating uncertain outcomes for investors and is stimulating interest in the comparative advantage in acquisition of existing mines with Development and Environmental Approvals in place. In 2016 the NSW Government made the unprecedented move to buy back the Caroona license for $220 million, after strident community and political opposition to the project. The concession had been bought by BHP from the state government in 2006 for $100m, with the company having invested over a decade in exploration and development approval process. Shenhua acquired the Watermark license two years later in 2008 through a NSW Government tender process with Shenhua paying $300m upfront and committing to pay another $200m once the Mining Licence was granted. The Chairman of Shenhua Australia, Liu Xiang is critical of the state and federal government approvals process. The process has been challenging and we have faced many delays and changes to the approvals system which nobody could have foreseen when we first entered the tender process. As international investors, we have found this experience to be inconsistent with the often proclaimed enthusiasm for offshore investment in this country, particularly in the mining sector. Source AFR. However, Liu Xiang confirmed Shenhua will continue to progress its Watermark Coal Mine on the remainder of EL7223 in line with the planning approvals from both the State of NSW and Commonwealth Government respectively in 2015. Source Australian Coal Report 12 July 2017

8 5 Sale of Coal & Allied Hunter Valley thermal coal business by Rio Tinto to Yancoal Australia in a deal with Glencore. Yancoal Australia acquired Rio Tinto's Coal & Allied Hunter Valley 17Mtpa thermal coal business in a deal with Glencore holding 49%. The US$2.69billion acquisition included: 67.6% of Hunter Valley Operations (HVO), 80% of Mount Thorley mine, 55.6% of Warkworth mine, 36.5% of Port Waratah Coal Services terminal at Port of Newcastle together with other undeveloped coal assets and property holdings Yancoal will have marketing rights for China, Taiwan, Thailand and Malaysia and Glencore will have marketing rights for Japan and South Korea and all other countries. Yancoal major shareholder is Yanzhou Coal Mining Company Limited (78%) in the People s Republic of China. Yanzhou is publicly listed on the Shanghai, Hong Kong and New York stock exchanges. Yancoal Australia was formed in 2004 with the acquisition of the Austar underground mine in the Hunter Valley and has subsequently built its business via strategic acquisition to become one of the country s most innovative coal exploration companies. Yancoal successfully introduced the pioneering LTCC coal mining method in 2006, following its acquisition of the former Southland Coal Mine in the Hunter Valley. In 2009, Yancoal completed the successful takeover of Felix Resources, acquiring the Moolarben mine and becoming a key player within the NSW coal industry. In 2012, Yancoal strategically merged with Gloucester Coal, listing with the Australian Securities Exchange as Yancoal Australia (ASX code: YAL), and becoming one of Australia's largest listed pure-play coal producers. The deal between Swiss miner Glencore and China s Yancoal to acquire Rio Tinto s Hunter Valley Coal Assets allows Glencore to become the dominant producer in the Hunter Valley, controlling the seaborne thermal and semi soft coking coal market. Glencore will take a 49% stake in Hunter Valley Operations [HVO] coal mine and form a joint venture with Yancoal to operate the mine. Post acquiring the 49% stake in HVO, Glencore will have a combined production capacity of 69Mtpa. The deal gives Glencore exclusive marketing rights for HVO coal sales into Japan, South Korea and other countries with the exception of Yancoal HVO rights for China, Taiwan, Thailand and Malaysia. Source Australian Coal Report 2 August 2017

9 6 Timing of Development Projects 6.1 Timing of NSW Brownfield Expansion Projects Brownfield expansion projects will precede any financial commitment to new projects which will require the coal price to strengthen in 2017. In the Hunter Gloucester Coal Basins some producers can beneficiate coal to capture the ~ A$30 price margin for Semi Soft Coking Coal and may commit to CHPP upgrading projects in 2017. Also the A$20/tonne price differential between Newcastle Thermal 6,300kcal and High Ash 5,500kcal may be the trigger for upgrading coal washing circuits in 2017 to capture higher prices for 6,300kcal. The key factor is Unused Take or Pay Rail and Port Commitments. Coal Producers have an economic imperative to use Take or Pay Commitments and there is Latent Hunter Valley Coal Chain Capacity. Latent Hunter Valley Coal Chain Capacity Name Plate [installed] Port Capacity 211Mt [PWCS + NCIG] 2016 Contracted Export Coal Volume 190Mt [ARTC] 2016 Port of Newcastle Actual Exports 161Mt Actual Exports Latent HVCC Capacity ~30Mt Unused This 30Mtpa latent coal chain capacity can be absorbed by Brownfield capacity expansion projects with Development Approval in place, including Hunter Valley Operations, Narrabri and Moolarben. [Bede Boyle client study 2015/16]

10 6.2 Timing of Queensland New Projects Queensland Metallurgical Coal Queensland is the largest global exporter of metallurgical coal, shipping more than 162 million tonnes in 2015-16. The strong long term demand fundamentals for metallurgical coal means a number of projects are in the planning / construction / ramping up production pipeline. Construction Byerwen and Eagle Downs are in construction / early stages of production adding 14Mt of output together. Planning Several other large projects including Anglo s Moranbah South mine and BMA s Red Hill are planned to produce approximately 14Mtpa. Source: Queensland commodity profile Metallurgical coal as at 27 February 2017 Queensland Thermal Coal The most advanced project is Adani Enterprise Limited Carmichael project in Queensland s Galilee Basin. Adani is pushing ahead with government approvals for the $22 billion project which will be Australia s largest coal mine with six open-cut pits and five underground mines producing 60Mtpa. Adani plans to produce coal to ship to its Indian coal-fired power stations. Adani claims that it is therefore not affected by the price of coal like most other coal exporting mines, giving them a unique advantage in the face of market price fluctuations. Adani plans to oversee the complete value chain of the project from mine, to rail, port, shipping, power station and some of the transmission and distribution network in India. Imports of high-quality resources to augment domestic mining will be required, India needs more high-quality coal than it can currently mine," Mr Gautam Adani said at the conclusion of the Australia-India CEO forum in New Delhi. Adani plans to import 60 million tonnes of coal from Australia each year, from his company's controversial Carmichael mine in QLD. ABC News 1 September 2017 Adani has commenced engineering design work on the 25Mtpa Stage 1 and expects to begin production in late 2022. The recruitment drive for Adani s Carmichael project is underway, with engineering services company Downer EDI on the hunt for people to fill engineering, project management and auxiliary roles. The drive signals both that Adani and Downer have reached agreement on the scope of works, and that the Indian conglomerate is working hard to commence the main engineering design phase of the project. Adani themselves are also on the hunt for a range of engineering and project management positions. Source ACR 23 August 2017