Mark Latham Commodity Equity Intelligence Service

Wednesday 22nd April 2015
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News and views:

Oil and GasAlternative EnergyUraniumAgriculturePrecious MetalsBase MetalsSteel, Iron Ore and Coal

Oil and Gas

Tillerson: OPEC price discovery.

OPEC’s refusal to curb output in response to the collapse in crude prices is an attempt to find the most economic price for oil, not an attack on U.S. shale drillers, said Exxon Mobil Corp. Chief Executive Officer Rex Tillerson.

The Organization of Petroleum Exporting Countries is engaged in “a classic price-discovery exercise” after the revolution in shale-oil production turned global crude markets topsy turvy, Tillerson said during the IHS CERAWeek conference in Houston on Tuesday.

The 10-month, 48-percent cascade in U.S. oil prices has crushed stock prices, eroded drilling budgets and cost tens of thousands of workers their jobs.

“I don’t take the view that they are in any way trying to threaten other suppliers,” Tillerson said. “I think they’re really kind of on a classic price-discovery exercise, which is important for all of us as investors to know.”

Its “price discovery” is OPEC’s effort to find the highest price at which it will no longer have to compete with supplies from higher cost producers.

MGL: We agree.

Falling US crude production could re-balance world market: EIA chief

Declining US crude production, already being seen in three of the country's four major shale basins, could cause a major shift in global supply and demand fundamentals, causing a significant increase in prices at some point this year, the head of the US Energy Information Administration said Tuesday at an IHS CERAWeek panel.

For the first time since EIA began tracking rig productivity, EIA data showed this month that production is expected to fall from April to May in the Eagle Ford, Bakken and the Niobrara, EIA Administrator Adam Sieminski said. While production is still growing in the Permian, the fourth major basin, it appears to be "plateauing," he said.

While multiple factors, including a return of Iranian and Libyan crude to the world market, could also influence prices, a decline in US production might have the most significant impact, Sieminski said.

"Flat crude oil production in the US between 2015 and 2016 would be a huge, huge difference between the growth that was occurring in 2012, 2013 and 2014," he said. "Ultimately, that drop is going to help rebalance supply and demand on a global basis."

Image titleImage titleEIA still buried in its own rig based data. Will someone please show the man the local state data based on Royalties?

This is a huge issue. Folks will believe the EIA, its 'official' isn't it? No mention of the enormous January revision of -480kbpd.

Fact is: inventories have been growing despite a large fall in US Oil production. So no, we violently disagree. US Oil contraction is not balancing the market!

March non-completions were, according to some sources, 85% of wells drilled. EOG, CLR and APC have been very up front about it. Others, like Oxy, Apa, are more sceptical. Some estimates put the fracklog in March at 2mbpd. That implies yoy US production is DOWN. 

There are going to be some very ugly q1 numbers in the US e&p space.


World’s biggest oil trader says crude price can’t drop much more

Vitol Group, the world’s biggest independent oil trader, said the cost of finding and pumping crude will prevent prices from dropping much lower than where they are now for prolonged periods.

Oil prices will range from $50 a barrel to $70 a barrel in the second half of this year, Ian Taylor, the firm’s chief executive officer, said in an interview at the FT Commodities Global Summit in Lausanne, Switzerland on Tuesday. They’re unlikely to trade below $50 for extended periods because of exploration and production costs, he said. Brent, the global benchmark, traded at about $63 at 9:39 a.m. in on the ICE Futures Europe exchange London.

“U.S. production growth is beginning to slow down and demand is looking quite good for the year, so the combination of all of that means that probably price, if anything, moves up a little bit,” Taylor said.

Oil prices collapsed almost 50 percent last year as OPEC kept pumping at about 30 million barrels a day, insisting producers outside the 12-nation group must help tackle a surplus. U.S. oil production rose to 9.4 million barrels in March, the highest in Energy Information Administration data starting in 1983.
MGL: Here's the Saudi line in the sand:Image title
Here's US crude inventory:
Image title
Here's retail in Oil equity:Image title

Here's the commodity currencies via an ETF:Image title

So Saudi holds its line in the sand with surging output whilst the other big producers crash their currencies and reduce their Oil operating costs.

Hope reigns eternal. Retail is 'full on' bull mode. 

Saudi's actions continue to be ignored. 


Norway considers support for Statoil project

Norway will ask European competition authorities whether it can provide state support to energy firm Statoil to bring oil and gas to the shore from its Johan Castberg field in the Arctic, the oil minister said on Tuesday.

Statoil initially favoured piping the oil to an onshore loading terminal, but deemed it too expensive and said pumping it onto tankers at sea might be a more viable option.

"Bringing it to the shore ensures the best resource management and the greatestbenefits to the Finnmark county, so that the Norwegian people get the most out of it," oil minister Tord Lien told an oil conference.

"We must look at what manoeuvring room we have to bring the oil and gas to the shore."

Though not a member of the European Union, Norway has extensive economic ties with the bloc as a member of the European Economic Area and accepts EU competition law.

The onshore terminal would create jobs in an area with relatively low employment and also create capacity that could be utilised by future finds in the Barents Sea, an under-explored area where Norway hopes for more discoveries.

Castberg, with up to 600 million barrels of oil equivalents, is one of Statoil's most expensive projects and has been delayed several times as the firm tries to reduce costs.

Analysts estimate that even with offshore loading, costs could be close to $80 per barrel, well above the current $63 per barrel oil price.

Lien said Castberg would be eventually built, even though Statoil has delayed the project three times since 2013.
MGL: Norway reaches for state support. Its an economy reliant on Oil and Gas employment. Oil is a very dysfunctional commodity at times. Its too important, too powerful and too political. Saudi is playing power politics. Norway is being alarmed. Both add up to too much Oil at the wrong price. 

Baker Hughes reports quarterly loss on $772 mln charge

Oilfield services provider Baker Hughes Inc, which is in the process of being acquired by Halliburton Co for $35 billion, posted a quarterly loss compared with a year-earlier profit as it recorded a $772 million charge related to restructuring and other items.

Baker Hughes said it would cut 10,500 jobs, or 17 percent of its global workforce, up from 7,000 it said it would cut earlier. The company also said it had closed and consolidated about 140 facilities worldwide, besides idling and writing off excess assets and inventory.

The company reported a net loss attributable it of $589 million, or $1.35 per share, in the first quarter ended March 31, compared with a profit of $328 million, or 74 cents per share, a year earlier.

Revenue fell 19.8 pct to $4.59 billion.

The Houston firm expects the downturn to continue in the second quarter and will make more cuts if needed, said Martin Craighead, CEO of Baker Hughes, in a written statement.

“As day rates for drilling rigs have fallen sharply, so has the demand for high technology products,” he said. Baker Hughes estimates 20 percent of the wells recently drilled in the United States have not been through completion stages – processes used to gear a well up for production. Prices for oil equipment have fallen as a supply glut builds, he said.
MGL: Oil layoffs by March 14 totalled 74000 according to Forbes.

Image title
The last few days have likely taken us over the 100,000 mark. This is a heavy hit for big Oil cities worldwide:


It has to have consequences in real estate markets, and secondary effects in the banking system. 


Petronas FLNG unit to load first cargo in Q1 2016

Petronas floating liquefied natural gas unit to be completed by March 2016, is expected to deliver its first LNG cargo in the first quarter of 2016.

According to the Petronas Vice President and Venture Director LNG projects Abdullah Karim, the project is expected to deliver its first cargo in the first quarter of next year and the supplies will be used for domestic consumption, Reuters reports.

Despite the drop in oil prices, Abdullah Karim said that the project remains viable for Petronas.

Although challenging, with the rise of oil prices to $70 a barrel, the Senior Vice President of Petronas’Technology and Engineering unit Colin Wong expects the company to get an internal rate of return in double digits.

Regarding the cost-efficiency of the project in relation to the land-based LNG facilities, Abdullah Karim said that over its lifespan of 20-25 years, the PFLNG1 would save the company about $500 million.
MGL: Project is 1.2mtpa of LNG. Image title
Here's recent 'classic' LNG build costs per mt. So if we take 1.2mtpa x $1200 per tonnes suggests 'normal' LNG project costs of $1.44bn, now $500m off that figure is a chunk of change. 

This small news item strongly implies FLNG build costs are $750m a 1mtpa, this is very close to US conversion costs. 

Image title
Here's LNG breakevens vs US spot.   At Tokyo Bay spot prices Cheniere should NOT authorise its FID on the second expansion this week. Image title
LNG supply add per quarter on completions of LNG export facilities under construction. Thats a 1-2% add to supply every quarter for 5 years.
Image titleHere are long term contract expiries by quarter. Today the LNG market is 30% ST, 70% LT approx. By 2025 it could be 70% short term. None of the buyers are signing LT Oil linked contracts, today they are signing 50:50 HH/Oil contracts. There's also the ticking time bomb on existing contract exit clauses, which if the Gazprom precedent is common, suggests the the big utility buyers can switch to spot if the volume is available in their market.

Image title
Here's Cheniere's economics. At $3 HH and $8 Tokyo Bay they make $2.52 per mmbtu of gross profit. There are 132mtpa of LNG export capacity in the FERC queue with roughly identical economics.

I would love to show these slides to Shell. This is worse than iron ore.


Yamal LNG has contracts to supply 80% of gas to Asia

Yamal LNG will mainly supply gas to customers in Asia, CEO Yevgeny Kot told journalists.

Yamal LNG already has contracts for about 95% of the LNG it will produce (approximately 15.5 million tonnes). Contracts with customers in Asia cover about 80% (roughly 13.5 million tonnes), the company said in materials.

Yamal LNG also has a contract to supply 2.5 million tonnes of LNG a year to Spain's Gas Natural Fenosa.

MGL: 2016 completion. Project reported 25% complete.

West Face to wage proxy battle against Gran Tierra Energy

Canadian activist firm West Face Capital Inc on Tuesday launched a proxy battle against Gran Tierra Energy and outlined plans to put up a slate of six nominees for the energy firm's board, saying that its current four-member board has failed investors.

West Face, whose managed funds control roughly 9.8 percent of Gran Tierra's shares, said the current board has overseen a failed high-risk, high-cost exploration strategy in Peru, Argentina and Brazil that has led to the destruction of more than half the company's market value since the start of 2011.

The activist firm plans to nominate six candidates for election to Gran Tierra's board at its annual meeting on June 24.

A representative for the Calgary-based energy company was not immediately reachable for comment.

West Face, which wants Gran Tierra to shift its strategic focus to its core properties in Colombia, also pitched oil and gas executive Gary Guidry to take over as chief executive, a role left empty since Dana Coffield was ousted in February.

Guidry is the former CEO of Caracal Energy Inc, which was bought out by Glencore last year. Four of West Face's other five board nominees are former Caracal directors.

Gran Tierra's current board is headed by executive chairman Jeffrey Scott, who manages company operations along with interim president Duncan Nightingale.
MGL: EV=$610. Standardised measure is $1bn, but thats at $90+ crude odd. GTE aggression was interesting at $100 crude, but here at $60, we're cleaning up the mess.

U.S. top court allows antitrust claims over natural gas prices

The U.S. Supreme Court on Tuesday ruled that a federal law governing the natural gas market does not shield energy companies from state antitrust claims made over the western U.S. energy crisis between 2000 and 2002.

The ruling, on a 7-2 vote, was a loss for several energy companies, including American Electric Power Company Inc, Dynegy Inc and ONEOK Inc, which were accused of manipulating published price indexes that led to a spike in gas prices. The resulting energy crisis included rolling blackouts in California.

As a result of the ruling, the case can now proceed in lower courts, although the decision made it clear there could still be some conflicts between state and federal law that could require further litigation.

The plaintiffs are industrial and commercial users of natural gas, including engine maker Briggs & Stratton Corp and Bombardier Inc's Learjet Inc.

After the energy crisis, they filed multiple lawsuits against various energy companies, accusing them of violating state antitrust laws. The cases were consolidated before a federal judge in Nevada.

The energy companies asked the Supreme Court to rule that state antitrust law claims were trumped by a federal law called the Natural Gas Act. The law grants the Federal Energy Regulatory Commission (FERC) authority to regulate certain aspects of the natural gas market including wholesale prices.

In an October 2012 ruling, the 9th U.S. Circuit Court of Appeals agreed with the plaintiffs and found that Congress did not intend to extend FERC's jurisdiction to retail transactions.

In an opinion written by Justice Stephen Breyer, the high court on Tuesday held that state antitrust law claims are not superseded by the federal law.
MGL: This is the infamous Enron cartel, which tried to 'fix' Californian natural gas prices. 

Nabors posts 10.5 pct fall in revenue

Contract driller Nabors Industries Ltd's quarterly revenue fell 10.5 percent, hurt by slower drilling activity in North America, and the company said it had cut its workforce by more than 18 percent since the end of 2014.

Revenue from Nabors' drilling operations in the United States - the company's biggest market - fell 17 percent in the first quarter from the previous quarter with oil producers slashing budgets to combat a slide in crude oil prices.

The company reported revenue of $1.42 billion in the quarter ended March 31, compared with the analysts' average estimate of $1.34 billion, according to Thomson Reuters I/B/E/S.

While revenue from Nabors' international drilling business rose 3 percent from the previous quarter, the company forecast a 10 percent drop in international rig counts through the year.

The company said this would start hurting results later in the year, but added that it expected full-year revenue from its international business to rise.

Nabors, whose completion & production unit is merging with C&J Energy Services Ltd, also forecast lower second-quarter results due to weak drilling activity, but did not provide more details.

The company said on Tuesday it had cut its workforce by 41 percent in its U.S. drilling operations and 26 percent in Canada. It had about 29,000 employees as of Dec. 31, 2014.
MGL: This really is a slowmotion crash in Oil capex. Intentions may be down 25% plus, but so far actual spend in q1 is down single digits, with domestic US managing to eke out 10% --just. 

The only evidence of supply contraction right now in the Oil arena is non-completion of drilled wells. Thats substantial, but we've still had an inventory build.

Halcon Resources Announces Preliminary First Quarter 2015

Preliminary First Quarter 2015 Production Results

Halcon expects to report production for the three months ended March 31, 2015 of 42,500 -- 43,500 barrels of oil equivalent per day (Boe/d). First quarter production is estimated to be ~81% oil, ~8% NGLs and ~11% natural gas.

Impairment Estimate

The Company estimates that it will record a non-cash pre-tax full cost ceiling impairment charge of $450 - $650 million in the first quarter of 2015.

Recent Developments

Halcon expects the following modifications to be made to its senior secured revolving credit facility, subject to the satisfaction of certain terms and conditions:

Removal of the interest coverage ratio covenant with the institution of a total secured leverage ratio covenant of 2.75x
Reduction of the borrowing base to $900 million from $1.05 billion

The Company is also seeking to extend the maturity of its senior secured revolving credit facility to August 1, 2019; however, there is no assurance that the extension will be available to Halcon on acceptable terms.

Operational Update. Details:
MGL: Production dead centre of Feb guidance.

$4.5bn EV. Debt is $3.1bn  face. We've already seen some debt/equity conversion. 

East texas unit: El Halcon looks to be sub 10% IRR on current spot prices.


Alternative Energy

North Korea, solar panel boom gives power to the people

In a country notorious for a lack of electricity, many North Koreans are taking power into their hands by installing cheap household solar panels to chargemobile phones and light up their homes.

Apartment blocks in Pyongyang and other cities are increasingly adorned with the panels, hung from balconies and windows, according to recent visitors to the isolated country and photographs obtained by Reuters.

"There must be at least a threefold increase in solar panels compared to last year," Simon Cockerell, who visits North Korea regularly as general manager of Beijing-based Koryo Tours, told Reuters from Pyongyang. "Some are domestically made, so that may have driven prices down."

North Korea has long suffered from electricity shortages which plunge large parts of the country into darkness, providing a stark contrast in night-time photos taken from space to prosperous and power-thirsty South Korea.

The soaring sales of cheap and easily-installed solar panels reflect rising demand for electricity in North Korea as incomes rise and people buy electronic goods like mobile phones and the "notel" media player that need regular charging. North Korea, one of the poorest countries in the world, is home to 2.5 million mobile phone users, about 10 percent of the population.

Once reserved for Workers' Party cadres, solar panels and voltage stabilisers are now sold openly both in markets and the hardware section of Pyongyang department stores, where small 20 watt panels cost just under 350,000 won - $44 at the widely-used black market exchange rate where a dollar is about 8,000 won, instead of the official 96 won.

Obtaining accurate data from North Korea is difficult, but roughly 10-15 percent of urban apartments in a series of recent photographs in North Korean cities obtained by Reuters appeared to have small solar panels attached to windows or balconies.

Whether that number translates nationally is unclear, but regular visitors have noted a significant increase in solar panel use across the country in recent months, either in urban areas or in one case in the backyard vegetable plot of a rural house.
MGL: Power to the people?


Japan nuclear ruling expected to cool Kyushu Electric's summer LNG demand

Japanese utility Kyushu Electric's late summer LNG demand is expected to be lower than last year after a court on Wednesday rejected a lawsuit attempting to stop the company from restarting its Sendai nuclear reactors, market sources said.

The ruling paves the way for Kyushu Electric to restart its two 890-MW reactors at its Sendai nuclear power plant in Kagoshima prefecture by this summer.

Platts research unit Eclipse Energy expects the restart to replace around 2 GW of capacity currently met by Kyushu Electric's oil-fired power plants but will have no impact on the company's gas-fired plants.

However, market sources said that having nuclear as baseload power would give Kyushu Electric more room to cut down on LNG purchases.

"This will definitely depress their demand for spot cargoes," said a North Asian source, adding that Kyushu Electric has been buying spot cargoes and not committing to long-term contracts because of the uncertainty over nuclear restarts.

Rather than sign additional long-term contracts, Kyushu Electric was heard to have secured four cargoes from Indonesia's Bontang through a strip deal over this summer, at a price in the 12% range of JCC on a FOB basis.

The utility's LNG stocks could also weigh on any additional spot demand.

Kyushu Electric is carrying high LNG inventory following a warmer winter.
MGL: At last! A Japanese Nuclear plant restarts! 

And it replaces Oil. Oops.


China grabs stake in Russian potash miner Uralkali

China’s sovereign-wealth fund (CIC) grabbed a 12.5% stake in Russian potash producer Uralkali, the world's biggest producer of the commodity, as it exercised Tuesday an option on a convertible bond it bought last year.

The news come on the heels of a $530 million loan deal the embattled potash miner signed Monday with eight international banks, including Industrial Commercial Bank of China (ICBC) and China Construction Bank.

ING Bank, Societe Generale, Nordea Bank, Commerzbank, IKB and Natixis also took part in yesterday’s deal as lenders.

At the current share price, CIC's stake is worth about $2.03 billion

CIC’s move, reports Dow Jones, represents a bold attempt by China to secure continued supply of the soil nutrient. At the current share price, CIC's stake is worth about $2.03 billion(64.5 billion rubles).

Since last year the fund has been shifting its focus to invest in agriculture and global food supplies, which reflects the priorities of the country’s current leadership.
MGL: China's focus moves away from metals? We just lost a major source of project funding for metals if this the general case. Thats good news, no more silly supply at IRR's that make little economic sense. (Mind, it is not as if China's investments have actually born fruit: look at CITIC in Australia, or African Minerals in Sierra Leone.) 

Precious Metals

Alrosa says Q1 output up 6 pct year-on-year

Russian diamond mining company Alrosa said on Tuesday its first-quarter output rose 6 percent year-on-year to 8.4 million carats and revenue from rough diamond sales was set to reach at least $1.1 billion.

Alrosa, the world's top producer by output in carats, also reported that its first-quarter rough diamond prices fell by 3 percent.

However, market conditions are expected to improve thanks to key markets in the United States, China and India, it added in a statement.
MGL: Regular readers may have gathered that I am huge sceptic on diamonds.

~They are more abundant than the industry would have us believe (see yesterdays article on Australian diamond resource)
~Artificial diamonds, once a technologists interesting display of bravado, have become a very real threat to the sub 2 carat category.
~Its becoming an industry reliant on irregular finds of super large, super interesting stones for the ultra rich.

Having said all that, Alrosa yields 5%+, its costs are in rubles, and the slow decline in diamond prices is no real threat to the business.


Base Metals

Rusal says may idle 200,000 tonnes of aluminium capacity

Top global aluminium producer United Company Rusal said on Wednesday it was reviewing its aluminium smelting operations and may idle a further 200,000 tonnes of capacity.

Rusal, which has cut capacity by 800,000 tonnes in the past two years, said its first quarter aluminium production came in at 900,000 tonnes, down two percent on the previous quarter, but up two percent on a year ago.

The Hong Kong-listed company said it expected calendar 2015 production to be flat on the previous year.

Deputy CEO Oleg Mukhamedshin said in March that Rusal was considering shuttering some production due to the weak price outlook and a desire to shift production to cleaner energy sources. The company is looking to have almost all of its production using electricity from hydroelectric power plants.

The review follows weak global aluminium prices and a halving in premiums this year in parts of Asia as China has stepped up exports of semi-manufactured products and logjams at London Metal Exchange warehouses have unwound. Premiums are a delivery surcharge paid to obtain metal.

Alcoa said in March it was reviewing 14 percent of its smelting capacity for closure, curtailment or sale.

Rusal also said on Wednesday it would not be restarting any capacity idled in 2013. It has cut capacity in the past two years by shutting down smelters that used electricity from coal-fired power plants and other fuels, it said last month.
MGL: Aluminium still in liquidation. 

Steel, Iron Ore and Coal

Teck earnings down, cuts dividend as coal slumps

Teck Resources, the second-largest exporter of seaborne coal used in steelmaking, cut its dividend for the first time since the world financial crisis amid slumping prices for the commodity.

The biannual payout will drop 67% to 15 Canadian cents (12 US cents) a share, the Vancouver-based company said Tuesday. That’s the first reduction since Teck discontinued its dividend in November 2008.

Coal is Teck’s biggest business, accounting for 39% of its revenue last year. The quarterly benchmark price for metallurgical coal has fallen to a seven-year low amid slowing Chinese demand and a global supply glut that’s set to continue.

Teck also reported Tuesday that first-quarter profit excluding one-time items was 11 Canadian cents a share, Teck said in a statement. That lagged the 15-cent average of 25 analysts’ estimates compiled by Bloomberg.

Net income slipped to C$68 million, or 12 cents a share, from C$69 million, or 12 cents, a year earlier, Teck said. Sales fell 2.9% to C$2.02 billion, trailing the C$2.12 billion average estimate.

Teck also mines copper, whose price has declined in the last two years and fell 3.4 percent this year through yesterday in New York. Fitch Ratings last week downgraded the company’s credit rating to BBB- from BBB, citing weaker coal and copper prices.

The dividend cut announced today will save Teck about C$346 million a year, or almost the equivalent of the company’s annual debt interest payments, Alex Terentiew, a Toronto-based analyst at Raymond James Financial, said in a note to clients.

As of April 20, the company had C$1.4 billion of cash and $3 billion available under a revolving credit facility, which matures in 2019, the company said.

The cash balance is “consistent with our goal of finishing the year with at least C$1 billion of cash at existing debt levels,” Teck said.

Lower coal and copper prices have coincided with Teck’s commitment to fund it’s 20% interest in the Fort Hills oil-sands project now under construction in northern Alberta.

The C$13.5 billion Fort Hills project is 41% owned by Calgary-based Suncor Energy, which is developing and operating the energy project, with Total SA holding 39%. Start-up is expected in 2017.
MGL: Here's Teck's EV as per Bloomberg:
Equity $7.4bn
Debt $7.2bn

Cash $1.2bn.

But there's nasty wrinkle hidden in the footnotes:

“Trail discharged solid effluents, or slag, and liquid effluent into the Columbia River that came to rest in Washington state, and from that material, hazardous materials under (U.S. environmental laws) were released into the environment,” Dave Godlewski, vice-president of environment and public affairs for Teck American, said in a telephone interview.

“That’s what we’ve agreed to. We’ve not talked about the amount of the release. We’ve not talked about the impacts of those releases. We’ve just agreed that there has been a release in the U.S.”

For the state Department of Ecology, the admission is a major victory in what has been a long, drawn-out fight.

“It’s very good news for us,” said spokeswoman Jani Gilbert. “It means that everyone is accepting the science... and we’re just closer in the process to getting some resolution of this.”

When Teck American, the U.S. subsidiary of Teck Resources, cleaned up Black Sand Beach two years ago, it hauled away 9,100 tonnes of slag.

The lawsuit brought by the Colville Confederated Tribes claims that 145,000 tonnes has been dumped directly into the river, where it has flowed downstream and settled on the riverbed. Bottom-feeding aquatic species eat it and the metals begin their journey up the food chain.

“It changes the ecosystem,” Gilbert said.

Teck said the agreement is expected to lead to a court judgment in favour of the plaintiffs. However, the court has yet to decide the extent of any injuries that may have resulted and what — if any — damages the company will have to pay.

The lawsuit brought by the Colville Tribes eight years ago was to begin Monday. They claim Teck dumped 145,000 tons of slag containing arsenic, cadmium, copper, mercury, lead and zinc directly into the river.

They claim those wastes have contaminated the surface water, ground waters and sediments of the upper Columbia River and Lake Roosevelt, the reservoir created by the Grand Coulee Dam. The Colville reservation of almost 5,700 square kilometres borders the Columbia River.

The U.S. Environmental Protection Agency joined the lawsuit as an intervenor. The cost of cleaning up the contamination has been pegged as high as $1-billion (U.S.), and the state wants Teck to bear that cost.

MGL: So in fact we have to to peg Teck EV at $14.6bn dollars. That leaves Teck at 8x ev/ebitda, and not the 'cheap' looking 6 odd. 

Stock fell 6%.

Heilongjiang Longmay Group to close eight coking mines

Heilongjiang Longmay Mining Holding Group Co. Ltd., or Longmay Group, the biggest met coal miner in northeast China, will close eight of itscoking coal mines, sources said.

The company will release implementation plan for production halt before April 25, and by May 15 all operations will be stopped completely.

The mines are to be closed because of poor production margins amid bleak sales and also because most of them had reached the end of their mining life cycle. The mines affected are: Lishu, Ronghua, Qidao, Nanshan, Zhenxin, Shuangyang, Taoshan and Xintie.

Some sources said the closures would have minimal impact on the market, as these mine closures only involve small volume and most are of slightly inferior quality.

However, other sources said this may lend some hope for the seaborne met coal market.

Should these mines remain shut, Northeast China mills would be desperate to get some Australian and Russian semi-hard cargoes, said one Beijing-based trader.

Another supplier of foreign coals said that he had already received some buying interest for foreign semi-hard and semi-soft coals from the region. But he was not sure whether this was a direct result of
the mine closures or just routine spot interest.

Longmay's products are mostly consumed within the Northeast China belt and hence it need not have a direct impact on other regions in the country, another market source said, while adding the "drastic" move may at least be indicative of terrible market conditions.

The company has a total production capacity of around 52-54 million tonnes of raw coal, of which most of the production is focused on hard coking coal, one-third coking coal, fat coal and gas coal. The Heilongjiang-based producer owns 42 mines and 16 washing plants.
MGL: We need more of this. Unfortunately it will alarm Beijing, who will attempt to slow closures with tax cuts/some stimulus. 

China imports just over 3m mt of coking coal per month. Thats way down on its 8mt of imports at the peak. 

China's implied demand for Coking coal = 500m mt (at o.6mt per tonne steel produced)
China's imports                                             = 36m mt.

Implied domestic production                    =464m mt

China's domestic coke grade mining is well over 50% of total mined coking coal.

Here's your classic coking coal cost curve:

Image title

Please find China.

The fact is that with a 3.5bn mt domestic thermal coal mining industry, we only need to high grade 15% of mine output, and we know there is an enormous industry in China that sorts, washes and separates coal by grade. Several HK listed companies have tried, and failed to make a business of this. Winsway, comes to mind, dont bother checking the website, all references to their coal washing business have been expunged. Its closed, and officially never existed. 

Point being: China is VASTLY more important to coking coal than to Iron ore, and we're 4 years into this coking bear, with precious little evidence that China has removed domestic coking capacity in any scale.


Arch Coal reports bigger-than-expected loss, cuts production forecast

U.S. miner Arch Coal Inc reported a bigger-than-expected quarterly loss and cut its full-year production forecast for both power-generating and steel-making coal.

The company said on Tuesday that it now expects thermal coal production of 120-130 million tons, down from the 124-136 million tons it forecast in February.

Arch also cut its production forecast for metallurgical, or steel-making, coal to 6.0-6.8 million tons from 6.3-7.0 million tons.

 The company, which mines coal in various regions in the United States such as Powder River Basin, Appalachia, Colorado and Illinois, said average sales price fell to $19.18 per ton in the first quarter from $20.09, a year earlier.

Coal miners have been under pressure as power utilities switch to cheaper natural gas and big consumers such as China reduce imports.

Prices of natural gas futures are down 11.6 percent this year to Monday's close.

The company's net loss narrowed to $113.2 million, or 53 cents per share, in the quarter ended March 31, from $124.1 million, or 59 cents per share, a year earlier.

On an adjusted basis, the company lost 54 cents per share, above analysts' average expectation of 48 cents, according to Thomson Reuters I/B/E/S.

Revenue fell 8 percent to $677 million, missing the average analyst estimate of $720.3 million.
MGL: Arch coal is on the wrong side of almost every trend:

~ Paid $3bn for International Coal at the height of the coal boom. CASH.
~Strong dollar.
~Weak coal.

Mark to market EV is about $2.5bn, mainly because the bonds are trading below 50c. Here's the heroic bond for Arch Coal:

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Equity is worthless whilst we have $5bn of junk below 50c.

Resource stocks are all about position, and costs. Arch is just on the wrong side of the wind right now.


BHP blinks as iron ore prices fall, delays output boost

BHP Billiton is slowing down its expansion plans in iron ore, the first big miner to pull back as a global supply glut sends ore prices tumbling.

The world no. 3 producer said on Wednesday it would delay a an Australian port project that would have boosted output by 20 million tonnes, taking total output to 290 million tonnes a year by mid-2017.

While the drop in output represents only a tiny amount compared with seaborne trade of around 1.3 billion tonnes, analysts said it was significant given BHP's position as a leading producer.

"It is probably more a symbolic posturing position by BHP, but it also likely signals the bottom of the iron ore market, given this action is being taken by one of the lowest cost producers," said Mark Pervan, head of commodities for ANZ Bank.

However, the big-tonnage miners have so far ignored calls to curtail expansions to help prices recover, and analysts did not expect Rio to follow BHP's lead.

Small adjustments in supply were also unlikely to have much impact on prices that have tumbled to around $50 a tonne from almost $200 four years ago, analysts said.

"Demand is the saviour," said Joel Crane, a commodities analyst at Morgan Stanley.

"The sort of tonnes we're talking about are drops in the ocean. If you're going to see a sustained stabilisation in the iron ore price, you're going to need a demand pick-up."

"I don't believe Rio will go down the same path, given they are much more reliant on iron ore for revenue than BHP. Rio has made it clear it is committed to its next expansion to 350 million tonnes," said David Lennox, mining analyst with Fat Prophets.
MGL: "Demand is the saviour,"

Amen to that. Please pray more. 

China's Q1 iron ore imports from Australia up 22.2 pct on year

China's iron ore imports from Australia rose 22.2 percent to 144.4 million tonnes in the first quarter from a year earlier, customs data showed on Wednesday, as major producers ramped up production and increase shipments.

Top miners Rio Tinto and BHP Billiton have boosted output, focusing on slashing costs to make returns and carve out market share as falling prices squeeze higher-cost miners.

The soaring shipments to China at a time when the country's steel demand is slowing has meant iron ore prices .IO62-CNI=SI have more than halved to around $50 a tonne in the past 12 months.

Amid this slump BHP Billiton said it will slow down its expansion plans by delaying an Australian port project that would have boosted output by 20 million tonnes, but Rio Tinto still plans to ship 350 million tonnes of ore in 2015.

Imports from Australia jumped 26.6 percent to 51.55 million tonnes in March from a year ago, data from the General Administration of Customs showed.

Total imports by China rose 2.4 percent to 227.1 million tonnes in the first quarter from the same period of last year.

China's imports of iron ore from Brazil, its second-largest supplier after Australia, inched up 0.6 percent to 41.8 million tonnes in the first quarter from a year ago. Shipments in March dropped 2.5 percent to 14.48 million tonnes.
MGL: Quick back of envelope suggests Chinese domestic iron ore production is now under 300m mt PA. (at 62% grade)

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China's domestic iron ore data actually confirms this contraction. We're not sure this data is grade adjusted. It implies annual production of 1.2bn mt, and that cannot be 62% grade. If this is simply raw data, we just have no idea on what the actual iron ore content really is in this series. All we know is that it is going down! 

China key steel mills daily output up 5pct in early-April

Daily crude steel output of key Chinese steel producers increased 5.05% from ten days ago to 1.695 million tonnes over April 1-10, showed data from the China Iron and Steel Association (CISA).

The increase was mainly resulted from improved production enthusiasm from steel mills as profit gained amid dropping pig iron prices.

By the end of the second week of April, total stocks of five key steel products across the nation stood at 14.65 million tonnes, down 8.3% from the beginning of March, the fifth consecutive weekly decline, indicating a weak market in the future.

Over April 6-12, the price of steel products dropped 1.1% on month, according to data from the Ministry of Commerce.

The CISA didn’t give an estimate on China’s total daily output during the same period.

Meanwhile, the CISA members produced 1.67 million tonnes of pig iron on average each day during the same period, up 4.56% from the previous ten days.
MGL: At last, and stimulus lifts the steel output measures. 

Its a rally in a bear market, of course. But we beggars can't be choosers!
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