South32 to walk away from Queensland’s $1.5bn Eagle Downs coking coal project

South32 to look at selling its half of Eagle Downs in Queensland, saying it’s not the time for a high-grade coking coal mine.

Coking coal is under growing pressure.

South32 chief executive Graham Kerr has confirmed the company is set to walk away from the development of the Eagle Downs coking coal mine in Queensland, saying the time is not right to build the high grade metallurgical coal mine.

The $1.5bn development would have extended South32’s business in the steel making commodity, as it pushes to get an extension to its Illawarra coking coal mine in NSW approved in the face of stiff opposition from environmental groups and even the state’s water authority.

South32 released its December quarter production report on Thursday, and Mr Kerr said the company was “assessing its options” for its half of the project, which it owns with Chinese steel giant Baowu, including a possible divestment.

“Following completion of the Eagle Downs metallurgical coal feasibility study in the December 2020 quarter, we have determined not to proceed with the project at this time,” South32 said.

“While the study indicated the potential for a long-life operation, the expected returns do not currently support the allocation of capital in accordance with our capital management framework. The project has been placed on hold while the partners assess options that may include the divestment of our 50 per cent interest.”

Baowu’s project website says the Eagle Downs feasibility study pointed to a low-cost operation producing high quality coal. It tips average production of 5.2 million tonnes of low volatile hard coking coal from an underground mine, at an average operating cost of about $71 a tonne – which the company says would put it in the lowest quartile of coking coal mines on a cost basis.

South32 bought half of the Eagle Downs coking coal project from Brazil’s Vale in 2018, paying $US106m ($148m) upfront and agreeing to deferred payments worth another $US27m.

At the time, Mr Kerr said the mine – already fully permitted and partially built by its previous owners, but mothballed in 2015 when coal prices fell and a major contractor went bust – was an “attractive development option” to add to South32’s coking coal operations.

The comments come as South32 reported record alumina production at both its Worsley operations in Western Australia, and from Brazil, along with record year-to-date manganese production from its Australian operations.

South32’s share of alumina production rose 3 per cent in the first half of the financial year, to 2.7 million tonnes, a 7 per cent rise on the September quarter at 1.4 million tonnes.

Production from its Illawarra coking coal operations fell sharply in the December quarter, down 25 per cent to 1.4 million tonnes, although sales grew 16 per cent to 1.7 million tonnes.

While Mr Kerr said South32 had booked a strong operating performance in the first half of the financial year, and remained in a strong financial position, he warned shareholders South32 faces cost pressures across its operations as demand and pricing for key commodities returns.

“Industry cost curves continue to steepen as a result of US dollar weakness, which provides further support for markets. While our operating unit costs are tracking to plan on the basis of previously disclosed exchange rate and commodity price assumptions, we will experience cost inflation should these external pressures persist across the remainder of the year,” South32 said.

“Updated unit cost guidance for FY21 will be provided with our December 2020 half year results.”

South32 shares closed down 0.4 per cent on Wednesday at $2.67.