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Grim outlook for Peabody following mine fire

Peabody Energy North Goonyella Halloween - Peabody Outlook

OPINION The never-ending mine fire saga that’s crippled Peabody Energy’s North Goonyella mine beginning in September 2018 has raised its’ ugly head once again as Peabody has declared a third-quarter loss attributable to shareholders of $USD 82.8 million ($AUD 121 million) and announcing that it would now require a three-year plan and USD $50-75 million to get the mine producing coal again.

It subsequently, advised the market that it would shed many of its workforce at North Goonyella to reduce the holding costs of the mine prior to recommencing operations.

But the twisting tale of North Goonyella mine fire goes much deeper than an earnings call for Peabody Energy.

It now serves as a case study for both mining companies and governments on the management of risk and the role of mine safety regulators in ensuring the integrity of assets for the state’s they serve.

While we can acknowledge that Peabody shareholders will bear the brunt of the mine fire, the Queensland Government’s royalties from the mine will also suffer substantially. The Queensland Government coffers will now potentially lose up to $90 million dollars over the three year period we are informed.

No answers from Queensland Government

There are still so many unanswered questions regarding the mine fire and why it got out of control in the first instance. While Peabody came clean and fell on its’ sword early identifying its’ own deficiencies in management, the subsequent investigations from the Queensland Government’s Mine Safety regulator have failed to report anything of substance on the matter…almost thirteen months on from the debacle.

More importantly, Peabody implied yesterday that it (the QMI) has been a stumbling block in the return to normal operation of the mine.

Glenn Kellow — President and Chief Executive Officer said in an earnings call “With North Goonyella, while we remain frustrated along with everyone by the protracted timing, we’ve also identified a path forward. We continue to work to ensure safety, de-risk the process, optimize the mine plan, reduce and stage costs and maximize the value of the asset.” 

“In July, we noted we were evaluating paths to recognize value from these assets given the long delays with tasks that should have taken days were taking weeks and even months. We have since completed our detailed review and assessment and will forego attempts to access the 10 North Panel that would have required to explore and mediate the most impacted areas of the mine and the unusual and protracted measures

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While Peabody may feel the matter has been protracted it may just come about because of a reluctance of people to discuss the matter with the Queensland Government’s investigating team. Largely because they are not obliged to under Queensland mining safety legislation and some have now vanished from the scene of the crime.

You can read more at our article posted three months ago. In summary, it appeared that those the investigators questioned simply exercised their right under the Coal Mining Safety and Health Act 1999 not to be interviewed by the inspectorate unless ‘compelled by law to do so.’

“At this time, persons of interest have exercised their right under the Coal Mining Safety and Health Act 1999 not to be interviewed by the inspectorate unless compelled by law to do so. As such, no interviews have been conducted yet.”

Queensland Mines Inspectorate Statement

We wrote at that time we were informed that a member of the QMI may have provided guidance on the application of TARPS at the mine including those to a key SOP which defined some of the operating requirement of the longwall.

Those recommendations included the relocation of gas sensors to more ‘suitable locations’ which may prevent triggering of alarms. The changes reportedly affected the operation of the methane sensor and how often it was in alarm mode – somewhat resembling the lead up to the Appin disaster.

“It seems, on the surface at least, that a sanctioning of Peabody’s operating procedures may have been provided by a member of the QMI”

We noted from the outset of the event that the lack of independence of the Queensland Mines Inspectorate would be troublesome to identifying the real issues in the matter…and it clearly has. It’s now potentially cost the State of Queensland more than $90 million and yet there’s a complete lack of transparency in the investigative processes of the mine fire.

A ninety million dollar error with an internal investigation

Mineworkers get the call

In the precursor to the announcement to the market last night, some of Peabody’s ever-faithful North Goonyella workforce was notified of the intention to terminate their contracts over a three month period. Of course, they were informed that telling the media would potentially result in loss of entitlements as a breach of contract. Announcing anything would be be very unfavourable one worker said.

Peabody’s Australian Operations president Marc Hathhorn said “I want to take this opportunity to thank each and every one of our North Goonyella team and their families for their hard work, dedication and loyalty over the past year in helping us try to get this great mine back into production”

“We will try to redeploy as many of our people as possible to our other Australian mines and we commit to working closely with unions, industry groups and other mining companies to find jobs for our team in what is, thankfully, a healthy jobs market for mine workers.”

What’s real and what’s not real…that is the question!

Several months ago former miner workers from the North Goonyella mine told AMSJ that the probability of full re-entry as Peabody had described was a quote “management pipe dream” given the impending uncertainties associated with how the coal reserve would respond when reventilated and the uncertainties of equipment and mine damage. “North Goonyella can be an angry beast that must be respected,” a worker said. “It has a known history of spontaneous combustion events”

Peabody’s three-year plan is fraught with danger and, quite frankly, after the number of past mistakes and management rhetoric on the mine fire matter…it’s now difficult to trust Peabody. Certainly the market’s response of a 22% fall in the value of Peabody shares to an all-time low is an indicator that trust is an issue.

Peabody shares topped USD $48.86 last year in June prior to the mine fire. Today they’re sitting at USD $12.48. A grim reminder of the volatility of market conditions and what can happen when risks are not managed effectively by competent personnel.

What did Peabody Energy say in their latest statement on North Goonyella?

In Peabody’s latest statement it highlighted delays and a future cost of USD $50-75 million to restore the mine

In July, we noted we were evaluating paths to recognize value from these assets given the long delays with tasks that should have taken days were taking weeks and even months. We have since completed our detailed review and assessment and will forego attempts to access the 10 North Panel that would have required to explore and mediate the most impacted areas of the mine and the unusual and protracted measures.

Overall, we believe the highly restrictive approach from QMI has required a greatly disciplined approach from Peabody. As such, we have identified a preferred path, which is to mine the southern middle seam reserves, beginning with the 6 South Panel. We believe this path represent significant lower risk, the best path to return the regular way mining and maximizes the value of a mine with a potential life of several decades.

Peabody’s preferred path would include the ventilation of Zone B using bore holes from the surface. Incremental spending for ventilation is contingent on obtaining pre-approval from QMI and that process is under way. Following planned ventilation, we intend to reenter Zone B and assess conditions with a target of developing the southern panels. These panels include approximately 20 million tons of high quality hard coking coal. At this point, we have completed most of the essential work needed in Zone A. Let me be clear, all steps we’ve taken thus far have not only been necessary, but beneficial to preserve access to an additional 65 million tons of hard coking coal in the lower seam. Development of that longer-term project is now in the pre-feasibility stage.

During our review, we considered a host of options including the mine — to mine the southern panels from the surface to access multiple seams. Given current barriers such as the cost of the box cut, timing of permits and cash flows, this was determined not to be a preferred path. At this point, we believe it’s far easier to control money than time.

Given the expected length of time to ventilate Zone B, we are significantly lowering labor requirements and planned holding costs. As such, we reduced most of the remaining salaried and hourly workforce and are looking to offer potential employment opportunities to fill vacancies at other Peabody mines where practical. We are also reducing our quarterly run rate estimates for 2020 to approximately half that of recent levels.

In addition, steps have been taken to market our take-or-pay commitments as well as our use of our prep plant and loadout infrastructure, which could further reduce quarterly costs by a further half again. Only if we gain pre-approval, we would then expect to incur additional costs of $12 million to $15 million to ventilate Zone B over a multi-month period.

Assuming the successful ventilation or reentry of Zone B, we estimate 2020 project capital costs are approximately $50 million to $75 million beginning in the second half of the year with development of 6 South. A panel this length should require about 18 to 24 months to develop based on typical development rights and then we would be in a position to begin longwall production. As you would expect, we will continue to refine capital and cost estimates as work progresses through Zone B. I’ll reiterate that we are not committing to incremental capital until we’ve ventilated and explored Zone B. We would also look to mitigate cash outlays by selling development tons into the market.

Peabody Energy

What’s next in the North Goonyella mine fire saga?

There’s a range of perspectives circulating on what will become of North Goonyella and indeed the mine fire investigation in itself.

Word on the street today is that Peabody may ultimately call time of the asset and flog it off in a fire sale (excuse the pun). A costly lesson in risk mitigation and management for Peabody but, even more so, for the mining industry.

Peabody’s failure to acknowledge and manage its spontaneous combustion risk serves as an extreme example of what not to do when it comes to mine risks, particularly those involving fires and underground coal mines. But more than that, the North Goonyella mine fire reminds us that mines are dynamic environments where real-time risk management must be undertaken through adequate data, information and implementation of known control strategies.

For the Queensland Government’s mines inspectorate the fire has highlighted the state of ineptitude that existed in mine safety inspection and investigation, the inadequacies of Queensland Government transparency in mine safety information flow and the lack of governance structures that ought to have been protecting the mine workers of Queensland, ensuring the integrity of the State’s resources and protecting jobs of mineworkers into the future.

There’s no doubt that Yancoal will be looking closely at the North Goonyella asset as time tick by. The current market confidence in Peabody may force the hand of Peabody to dump and run. Yancoal is well known for re-invigorating troubled assets and has proven its success in the industry.

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