Coal: US, China take different position on coal, Israeli technology making waves in China

Thanks to increasingly hostile coal related US environmental regulation and an oversupply of coal in Asia as well as low natural gas prices, coal prices are near rock bottom. These factors have worked together to not only affect the price of coal but also demand from one of its main customers, utility plants; Traditionally over 45%, coal's share of power generation was at 39% in November 2011, the lowest level since March 1978. What's worrisome about that drop is this, the other main sources of popwer generation were all up (natural gas 22%-->26%, nuclear 20%-->22%, hydro 6%-->7%). What this also suggests is that the growth in renewables ARE NOT making any meaningful contribution to overall production (unsurprising given that their associated total costs of production exceed 20c per kWh, that compares to under 4c/kWh for coal) - not much incentive to shift over if you ask me.

Some are suggesting that it's the low price of natural gas that's causing companies to abandon coal but I say not so fast ! Even with the 49% drop in price (gas) between January and April 2012, per kWh gas there's still not much difference in cost when choosing it over coal. In Canada analysts expect natural gas prices to more than double over the next 1-2 years which would certainly take away any price incentive fueling the shift from coal to gas. (from $2.1/mmBTU April 22 --> $4.5 by 2014); Also keep in mind that while analysts almost unanimously agree that the price of natural gas will rise, the same can't be said of coal.
Natural gas averaged $4.00/mmBTU in 2011 but ended the year at only $2.75, it then fell further down to $1.40/mmBTU by April 19, 2012. Also to consider: The outlook for coal prices is not as good as it is for natural gas.

Greater access to cheap energy is something the United States should be striving for. Cheap energy has become the cornerstone to China's growth model. China's long term demand for coal is growing at around 5-8%/yr meaning that demand from that country will double within a decade (in 2010 China accounted for 48% of global thermal/metallurgical coal demand). Non-OECD Asian countries will account for 95% of the 55% global rise in coal demand by 2035. That trend is in stark contrast to the United States where demand for thermal coal is expected to drop by 5% to 884 million tons (lowest level in 17 years) and where 106 coal-fired plants have shut down in just the last two years directly translating into a 13% loss in terms of MW capacity). Thermal coal accounts for about 60% of US-China coal exports. The major drawback to China's reliance on cheap, nonrenwable energy sources? Well for starters, it is home to 16 of the world's 20 most polluted cities.
Though US coal exports were up +31.3% in 2011 to 107,258,561 tons total US coal production was up only +0.9% to 1,094,336,000 tons. Major contributors to that change were Latvia (142-->163 thousand tons), Japan (3164,098-->6911,539 tons) South Korea (5722,599-->10448,751 tons), India (2722,677-->4500,105 tons), Netherlands (7306,376-->10785,421 tons). Demand from Canada was down -40.0% to 6845,316 tons (in 2010 Canada lone demanded more than all of South America but because of changes in 2011, Brazil now demands about 1.8Mt more than Canada.

Israel and China

Although many renewable sources of energy require technology that's very expensive to build and with less desirable results, a new form of clean energy with relatively low operating costs (1c/kWh) is one that harnesses energy from naturally occurring sea waves. The production costs being only a quarter as much as it is for wind or solar, have attracted Chinese investors keen on bringing it to China. In 2010 the first of a number of Chinese sea wave plants was constructed in Guangzhou by Israeli company SDE. Though it has a capacity of only 1MW it ushers in the first of many such plants (Guangzhou alone will be home to 10000 MW capacity by the time the project is completed).

Facts

-Rock bottom shipping prices (freight) is making it easier for US coal producers to access Asian markets; In 2012 US coal exports to China are expected to double to 12M tonnes.
-Today, freight from the US Gulf of Mexico to China is around $50/tonnes, that compares to the bid price for coal of $102-104.

Rio Tinto (RIO) Production up only for Aluminum, Bauxite, Iron, Salt, Borate & Titanium; Copper Will get a boost from Ivanhoe Mines (IVN), Pilbara, Escondida

Rio Tinto's largest projects as of January 2012 (indepth look here)

Project												New Annual Output												Metals												Year												Total cost
Pilbara 283												53 Mt												iron ore												2014												$9.7 bil
Oyu Tolgoi												1.2b lb 650th oz 3m oz												copper gold silver												mid 2013												$6.0 bil
Kitimat												400th tonnes												aluminum												3Q 2014												$3.3 bil
Yurwun 2												2 Mt												alumina												3Q 2012												$2.3 bil
Argyle												20 mil carats capacity												diamonds												2Q 2013												$2.1 bil
Hope Downs 4												15 Mt (30 yr life)												iron ore												mid 2013												$2.1 bil
Kestrel												1.3 Mt												coal												mid 2013												$2.0 bil
AP 60 Quebec												60 kt												aluminum												2Q 2013												$1.1 bil
Marandoo Aus												15 Mt												iron ore												early 2015												$1.1 bil
Iron Ore Company Canada 1 2												5.3 Mt (Rio owns 59%)												iron ore												early 2013												$763 mil
ISAL Iceland												40th tonnes												aluminum												mid 2012												$487 mil

      Rio Tinto (RIO) had a lot going for it and against it in 2011. Copper grades and low exit-year prices affected earnings in the second half. Fiscal year results were buoyed by iron ore which saw prices peak mid year and output grow to record levels (ended the year at $140/tonne vs high of $180/tonne mid year). Rio Tinto is Australia's biggest iron ore exporter and also a major producer of its coal (coal is Australia's single largest export earner). A $7 billion share buy back plan is nearing completion.

Of the $33 billion capital projects underway the largest one, Pilbara 283 ($9.7B) won't be ready until the end of 2013. The second largest, Oyu Tolgoi phase 1 ($6B) will be ready midyear 2013. Nine of the eighteen projects will be completed in 2012. 2015 is on track to be a big year for Rio with 167.7 million tonnes/yr of new iron-ore production coming online.

Notes:
-Grasberg, Indonesia has been a joint venture with Freeport-McMoran since 1998.
-Sold 100% interest in Colowyo on Dec 1, 2011
-Rio is no longer in the business of talc as of August 1, 2011. That's why talc output is down; No attributable production from there since the 3Q 2011 when output fell to below 100 mil tonnes for the first time ever.  The talc unit, Luzenac which is the world's leader in talc production, was sold to a French company for $340 million.
-2012 will see new copper production from Coal & Allied in which Rio Tinto now has an 80.0% interest up from 75.7% (effective December 16, 2011).
-Spun off US coal operations in Dec 2010. That transaction netted the company $2 billion however it cut off nearly three quarters of Rio Tinto's coal production going back to 2009. The new company formed in the spinoff is Cloud Peak Energy which trades on the New York Stock Exchange as CLD.
-On Feb 20, 2012 announced a $518M investment in autonomous Iron Ore rail cars that will operate in Pilbara, Australia beginning in 2014 (at present Pilbara is the site of a major expansion project underway that will boost copper output significantly over the coming years beginning in 2013).
-all of the company's molybdenum comes from Kennecott Utah
-February 3, 2012: Rio Tinto Alcan begins restarting aluminum smelters in Shawinigan, Quebec
-Doubled interest in Richards Bay Minerals to 74% from 37%. RBM is a South African titanium dioxide company. That will lead to an inevitable increase in titanium production.
-Hecla Mining, the US's largest primary producer of silver gets 68% of its silver from a mine that Rio Tinto owned up until April 2008 (Green's Creek).

Financial Highlights quoted in US Dollars
Higher commodity prices led to a record in underlying earnings (+11% to $15.5 billion), record in ebitda (+10% to $28.5 billion) and record in cash flow from operations (+16% to $27.4 billion). Capex was 2.67X higher at $12.3 billion. Surprisingly all of this didn't translate into higher net earnings which were down 59% to $5.8 billion on account of impairment costs amounting to $8.9 billion, associated with the aluminum business. Don't be too concerned about the fall in EPS to $3.035 from $7.31 in 2010; dividend per share was $1.45 +34% vs 2010. Here's some background on what Rio Tinto excludes when determining underlying earnings.

In 2011 Rio Tinto spent $6.1 billion on acquisitions, $2.2 billion on dividend payouts and $6.2 billion on taxes. Cash flows from operations have nearly doubled since 2009. Targeted 2012 capex is $16 billion or over 30% higher than 2011 with about 3/4 of it going to Australia (over half) and Canada (less than a quarter).

Iron Ore
This continues to be Rio Tinto's backbone. It is the largest source of EBITDA contributing 73.4% of the group's product total of earnings before taxes ($20.93b/$29.491b) which is up from 62.4% in 2010 (was as low as 43% in 2008). Iron ore contributed 78.0% of group earnings in 2011 up from 67.6%.

Iron ore output from the 6 of 8 Hamersley iron ore mines that Rio owns outright, was 7.8% higher on the year (121.525M tonnes). The other two Hamersley mines are 60% owned and produced 15.994M tonnes (up 1.13% from 15,816 in 2010).

As of 2011 global iron ore production capacity was announced for 800 Mt annually but by 2011 4Q only 200 Mt was achieved.

Copper
Contributed 6.9% of ebitda down from 16.9% in 2010. Copper earnings were down 23.6% and the reason for that is two-fold: total mined copper down 23% stemming from lower grade ore at Escondida and Kennecott Utah, the same thing that negatively affected results at the end of last year and also the price of copper, down to $3.44/lb in December from $4.24/lb mid year. The lower grades are only temporary given that grades will come in higher in the coming years due to the commencement of operations at new projects/expansion projects

Oyu Tolgoi - Construction is currently 70% complete, by 2013 it should be producing 1.2 billion pounds of copper per year then working its way up to 1.7 billion pounds by year seven in 2019-2020. Ivanhoe Mines has a direct, controlling stake in the project (66%, ownership is not through South Gobi) and Rio Tinto has a 49% interest in Ivanhoe Mines and strong board representation (7/13 Ivanhoe board members represent the interests of Rio Tinto). Just recently Bank of America said that Ivanhoe Mines will be a leading position for copper in 2018 when it will be "one of the world's 10 leading copper producers".
Escondida - the site of major project expansions underway in Chile where just last week Rio Tinto and its partners (30/70 interest) approved a $1.4B expansion.
Pilbara - Output expands to 283M tonnes/yr by 2013, 353Mt by 1H2015. The company just announced yesterday its US$518 million autonomous rail network which will the first of its kind. Rio Tinto's rail network is currently 1,500 km long and has 148 trains. Copper production from Pilbara was down 7% in 2011 due to lower recoveries key equipment being unavailable.

Rio Tinto is probably not complaining about the temporary decline in copper production considering that copper prices ended the year at a low point (3.44/lb Dec 31 vs $4.24/lb June 30).

Northparkes was only one of five major copper operations that recorded a year on year increase in output. Mined copper was +29% on the year, +34% in the 4Q as a result of optimization projects being implemented & higher grades from section E48.

Gold and Silver
Lower grades caused gold (-12.3%) and silver (-27.0%) output to decline from 2010 levels however that is expected to change in 2hlf 2012 and 2013 when grades will get a boost from new mining activity in Mongolia and elsewhere. Oyu Tolgoi possibly beginning in 2013, will produce silver at a rate of 3 million ounces a year (59 year mine life) and 650,000 ounces of gold.

33.2% of the decline in silver output (605/1823) was due lower production from Grasberg, the smallest of Rio's four silver mines; Grasberg is a joint venture. Silver production from the largest of its operating mines, the 100% owned Bingham Canyon mine was 20% lower to 2.976 mil ounces. The second largest source of silver, Escondida is only 30% owned (prod there down 29.5%).

Though mined silver production fell on the year, refined silver output (all of it occurring at Kennecott Utah) was +32.61% to 4.732 million ounces.

Primary Aluminum
13 of the 21 mines are 100% owned. Those 13 produced 2442 thousand tonnes of aluminum in 2011 up 30.73% from 2010 when output was 1868.

Diamonds
The largest of Rio's three diamond mines is Argyle in Western Australia. Argyle produced 7.441m carats in 2011 which is down 24.1% from 2010. In contrast, the 60% owned Diavik mine in NWT increased its output by 2.72% to 6.677m carats while 77.8% owned Murrowam Zimbabwe produced 2.06X more at 367,000 carats.