Coal mining in Australia: expansions and new projects in an era of funding uncertainty

Coal being prepared for shipping in NSW.

After reaping the fruits of higher coal prices throughout 2022 and the first part of 2023, Australian coal miners could be in for a tougher year in 2024. Newcastle thermal coal, the main Asian benchmark for prices, fell by 13% in January and was down 66% since the same time last year. Similarly, Australian metallurgical quotations dropped by 11.7% in the first two weeks of March due to lack of demand from China.   

While prices are coming down, costs are also inflating, further squeezing miners’ margins, owing to a combination of labour shortages and rising diesel, electricity and strip ratio costs. Such conditions are reflected on the books of some of Australia’s largest coal miners. Whitehaven Coal’s profits were down to $257.6m (A$395.16m) in the half year ending on 31 December 2023, an 86% fall from the same period in 2022.  

Yet in the face of such difficult conditions, mine production is still expanding, both through the enlargement of existing mines and the development of new greenfield sites.

Rather than wade through the regulatory quagmire of obtaining approval for new mines, many miners are opting to expand existing operations. This is the case in NSW, where all new mine applications appear to be for mine extension projects.   

From January to August 2023, combined coal sales for the largest six mines in NSW grew by more than 20%. Bengalla, Hunter Valley Operations, Moolarben OC, Mt Arthur Coal, Mt Thorley Warkworth and Wilpinjong are all open-cut mines that produce thermal coal – but why opt to enlarge rather than take on new assets?  

Speaking to Mining Technology, Andrew Gorringe, energy finance analyst for Australian coal at the Institute for Energy Economics and Financial Analysis, said: “There is now a recognition in the industry that there are a lot more state and federal-level approvals that are required for new coal mines.”  

As well as the arduous approval process, new projects in NSW struggle to obtain traditional financing owing to environmental concerns surrounding thermal coal. Around 89% of production in NSW is thermal coal and some of Australia’s major banks, including Australia & New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking, have all committed to limit or refrain from lending to thermal coal miners.

Patrick Marshall, head of private credit at Federated Hermes, toldBloomberg: “Mainstream lenders do not want to finance coal, so they have to go to higher cost hedge funds and family offices.”  

While funding issues push miners towards expanding existing assets, there are also scale benefits motivating this decision. In Gorringe’s report on the topic, he noted that use of automated equipment such as autonomous haul trucks makes more sense in mega mines (mines that have been enlarged, rather than fresh new mines). These mega mines benefit from economies of scale; as they get larger, the use of expensive technology to streamline operations becomes more efficient.  

A combination of these factors makes mine extension projects more attractive for those with a lower risk appetite.   

Gorringe said: “A greenfield mine comes with a large ticket, a large upfront expense. You have to look at what the market for coal is going to look like over the longer term. With existing mines, there is quite a bit of optionality for the miner to ramp up production levels. They can employ contractor fleets and a number of miners have done this over the past year.”

Mines in NSW may be getting bigger and bigger, but rising strip ratios will ensure there is an upper limit on this growth. The strip ratio represents the amount of waste or surface material that must be removed to extract a given amount of coal and serves as a measure of an open-cut mine’s implicit efficiency.   

Data from NSW Coal Services shows that strip ratios have risen by 6% per year on average in NSW since 2021 – but why is this ratio rising?  

“It is a function of the geology of the mine,” Gorringe explained. “A coal mine starts in a shallower section and get deeper through its life. The start will be the most economic. So using strip ratios as a measure of efficiency, you start in a productive area, but as time progresses, you eat away and mine out that low-ratio coal and you move into higher-ratio areas.”  

One therefore has to question the upper limit of a mine's size – the point where it becomes uneconomic. In November 2023, Bowen Coking Coal’s Bluff mine appeared to reach this limit as it was forced into care and maintenance as margins were squeezed.  

“There is a size limit that these mines can reach, and this limit is largely determined by strip ratios,” Gorringe said.

In the face of economic and regulatory challenges, rising strip ratios, lower prices, labour shortages and a difficult approval process, the decision of miners to seek out new greenfield projects may seem surprising. As Gorringe said: “It is going to take a lot to develop new mines with the outlook of cash flows drying up.”  

Yet large new projects are going ahead, predominantly in Queensland. Major developments include Whitehaven’s Winchester South and Blackwater South projects, Pembroke Resource’s Olive Downs development and Vitrinite’s Vulcan South greenfield mine.  

Why take on this level of risk with market conditions as they are?  

Gorringe reckons some of the large companies may not be looking to hold onto the assets for that long.

“With a lot of M&A [mergers and acquisitions] activity, there is demand for these sorts of assets. Once they get approved, they become a major saleable asset. So companies may look to sell after approval rather than invest in the asset themselves,” he said.   

Referring to the Winchester South development, he added: “Whitehaven will go through the process of trying to seek approvals, and then it still has the option of whether it gets the approvals or not to sell the asset to a company with a different risk appetite.”

According to think tank Ember’s 2022 report entitled Tackling Australia’s Coal Mine Methane Problem, Australia’s coal mines produce twice as much methane as official estimates.   

Australia joined a group of 120 countries signing the Global Methane Pledge to collectively reduce methane emissions by at least 30% from 2020 levels by 2030. Methane emissions from the mining sector will have to be cut drastically, but with 75% of the nation’s mines being open-cut, is this possible?  

“There are two impediments to it," Gorringe said. “Firstly, there is the financial component. Reducing methane emissions is costly and there is no real incentive for open-cuts in Australia to reduce their emissions. Why would they do it if the business case does not stack up?”   

Launched in July 2023, the Commonwealth Government’s Safeguard Mechanism was designed to incentivise reductions in industrial emissions such as methane. Nevertheless, a review by Energy & Resource Insights found that six of the top ten coal mines in Australia were not affected by the scheme. In other words, there is no real financial incentive offered by the government for them to reduce methane emissions.  

Gorringe added that there is a time element involved in the reduction of methane emissions. In open-cut coal fields, methane can be pre-drained from the coal seam before operations begin. However, as Gorringe explained: “Pre-drainage would be another extended leave time. Depending on the contents, this could take a number of years. This time period acts as an excuse not to pre-drain the methane.”  

However, while the government’s Safeguard Mechanism appears to be inadequate, the Queensland Government’s Low Emissions Investment Partnerships (LEIP) programme could be a “a step in the right direction”, according to Gorringe. Under the LEIP programme, the Queensland Government will contribute to the capital costs of pre-drainage programmes, offering a more tangible incentive to miners to reduce methane emissions.  

On the environment front, the introduction of climate reporting obligations in July 2024 could get coal miners to recognise their contributions to scope 3 emissions. However, do not expect this to be effective straight away.  

“My sense of it, at the moment, is that the effect in the first year will be very minimal. I think they will just focus on business as usual and it is not going to be a big stick that changes the way companies act,” said Gorringe.  

Throughout 2024, Australian coal miners will face multiple challenges. Expanding existing mines still seems to be a viable option, but with rising strip ratios and inflated cost bases, who is to say when they will tip into the realm of the uneconomic? Greenfield sites may be attractive as saleable assets, but the broader outlook of falling prices and tighter margins, combined with difficult approval processes, mean they may not be sensible long-term investments.   

In addition to these factors, coal miners are increasingly having to consider their operations’ impact on the environment. While this may not hurt them this year, do not be surprised to see investors shunning coal mining in favour of ‘greener’ options in the near future.