This analysis aims to address the following questions over the forecast period:

Transcription

1 Ref: H-C-D Australian Coal Industry Review 4 April 2017 HARRADYNAMICS Pty Ltd Web Site Release Version HARRADYNAMICS 2017 Australian Coal Industry Report HARRADYNAMICS has recently completed a review of each and every Australian coal mining operation along with those coal projects which have been advanced sufficiently to be recognised by State based approvals agencies or listed to be developed within the period 2017 to 2021 by the tenement owner. Other coal projects which have not lodged development documentation with either NSW or QLD government agencies, or have not been publically listed by tenement or mining lease owners, have not been considered in this analysis as their likely development timeframes fall beyond the forecast period 2017 through HARRADYNAMICS has ranked various development ( greenfields ) projects and expansion ( brownfield ) projects that could add production volumes into the domestic and export markets over the forecast period. The ranking process allowed each project to be ranked from Tier 1 (most likely to be developed during the forecast period) through to Tier 10 (least likely to be developed during the forecast period). A series of value criteria were applied to each greenfields and brownfields project that subsequently allowed for the ranking process. At the heart of those value criteria are life-ofmine (LOM) strip ratio (for OC mines), product coal quality, capital and operating costs (if known), product yield, mining costs per product tonne, rail and port charges per tonne, scale, expansion capability, complexity of the mining operation, track record of mine owner/operator, and a series of revenue variables. The analysis was undertaken across all thermal coal projects separately from those for coking coal projects to allow insights for each coal market to be determined. Once HARRADYNAMICS applied the value criteria the rankings for each coal project were then re-assessed based on the ownership structure, management team, clarity of purpose and direction as expressed by executive management from public domain records. This analysis aims to address the following questions over the forecast period: Of the numerous thermal and coking coal project developments that could be undertaken which make the most sense based on fundamentals as defined by the value criteria applied? Does the ranking (Tier 1 through 10) process for each and every coal project provide some insights into the likely Australian export volumes for coking and thermal coal? Is there a direct relationship between the Tier grouping of coal projects, as defined by HARRADYNAMICS, and the quality of those projects? Prior to undertaking the above analysis HARRADYNAMICS applied a set of assumptions in order to define the likely thermal and coking coal revenues and exchange rates driving seaborne demand over the forecast period. HARRADYNAMICS have referred to a number of price decks produced by key brokers and then calculated median figures as per Table 1 below. Worth noting from Table 1 that the 2016 figures are averages and thereby do

2 not take into account the huge swings in revenues experienced throughout the year. For example the thermal coal benchmark started 2016 below US$52/t and then rose to US$108/t by November Coking coal revenues also rose quickly and unexpectedly on the back of Chinese domestic production constraints from US$81/t in January to US$285/t in December In effect the spot price dragged the benchmark price up rapidly in the back half of 2016 and now that we are in early 2017 it is evident that the spot price is now dragging the benchmark back down to what forecasters are predicting to be closer to the long term average price for both thermal and coking coal. We are already seeing coal stockpile volumes increasing across many jurisdictions, including Australia, China, and the US, whilst at the same time the Chinese government is unwinding some of the policies it introduced in 2016 that constrained Chinese domestic production. Recent announcements by the Chinese central government suggest that domestic coal fired power generation, along with steel manufacturing, will weaken in HARRADYNAMICS do not see the recent and short short-lived spike in thermal and coking coal revenues providing any sustained stimulus leading to additional greenfields coal project development other than that forecast in this Industry Report for the forecast period. We are nonetheless forecasting an uplift in the sale of both thermal and coking coal assets throughout 2017 and over the short to medium term. Rio Tinto continues to sell out of coal worldwide and to that end has recently announced the sale of its two remaining NSW coal operations (Hunter Valley Operations & Mount Thorley Warkworth) to Yancoal. The sale of the two remaining Queensland coal assets (Hail Creek and Kestrel) have just commended through the appointment of BAML to lead the sale process. Anglo American also continues to sell down its Australian coal assets and looks to have recently sold the Dawson coal mine in Queensland. There is market speculation that the buyer is either AvidSys Group (an Australian-Indian commodity trading and software/consulting business) or Siberian Coal Energy Company (SUEK). The sale of Moranbah North and Grosvenor by Anglo has stalled, possibly on the back of profitable revenues in the back half of calendar year HARRADYNAMICS is nonetheless seeing Anglo American, Rio Tinto, and Vale as active sellers of coal assets going forward. We also note that Peabody Energy Australia has not concluded the restructuring of its assets even though it appears to be successfully trading out of Chapter 11 in the United States. HARRADYNAMICS is forecasting Peabody (in Australia) will sell non-core assets which we take as the worst performing of the Macarthur Coal mines purchased by Peabody in Peabody s Burton mine, shuttered in December 2016, may have recently sold. Olive Downs tenements were sold to Pembroke Resources for US$120m (plus a royalty) in May Other under-performing Peabody assets in Australia are also likely to sell. It is also likely that Yancoal (Yanzhou) will re-structure their Australian coal portfolio in 2017/2018 once the newly acquired NSW mines are fully integrated into the Yancoal Australian business.

3 Table 1 Broker consensus forecasts ( ) Pricing Assumption FX Rate (US$/t real) Thernal Coal (FOB Newc) Hard Coking Coal Semi-soft Coking/PCI ave Inflation %(both USD and AUD) Broker Consensus Forecast (USD real, 2016 basis) $73.85/t $69.20/t $67.50/t $65.90/t $65.10/t $64.15/t $105.80/t $122.50/t $110.90/t $125.90/t $119.10/t $116.45/t $93.75/t $86.20/t $79.80/t $89.50/t $86.75/t $85.25/t Australian Coal Industry Report Forecast Period Graph 1 below suggests a modest increase in total thermal coal production (up by 18.9Mtpa) over the 5 year forecast period. This equates to a modest 1.5% p.a. increase over 5 years. Coking coal production volumes are up over the same period by more than 31Mtpa or 3% p.a. Basis data includes FY2017 actuals to March Graph 1 Coal Mine Production Forecast HARRADYNAMICS has investigated all known (publically reported) greenfields and brownfields coal projects in QLD and NSW to get a sense of their current status along with the likelihood of those projects being undertaken in the forecast period. It has

4 been assumed that no new coal mine discoveries will occur in the forecast period and given the substantial coal mine development activity that occurred in the mining boom this assumption appears reasonable. The level of exploration and resource development across the coal mining sector has shrunk dramatically on the back of the mining boom and what little exploration activity is occurring at present appears to be focused on the development of known projects and/or current mining operations. Once the full list of greenfields and brownfields projects was assembled a process of ranking those projects was completed. Coal projects which were deemed unlikely to be developed over the forecast period were then classified as Pipeline projects given there low prospectivity of being developed prior to Graph 2 below suggests a thermal coal project Pipeline of some 322Mtpa (on average) over the forecast period. This graph also suggests that the coking coal project pipeline is smaller at 137Mtpa (on average) over the forecast period. The trend for both thermal and coking coal pipeline projects is relatively flat out to 2021 indicating that few of those projects have the financials to be converted into additional production volumes in the near term. Graph 2 Coal Project Pipeline Forecast Graph 3 below provides a comparison of the coal production forecast with the project pipelines for thermal coal and coking coal projects. The thermal coal project pipeline forecast always exceeds total thermal coal production whilst the coking coal project pipeline is always below the production forecast, and falls to approximately 50% of the coking coal production volumes by The relationship between production forecasts and the project pipeline, as depicted in Graph 3, provides some insights into what the future holds for the Australian coal mining sector:

5 1. Coking coal pipeline forecasts look reasonable and are in-line with longer term trends as they are between 75% and 50% of forecast production volumes over the period. This means the project pipeline is well known and well advanced without being so large that the number of cued projects are unlikely to be developed. 2. The forecast pipeline figures for thermal coal don t make sense and are more typical of a mining boom mentality where the presumption is demand is uncapped and volumes unconstrained without negative revenue impacts. Thermal coal pipeline forecasts are between 130% and 114% of forecast production volumes over the period. Clearly most of the pipeline projects cannot happen as they would more than double the most optimistic thermal coal production forecasts going forward. 3. HARRADYNAMICS have determined that the thermal coal project pipeline is skewed towards a number of Galilee Basin coal projects which are large in scale but perhaps low in probability of being developed. The vast majority of those large scale Galilee Basin thermal coal projects can t happen because of the medium energy coal qualities, relatively high strip ratio s, and the expensive rail and port requirements from both a capital and operating cost perspective. Better quality (higher tier) thermal coal assets in QLD, like Glencore s Wandoan project, should be developed prior to any of the Galilee Basin coal projects currently slated for development over the next 5 years. 4. Thermal coal production over the forecast period is relatively flat at around 260Mtpa. Thermal production is not being materially added to from the pool of pipeline projects as indicated in Graph 3 by the relatively flat Thermal Coal Pipeline curve. Whilst the individual coal mine and coal projects vary considerably in there fundamentals it would appear that most of the 260Mtpa of thermal coal production being forecast over the period are coming from existing operations and mostly from the expansion of top tier assets. Given the modest growth being forecast in the export thermal coal market the growth in top tier asset volumes has to come partly from lower tier assets reducing production volumes in response to market forces. 5. Coking coal (including SSCC, SHCC, and PCI) production over the forecast period is expected to grow by an average of 6.2Mtpa for each of the five years out to This modest increase in annual coking coal production appears to be coming from the pool of pipeline projects - as indicated in Graph 3 by the slightly falling Coking Coal Pipeline curve. Even though the pipeline of coking coal projects falls slightly most of the growth in volumes over the period is coming from existing ( brownfields ) operations and mostly from the expansion of top tier assets as some lower tier assets contract or close. The best of those existing coking coal assets are the Queensland based BMA operations, which we see expanding over the forecast period. What Graph 3 doesn t show is the relationship between forecast production volumes and coal quality over time. Generally speaking the quality of both thermal and coking coal production is falling throughout the forecast period - or processing yields are falling as a response to lower quality ROM coals being mined. In any case the relatively flat production volume forecasts may be hiding lower revenues or higher production costs over the forecast period. HARRADYNAMICS makes the observation that the low level of conversion of pipeline or greenfields projects into mining operations over the forecast period is unsustainable over the longer term. As existing operations mine deeper or encounter lower quality working sections unit costs must increase and the attractiveness of developing a greenfields project, compared to sustaining or expanding a brownfields operation, improves. At that tipping

6 point the economics of a greenfields coal mining project allows for their development even in a relatively flat growth market. We see such a tipping point arising for thermal coal projects from around and for coking coal projects from around The most recent mining boom allowed for near-economic, and some sub-economic, coal projects to be brought into production. Since the end of the mining boom those coal mining operations are typically highly geared and cash negative. Whilst many of the near-economic operations have managed to reduce costs and maintain slightly positive cash flows. Other near-economic operations have already reached a point where they are being offered for sale or have been closed and put on care-and-maintenance. As Graph 3 suggests the Australian coal mining sector appears to be going sideways over the next 5 years or so with respect to total production levels as well as the low probability of new greenfields projects coming on stream. Graph 3 Coal Project Production vs Project Pipeline Forecasts HARRADYNAMICS reviewed the relationship between existing coal mining operations, in the top tier sectors, against the likely coal mine developments in the same top tiers to see if the pipeline of quality projects could keep up forecast production volumes over the 2017 to 2021 period. What is evident from Graph 4 below is that the vast majority of Australia s current thermal and coking coal production is being produced by the best coal mining assets a somewhat intuitive and predictable finding. What is also evident is that the top tier project pipeline is skinny and falls away quickly over the forecast period. BRISBANE PO Box 10012, Brisbane Adelaide Street, BRISBANE QLD 4000; Ph: ,

7 Graph 4 Tier 1 and 2 Coal Mine Production Forecast Graph 5 below suggests that the very best (Tier 1 and 2) coal projects are not well supported over the forecast period with pipeline projects that are also in the top tier bracket. The inference being that the best quality coal mining operations, both thermal and coking coal, are unsustainable beyond 2021 unless new discoveries are made in the meantime that can top-up the pool of Tier 1 and 2 pipeline projects. HARRADYNAMICS believes that such new discoveries are unlikely and therefore production from top tier assets will continue to fall beyond Graph 5 Tier 1 and 2 Coal Project Production vs Project Pipeline Forecasts BRISBANE PO Box 10012, Brisbane Adelaide Street, BRISBANE QLD 4000; Ph: ,

8 Over longer forecast periods, say 10 to 12 years, a number of the top tier mining assets will not be able to maintain high production volumes or indeed remain top tier assets. All mining operations seek to implement an optimal and value maximising mine plan which sees the cheapest and best quality coal mined first. Over time each mine therefore mines deeper (if open cut) or further from mains, drifts, or shafts (if underground), and even if there is no fall off in coal quality, production costs invariably rise. The consequence of the top tier thermal and coking coal assets taking the lion s share of forecast growth between 2017 and 2021 is depicted in Graph 4 and 5 above. These graphs also suggest that expanding top tier ( brownfields ) mines ultimately reach an upper limit on their ability to grow further or to take more market share from lower tier assets. Both Graph 4 and 5 confirm that Australian coal producers will increasingly have to look to greenfields coal projects beyond 2021 in order to prop-up total export volumes beyond the next 6 to 8 years. What we don t know at this time of course includes the number of top tier mining assets likely to be discovered in the future that would increase the pipeline of top tier assets beyond our current knowledge base. That said it is also true that the recent mining boom created a significant uplift in resource and reserve knowledge across the Australian and global coal sectors. At no time in the past have we seen a period of less resource knowledge across both the existing coal mining operations or the greenfields project development space. It is HARRADYNAMICS opinion therefore that the top tier pipeline will indeed fall over time as a natural consequence of the industries desire to develop or expand the best coal mines ahead of the rest. Perhaps the best way to explore and define the challenges ahead for the Australian coal mining sector is to broaden the field of investigation and look at all of the current coal mines and coal development projects. HARRADYNAMICS has analysed all Australian coal production figures (excluding WA and VIC) from 2016 and then compiled a list of production forecasts that cover the 2017 to 2021 period for both thermal and coking coal mines. Production figures include domestic thermal coal volumes to get a sense of the size and production capacity of the complete thermal coal sector. HARRADYNAMICS note: 1. Forecast production volumes are not being constrained by either rail or port capacity in QLD or NSW. Unlike the mining boom there does not appear to be any rail or port capacity limitations that could impact on the growth forecasts across the QLD and NSW coal industry from 2017 through If anything the rail and port charges over the forecast period are showing signs of softening in a competitive market for rail and port services that is experiencing little volume growth and low utilisations. That said we note the ongoing speculation about the financial viability of some coal terminals such as WICET in QLD and to a lesser extent NCIG in NSW. Whilst those ports have long term take-or-pay (TPC) contracts under-pinning their financials it is what happens after those TPC contracts unwind that is of concern. 2. Aggregate production forecasts for thermal and coking coal show moderate growth over the forecast period but at the individual mine level there is substantial variability across the industry. For example there are some greenfields projects forecast to come online before 2021 (eg Qcoal s Byerwen mine and MACH Energy s Mt. Pleasant mine). There are also mines forecast to close such as the Burton open cut and Charbon underground mines. 3. The project pipeline is heavily dominated by thermal coal projects and the larger of those projects are located in Queensland s Galilee Basin. Whilst there are several large scale thermal projects proposed for the Galilee Basin the most prospective of those

9 projects (perhaps Adani s Carmichael Coal, and GVK Hancock s Alpha Coal) are still unlikely to be developed over the forecast period due to unfavorable economics and long lead times typical of such mega-projects. 4. Over the forecast period we are seeing more tenements being relinquished back to the State along with some that are being purchased by the State (eg: BHPB selling the Caroona EL back to NSW Government for $220m). There has been a significant fall off in investment capital finding quality coal mining projects which in part may explain why some tenements are being relinquished after a number of years of exploration and predevelopment effort. 5. Even with the recent (H1 FY17) improvement in both thermal and coking coal revenues those asset sales that have occurred over the past 12 months suggests the financing community is still somewhat pessimistic about the sector. We see this negative sentiment continuing throughout 2017 unless the US economy does something positive for the rest of the world s major economies. HARRADYNAMICS have presented in Graph 6 through Graph 9 below the relationship between the coal mining forecasts and the project pipeline forecasts for both thermal and coking coal over the full range of projects. That is to say all projects have been ranked Tier 1 through Tier 10 and the relationships between the projects and pipelines gives some insights into the financial viability of the Australian coal mining industry well into the future. Graph 6 Tier 1 through 4 Coal Project Production vs Project Pipeline Forecasts BRISBANE PO Box 10012, Brisbane Adelaide Street, BRISBANE QLD 4000; Ph: ,

10 Graph 7 Tier 1 through 6 Coal Project Production vs Project Pipeline Forecasts Graph 8 Tier 1 through 8 Coal Project Production vs Project Pipeline Forecasts BRISBANE PO Box 10012, Brisbane Adelaide Street, BRISBANE QLD 4000; Ph: ,

11 Graph 9 Tier 1 through 10 (All) Coal Project Production vs Project Pipeline Forecasts Australian Coal Rail Freight Business Australia s rail transport industry currently consists of 25 operators, primarily located in Queensland, New South Wales, and Victoria. The resource rich regions such as Western Australia s Pilbara, Queensland s Bowen Basin, and the Hunter Valley in New South Wales account for the majority of the bulk commodity rail freight business. The large mining companies also own and operate their own rail haulage fleets as indicated in Table 2 below. The bigger mining companies, such as Rio Tinto and BHPB, dominate the iron ore rail haulage market and are also players in the QLD and NSW coal haulage business. The coal haulage business in QLD and NSW continues to undergo structural change with increased competition and new entrants to the rail freight business across the coal sector. In 2016 Glencore sold its Grail business to Genesee & Wyoming and there were a number of other structural changes in the ownership and operations of existing rail freight businesses such as Pacific National. HARRADYNAMICS has taken the coal production forecast analysis described in this briefing paper and looked at the numbers from a rail freight perspective. The coal haulage market in Australia is dominated by Aurizon (QLD dominant) and by Pacific National (NSW dominant). The traditional markets for each of these two major players is now open to more competition in the above rail sector and over time Aurizon has made its mark in the NSW market just as much as PN has entered the QLD coal haulage business. Each of the coal mines operating in QLD and NSW has been identified and sorted by rail freight service provider. In addition each of the coal projects identified as likely to proceed within the forecast period has been assigned a rail freight service provider if that information has been defined and available in the public domain. For those pipeline coal

12 projects that HARRADYNAMICS has defined as not likely to be developed over the forecast period there exists an opportunity for any rail freight service provider to win that potential business. Those rail freight opportunities have been defined as OPEN or contestable at some point in the future. There are also a number of coal mines currently in production that don t export and also do not require rail freight services. Those mines are captive coal mines to adjacent power stations which typically also own and operate the mines for the exclusive use of the power station. Such mines are defined as None in the rail freight analysis given they do not require rail freight services from any provider. Refer to Tables 3 and 4 below for the details. Table 2 Rail Freight Service Providers BRISBANE PO Box 10012, Brisbane Adelaide Street, BRISBANE QLD 4000; Ph: ,

13 Table 3 Australian Coal Freight Service Providers Australian Coal Rail Freight Service Providers Forecast Year Aurizon QLD 155,043, ,935, ,740, ,600, ,800, ,300,000 Aurizon NSW 51,732,170 58,600,000 57,500,000 54,450,000 52,100,000 50,600,000 Pacific National NSW 110,872, ,050, ,800, ,200, ,050, ,910,000 Pacific National QLD 63,771,558 63,555,000 64,190,000 66,390,000 59,500,000 55,750,000 Other Freight Providers 59,617,572 60,520,000 65,700,000 67,350,000 67,750,000 68,700,000 OPEN for competition ( ) 0 0 5,750,000 7,500,000 25,100,000 32,100,000 OPEN for competition - pipeline 345,101, ,101, ,101, ,101, ,101, ,101,000 TOTAL 786,138, ,761, ,781, ,591, ,401, ,461,000 Table 4 Aurizon and Pacific National Coal Freight Forecasts Aurizon vs PN in Australian Coal Freight Aurizon (QLD + NSW) 206,775, ,535, ,240, ,050, ,900, ,900,000 Pacific National (QLD + NSW) 174,643, ,605, ,990, ,590, ,550, ,660,000 OPEN for competition ( ) 0 0 5,750,000 7,500,000 25,100,000 32,100,000 OPEN for competition - pipeline 345,101, ,101, ,101, ,101, ,101, ,101,000 TOTAL 726,520, ,241, ,081, ,241, ,651, ,761,000 Table 3 above defines Aurizon as the dominant rail freight service provider in QLD and Pacific National (PN) as the dominant rail freight provider in NSW. The table also indicates that Other Rail Freight Providers do not make up the majority of the rail freight business and are therefore not seen as dominant or indeed capable of setting the market rate for such services. Table 3 notes that the identified market for rail freight services that are not currently assigned over the forecast period ( OPEN for competition) is small and all but insignificant prior to By 2021 the OPEN for competition market rises to 32.1Mtpa for all asset qualities. However if we limit the asset qualities to just Tier 1 4 then the 2021 OPEN for competition market falls to 22.1Mtpa. The contestable rail freight market defined as OPEN for competition pipeline is large and reflective of the number of large scale thermal coal projects that are not likely to be developed in the forecast period. As stated elsewhere in this report the likelihood of the majority of the OPEN for competition pipeline projects being developed over the forecast period is considered very low. When we limit the asset qualities to just Tier 1 4 then the 2021 OPEN for competition - pipeline market falls from 345.1Mtpa to just 61.1Mtpa or less than 17.7% of the project pipeline. Once graphed the analysis becomes clearer. Graph 10 below shows the relationship over time between rail freight service providers and their secured volumes. Aurizon s QLD business along with PN s NSW business dominate. Aurizon s interstate businesses appear to plateau at around 2016 volumes or 51Mtpa. On the other hand PN s interstate business appears to fall over the forecast period by some 8Mtpa however that reduction is more than compensated by a forecast increase in PN s home state volumes of approximately 13Mtpa.

14 Graph 10 Australian Coal Rail Freight Forecast The rail freight services market defined as OPEN for competition pipeline appears large and constant in Graph 10 because those pipeline projects are already defined and are unlikely to change either in number, scale, or probability of being developed within the forecast period according to HARRADYNAMICS. To get a better sense of the contestable rail freight service business the numbers were looked at in a slightly different way. Graph 11 below excludes rail freight service providers other than Aurizon and PN (now owned by Australian Logistics Acquisition Investments Pty Limited). Graph 11 includes the rail freight services business not secured by either Aurizon or PN in the categories of OPEN for competition and OPEN for competition pipeline. By 2021 the volume of business not secured by Aurizon or PN in early 2017 is approximately 32.1Mtpa of which 22.1Mtpa is considered probable of being developed given those projects fall into the Tier 1 4 category. If we assume Aurizon and PN have an equal chance of picking up those 22.1Mtpa then the 2021 forecast volumes for Aurizon would increase to approximately 219Mtpa and those for PN would increase to 191Mtpa.

15 Graph 11 Aurizon vs Pacific National Rail Freight Forecast What we don t know in the above analysis is the timing of the take-or-pay rail freight services contracts and more importantly when those contracts are due to expire. That information is tightly held and no doubt commercial-in-confidence between the rail freight service provider and mine owner. What we do know is that both Aurizon and PN are holding contract renewal discussions with mine owners mid-term in an attempt to secure long term business. For example BHPB renewed its Mount Arthur Coal mine rail freight contract with Aurizon mid-term and in so doing BHPB secured a lower cost, on a tonne per kilometer basis, through to the Port of Newcastle for the renewed contract period. It is clear that rail freight and port service providers are facing strong competition given the coal export market is not forecast to be constrained by either rail or port capacity out to As and when rail freight services contracts fall due they are being replaced with coal haulage contracts on terms that benefit mine owners. This softening revenue trend for rail (and port) service providers is forecast to continue over the period and on the basis that increased competition between Aurizon and PN continues to drive efficiencies and those cost savings are passed onto miners. In Summary Of the numerous thermal and coking coal project developments that could be undertaken those that make the most sense are defined as top tier (Tier 1 through Tier 4) projects. Those projects contribute 100% of the likely to be developed thermal and coking coal projects over the forecast period.

16 The ranking (Tier 1 through 10) for each and every coal project provides significant insights into the likely Australian export volumes for coking and thermal coal over the forecast period. In essence those projects ranked Tier 1 through 4 (as per Graphs 5 and 6) will be developed and those ranked Tier 5 through 10 are most unlikely to be developed before HARRADYNAMICS have ranked each and every coal project on its fundamentals. This means the quality of each and every coal project can (and should) be used to define the likelihood of its development over the forecast period. Post the forecast period the pipeline of top tier assets falls away sharply, particularly for coking coal projects. The Australian coal industry longer term will therefore experience a combination of rising costs and falling revenues based on the depletion of the best coal mines and the need to replace those mines with lower quality assets. There is clearly no standing-still strategy for the coal industry!