Investing in coal: market opportunities and competitive threats - presented at

Mines and Money Australia

International Coal Markets

Bernard Guarnera, ChairmanBehre Dolbear Group Inc.

andTim Alch, Vice President

Behre Dolbear & Company (USA), Inc.

BEHRE DOLBEARfounded 1911 MINERALS INDUSTRY ADVISORS

The Current State of the International Coal Markets

• “Russia's Severstal sets sights on U.S. coal market ”Marketwatch, Sept. 29, 2011

• “India 2011/12 coal import needs may jump to 114 mln T; Demand-supply gap may touch 200 mln T by 2017-min”Reuters, Sept 27 , 2011

• “Australia cuts coal output forecasts as recovery drags –lowering forecast for the production of met coal by 6 % to 161 million tonnes” Reuters, Sept 19 , 2011

• “Coal shortage begins to bite: At the end of Aug, 2 2 power plants across India had a supply of less than 7 days of coal”Livemint, Sept 20, 2011

• “SK's Posco to form iron ore, coal joint ventures in Co lombia”Platts, 15 Sep , 2011


Metallurgical Coal Price Trends

Source: Platts, Citi Investment Research and Analysis


Current “Contract” Coal Prices Remain Resilient1

• Hard Coking Coal: US$320 to US$350 per T2

• Soft Coking Coal: US$240 to US$265 per T2

• Thermal Coal: US$130 to US$140 per T

(Forecasts made in December 2010 have gone bust)

1”Quarterly” Australian Benchmark2±35% to 45% increase QoQ


The Long-Term Outlook


More Consumers in Asia Need More Energy and Coal Especially


Coal Use Outside the OECD

Source: International Energy Statistics Database, UN Statistics Division


China and India Will Account for Bulk of Metallurgical Coal Demand

Source: BHP Billiton


Asia Forecast to Dominate Future Energy Demand Scenarios

• Thermal and metallurgical coal demand and imports in Asia are surging to record levels

• A steady (sporadic) increase in coal prices is forecast over the next several years

• Production may struggle to meet future demand

• China, India and Korea buying coal resources


Southeast Asian Coal Imports Are Trending Higher

Source: GTIS; Trade Data, Credit Suisse Estimates

Mill

ion

Ton

nes

6

5

4

3

2

1

0

1995 1997 1999 2001 2003 2005 2007 2009 2011


China

• Still moving 20 million people a year into cities (over the next 15 years)

• Average GDP growth of +/-6% per year

• A power grid the size of that in the UK each year for the next 15 years

• Largest consumer and producer of coal

• Switched from being a coal exporter to coal importer three years ago


China’s Mining Acquisitions By Commodity – Coal is Target #1

Source: Ernst & Young’s Global Mining & Metals Center*Includes domestic deals within sector


India Plans to Build Power Plants and Ports to Import More Coal

India’s Power Plant Expansion Forecasts Indian Port Expansions

Source: CEA; Credit Suisse Estimates Source: Credit Suisse Estimates

0

5

10

15

20

25

FY

-11

FY

-12

FY

-13

FY

-14

FY

-15

FY

-16

FY

-17

FY

-18

FY

-20

GW

0

50

100

150

200

250

300

350

2009

2010

F

2011

F

2012

F

2013

F

2014

F

2015

F

2016

F

2017

F

2018

F

2019

F

2020

F

mn

tonn

es

India - East India - West


India Will Be (Is?) The India Will Be (Is?) The WorldWorld’’s Largest Coal Importers Largest Coal Importer

India Coal

Imports

Source: Peabody


Global Thermal Coal Demand


Coal Demand Will Outpace Other Fuel Sources

Source: International Energy Agency World Energy Outlook 2009, Energy Information Administration Annual Energy Outlook and Peabody Analysis


Major New Global-Fuel Generation Build-Out Under Way

Data and Estimates Based on Platts Worldwide Power Plant Database and Peabody Analysis


Global Metallurgical Coal Demand


Global Steel Production Drives Met Coal Demand in China, India, etc.

Global Met Coal Use Likely to Increase by 50%

Source: World Steel Association; Third Party Data and Peabody Analysis


Global Coal Production Overview


Six Largest Producing Nations 20101

(Million Tonnes) and % Change from 2009

• China 3,680; Up 9%

• USA 1,000; Up 2.1%

• India 580; Up 2.5%

• Australia 410; Up 3%

• Indonesia 350; Up 19%

• Russian Federation 300

1Approximations – Various Sources (±2% or 3%)


Metallurgical Coal Cost Curve – Well Below Current Prices

Source: Macquarie Research, September 2010


Global Coal Trade Overview


Thermal Coal Trade Flows 2010

Source: GTIS, Macquarie Research, September 2010


Indonesia and Australia Forecast to Increase Coal Exports Significantly

Source: Wood McKenzie

Indonesia and Australia’s Transportation Costs: Key Suppliers to Asia

Transportation Routes

Main Demand Area

150M Tons in 2009150M Tons in 2009

130M Tons in 2009130M Tons in 2009

MalaysiaMalaysia

IndiaIndia

ChinaChina

Hong KongHong Kong

KoreaKorea JapanJapan

PhilippinesPhilippines

TaiwanTaiwan

Australia

IndonesiaIndonesia

ThailandThailand

Main Supply Areas

Origin Destination Estimated Time to Destination

(Days)

Estimated Cost per Tonne

(US$/t)

Indonesia Japan 7 - 9 8 - 10

China 8 - 10 9 - 11

Australia Japan 10 - 13 11 - 17

China 12 - 15 13 - 19

Canada(East Coast)

Japan 14 - 16 15 - 18

China 15 - 18 17 - 20

USA(West Coast)

Japan 27 - 33 16 - 20

China 29 - 35 18 - 21


Greatest Metallurgical Coal Import Regions (Million Tonnes – 2011e)

• Japan 59

• India 49

• European Union 35

• China 35

• South Korea 25

Source: Citigroup


Greatest Metallurgical Coal Export Regions (Million Tonnes – 2011e)

• Australia 140

• USA 53

• Canada 26

• Russia 14

• Mozambique 4

Source: Citigroup


Conclusions and Challenges

• Outlook for Coal in Australia and Southeast Asia Robust

• Social Opposition to Mining Development

• Higher Taxes

• Increased Regulations

• Replacing Production from Existing Coal Mines

• Shortage of Skilled Laborers and Experienced (or any) Professionals

• Mine Cost Inflation


Coal Mine Cost Inflation 2010

Source: UBS


Technology

Investing in coal: market opportunities and competitive threats - presented at