There’s a public meeting at Wollar, near Mudgee, this week at which US coal major Peabody will seek community support for an approval to extend its Wilpinjong coal mine.
No doubt a report by Peabody’s “expert”, Deloitte Access Economics, will be brandished about with élan. For the report finds the Wilpinjong expansion has net benefits of $745 million; something which may surprise Peabody’s shareholders as their entire company is now worth $US38 million.
That’s correct; a mere expansion of the marginal Wilpinjong, near Wollar, is worth 15 times more than the share market value of the US parent corporation.
This must mean one of two things; Deloitte is wrong, or markets are wrong (in which case, pin back the ears and dive into Peabody shares!).
We prefer option one though, partly as Deloitte’s coal price calculations were, “based on advice from [Peabody]”.
This is the beauty of being an economic consultant; it doesn’t matter if you are right or wrong, you get paid regardless. By the time the age of coal has passed, Deloitte can simply plead they were doing what the client told them.
Besides, they complied with all the relevant Departmental guidelines…which is coincidental as they also helped to write those Departmental guidelines.
Deloitte consulted to both the Department of Planning and the Minerals Council of NSW in preparing the NSW guidelines for economic assessment of mining and coal seam gas.
It would seem unlikely for a department to denounce a report by one of its own consultants, so the advice to government will inevitably be: “dig up more coal”.
By approving 20 new coal mines it was wrecking the price of Australia’s second largest export. Today’s proposition is to establish why.
Government is turning a deaf ear to frank advice, listening instead to miners pushing their own projects, their economists saying whatever the miners tell them and mining departments agreeing with the same economists.
As part of the approvals process each mine has to submit an economic assessment. This economic assessment is written by a consultant, who is paid by the miner and who produces so-called “independent” analysis based on estimates of revenues and costs provided by their clients.
Economics consultants come in different shapes and sizes, but they often either worked in, or consult to the planning departments that are evaluating the coal mines to which they are consulting.
To another topical example; Last week, Chinese coal company Shenhua could have applied for a mining licence to start its controversial Watermark mine on the Liverpool Plains.
But it didn’t. It is not prepared to take the financial risk of a $200 million mining licence fee and the $780 million capital cost.
Over and above community unrest and the consequent political nightmare, Shenhua is well aware its project doesn’t stack up financially.
Let’s rewind to 2012 when the consultants to Shenhua, Gillespie Economics, found this mine had a net benefit of over $3 billion.
To arrive at this number, Gillespie used coal prices of $A99 and $A142 per tonne for the mine’s thermal and low-grade coking coal respectively.
Today these prices are $US45 and $US72 a tonne.
Gillespie’s input prices were provided by none other than its client Shenhua. But as a rigorous, independent consultant Gillespie also checked the value of the project at coal prices 20 per cent lower. Happily the mine was still worth $1 billion.
Anyway, the Department happily signed off on the Gillespie analysis of the Shenhua mine in 2014. By then prices had already dropped and every farmer from Coonabarabran to Quirindi was hollering the mine would affect their water.
Based on Gillespie’s report, the Planning Department was “satisfied that the projects benefits … would significantly outweigh its costs” and emphasised the project’s role in “meeting society’s basic energy needs” as if there was no other coal being mined.
With advice like that, what’s a poor government to do?
It could start by trying to get more rigorous, independent advice. Or it could simply adopt the policy of common sense and put a moratorium on all new coal mines and expansions so that the deluge of supply would not demolish the price of such a large export.
For those concerned not just with the economics but also with the environment, the fall in the price of coal is delaying the inevitable transition to clean energy.