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Thermal coal

Increased energy demand in emerging markets continues to drive growth in thermal coal demand. Ironically, China’s environmental clean-up effort is increasing demand for electricity (electric vehicles etc.). Given that thermal coal is perceived to be a “dirty” commodity from an environmental perspective, very few Western mining companies are building new thermal coal mines. We believe that some banks may also not be willing to lend to companies that wish to build new coal mines. We believe a shortage of capital invested in new thermal coal supply against a stable demand backdrop over the medium term could support favourable prices.

We believe the Chinese authorities may regulate thermal coal prices in a range of around $70-100/t, to maintain profitability for coal miners and electricity generators.

Renaissance Capital

14 January 2019

Metals & Mining

Thermal coal cost curve (1,640mnt)

Figure 70: 2018E thermal coal cash costs plus sustaining capex, $/t

120

	100	Spot price: $98/t*
		Incentive price: $89/t
	80
		Average cash cost: $67/t
$/t	60				64
			Glencore,59	American,Anglo 59
	40	BHP,53			RainbowAfricanMinerals,
	20
	0

Note: Coal consists of seaborne supply, including coastal trade in China (i.e. coal that is shipped from northern Chinese ports to southern ports). *Priced as at 8 January 2019

90th percentile: $92/t

	South32,76 Exxaro,80	70th percentile: $71/t
		50th percentile: $64/t

Source: Bloomberg, CRU, Renaissance Capital estimates

Around 7% of the thermal coal industry is cash-burning at spot prices. This is very low compared with historical levels and could point to downside to coal prices.

Figure 71: Percentage of thermal coal cost curve that is cash-burning over time

										% Cash burning								Thermal coal (FOB Richard's Bay), $/t															Average LT cash burn
	180									157																							60.0%	64.0%
																										58.5%																		70%
	160
																																51.0%			51.5%
	140					48.0%	47.0%					48.0%	45.5%					121				45.0%	49.5%		49.5%						45.5% 45.0% 45.0%													60%
																					41.0%						41.0%
	120	35.5%			35.5%			37.0%			35.5%			35.5%	34.5%									35.5%				36.0%	37.0%	39.0%												102	98	50%
			33.5%														33.0%
				32.0%						31.0%						30.5%																				32.0%
$/t	100																			29.5%																								40%
	80
																				19.5%															Average LT cash burn, 29.0%									30%
																																						17.0%
	60																																				12.0%		11.5%
	40																																			9.0%					9.5%			20%
							53											3.0% 2.5% 2.5% 3.0%															51							5.0%		5.0% 5.0% 5.0% 5.0%
									1.0% 1.5%	0.5% 0.5%
	20																																											10%
	0	Mar 06		Sep 06		Mar 07		Sep 07	Mar 08	Sep 08	Mar 09		Sep 09		Mar 10		Sep 10	Mar 11	Sep 11	Mar 12		Sep 12		Mar 13		Sep 13		Mar 14		Sep 14	Mar 15	Sep 15		Mar 16		Sep 16	Mar 17		Sep 17		Mar 18	Sep 18	Spot	0%

Source: Bloomberg, CRU, Renaissance Capital estimates

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Renaissance Capital

14 January 2019

Metals & Mining

Our long-term thermal coal price of $80/t is around 13% below the 90th percentile of the cost curve.

Figure 72: Thermal coal price vs cash costs* at the 90th percentile		Figure 73: Thermal coal price premium (discount) to the 90th percentile
Cash costs, $/t	Thermal coal average price. $/t	45%

	140						122											35%		18%
$/t			102	91	102	117		109	93	85	83	88			86	84							0%			7%
																		25%
													Forecasts
	120
																		15%
													98
	100													93				5%
																	80
		2007 72																-5%
	80																					Historical average, -16%			2017 -4%		2019E -2%
												85
																		-15%
	60																	-25%
	40																	-35%
	200666																	-45%	200713%-		200929%-	201010%-		201224%- 201326%- 201422%- 201533%- 201623%-				2020E12%-	2021E16%-
			2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E	LT(real)	200623%-		2008			2011			2018E

*Cash costs net of by-product credits plus sustaining capex.

Source: Bloomberg, CRU, Renaissance Capital estimates

Source: Bloomberg, CRU, Renaissance Capital estimates

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Platinum group metals (13mn oz)

We see downside risk to the spot PGM basket price, which is trading above cost support and could suffer from escalating fears of a global slowdown and falling vehicles sales.

However, we believe the price differential between platinum and palladium is unsustainable, and forecast this to close over the medium term as platinum is substituted for palladium in gasoline auto catalysts.

Longer-term, we continue to see a risk that low-cost supply and recycling growth could outstrip incremental demand growth and effectively displace some of the high-cost South African mine supply, potentially lowering cost support.

Renaissance Capital

14 January 2019

Metals & Mining

Figure 74: 2018E 3PGM cash costs plus sustaining capex, $/oz

1,200
	3PGM price: $1,107/oz*
1,000								90th percentile: $943/oz
	Average cash cost: $822/oz						RiversTwo(ARI), 813 Zondereinde(NHM), 827 BRPM(RBP), 842 Kroondal(SGL), 879	Lonmin, 888	Rustenburg(SGL), 928	Union (AMS), 935
800		509(THA),Tharisa	528(AMS),Mogalakwena	613(SGL),Stillwater (NHM),Booysendal692 (AMS),Amandelbult726	(AMS),Amandelbult726 (AMS),Kroondal739 (AMS),Unki749 (IMP),RiversTwo 767	(IMP),Zimplats776
600	Norilsk
400
200
0

Marula (IMP), 997

Rustenburg lease (IMP), 1,134

*Priced as at 8 January 2019; 3PGM basket (57% Pt, 36% Pd, 7% Rh).

Source: Bloomberg, CRU, Renaissance Capital estimates

Figure 75: NYMEX platinum inventory days and price, $/oz (RHS)

Figure 76: NYMEX palladium inventory days and price, $/oz (RHS)

16	1,737			1,846		15								2,000	30	27													1,2621,400
					1,662
														1,800				24	24									1,064		1,200
14															25
														1,600								20
																		20						906
						1,241								1,400													827			1,000
12									11						20
					10						10
												983		1,200										15	677					800
10					9								796	1,000	15									Average exchange stock days, 13
		Average exchange stock days, 9						9																						600
												8
				8									8	800
															10
8		7					7							600										7						400
6			5				6							400	5										3		2	1	2	200
														200
4	Jan-10	Jun-10	Nov-10	Apr-11 Sep-11 Feb-12	Jul-12 Dec-12 May-13	Oct-13 Mar-14 Aug-14	Jan-15 Jun-15	Nov-15 Apr-16	Sep-16	Feb-17	Jul-17	Dec-17 May-18	Oct-18	0	0	Jan-10	Jun-10	Nov-10 Apr-11 Sep-11	Feb-12	Jul-12	Dec-12	May-13	Oct-13	Mar-14 Aug-14 Jan-15	Jun-15 Nov-15 Apr-16	Sep-16	Feb-17	Jul-17 Dec-17 May-18	Oct-18	0
Note: Calculated as exchange inventory/global platinum demand*365.															Note: Calculated as exchange inventory/global palladium demand*365.
								Source: Bloomberg, Renaissance Capital																	Source: Bloomberg, Renaissance Capital

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Renaissance Capital

14 January 2019

Metals & Mining

Figure 77: Percentage of 3PGM cost curve that is cash-burning over time

							% Cash burning								3PGM basket price, $/oz										Average LT cash burn
	2,500								74.5%																															90%
							1,973																																	80%
	2,000																																							70%
															1,476														47.0%											60%
	1,500								41.0%										37.0% 37.0%																				1,107 50%
$/oz																				31.0%					33.5%			28.5%
	1,000									26.0%								22.0%					24.0%				22.5%			23.0%										40%
																								21.5% 21.5%										21.5% 21.5%
	667										12.0%						13.5%					12.0% 12.5% 12.5%				12.0%					12.0%		12.0%							30%
	500	Average LT cash burn, 13.1%						679													10.5%											11.0%			11.0%	10.0%	8.5% 8.5%	10.0%	8.5% 8.5%	20%
	2.5% 2.5%	1.0% 1.0% 1.5%		0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%				7.0%				0.5%	2.0% 2.0% 2.0% 2.0% 1.5% 1.5% 1.5%																											10%
	0																																						Spot	0%
	Mar 05	Sep 05	Mar 06	Sep 06	Mar 07	Sep 07	Mar 08	Sep 08	Mar 09		Sep 09		Mar 10	Sep 10	Mar 11	Sep 11		Mar 12	Sep 12		Mar 13	Sep 13	Mar 14	Sep 14		Mar 15		Sep 15		Mar 16		Sep 16		Mar 17	Sep 17		Mar 18	Sep 18

Source: Bloomberg, CRU, Renaissance Capital estimates

Our long-term 3PGM price forecast of $1,127/oz is around 20% above the 90th percentile of the 3PGM cost curve.

Figure 78: 3PGM price vs cash costs* at the 90th percentile

Figure 79: 3PGM price premium (discount) to the 90th percentile

		90th percentile of 3PGM cost curve*													3PGM basket price**					100%		87%	81%
	1,800								1,421						Forecasts					80%
										1,370
$/oz				720	1,226	946	1,053	1,339			1,320	1,088	947	970					1,127		42%			21%		21%	3%							9%	3%	10%	3%
	1,600														1,028	1,100	1,153	1,182		60%
	1,400
	1,200																			40%
																													Historical average, 14%
																				20%
	1,000
	800	514	580											933						0%					-6%			15%-	14%-	12%-	16%-	12%-	-4%
	400
	600																			-20%
		2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E	LT (real)	-40%	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E

*Cash costs net of by-product credits plus sustaining capex.

Source: Bloomberg, Renaissance Capital estimates

Source: Bloomberg, Renaissance Capital estimates

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