London Mining
London Mining is incorporated and registered in the UK and is developing mines to supply the global steel industry. The Company has iron ore mining, exploration and development projects located in Saudi Arabia, Greenland, Sierra Leone, Mexico and coal projects in South Africa and Colombia. London Mining has off-take agreements in place with Chinese steel producers. The company is listed on the Oslo Stock Exchange.
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Colombian Potential for Coking Coal Producers
With the recent London Mining (AIM: LOND) acquisition of the remaining 80% of the Colombian coal producer International Coal Company (ICC), attention turns to the potential opportunities available in this South American country, which London Mining hopes to take advantage of.
Colombia is well placed both geographically and structurally as
far as the coking coal market is concerned, with an abundant amount of
what currently stand as untapped and underdeveloped resources. The
broader market looks to keep the physical prospects for coke tight, with
ever increasing global steel production and ongoing demand in China,
offsetting the more subdued decreases in demand from Europe. It is in
this context that we will take a look at what Colombia has to offer
those companies that look to take advantage of the coking coal
opportunities in the country.
Coke is a solid fuel source derived, through a process of baking
in an airless furnace known as coking, from raw coal (adhering to
certain criteria such as low sulfur). This process removes the varying
impurities (known as volatile constituents or volatile hydrocarbons)
inherent in the coal by fusing together the fixed carbon and residual
ash.
Too much or too little volatile matter in the coal will result in coke of a poor quality, and it is generally considered that 26-29% volatile matter is the optimum levels for coking. Unlike coal, coke produces little to no smoke when burned, making it ideal for domestic use as well as use in more confined, or less aerated areas. The primary use of coke however is as a reducing agent when smelting iron ore in the process of steel making. It is this industrial use that drives the coke market in modern times, with the strong links between steel demand and coke prices far outweighing the sliding domestic demand for this somewhat ‘old fashioned’ fuel.
When deciding to buy the remaining 80% of ICC, London Mining
cited the fragmented and underdeveloped Colombian coking coal industry,
as well as opportunities for current and future concessions and joint
ventures, as the primary reasons they are expanding into the South
American country.
Taking a look at current production levels
compared to the estimated reserves in the country’s four main regions,
we can see this belief is not unfounded. Data from the coal consultancy
IHS McCloskey, shows that the Boyacá and Socha regions hold an estimated
coking coal reserve of 860m/tn, but currently the estimated existing
production in those areas is only 1.6m/tn. An estimated 702m/tn coking
coal reserves are estimated in the Cundinamarca region, while only
1.4m/tn are currently being produced from the area.
Similarly, the Norte de Santander region has an estimated reserve of
245m/tn while the Santander area holds 158m/tn, but only 0.2m/tn are
being produced in Norte de Santander while no discernable production
comes from Santander. These all indicate a lot of potential to develop
and increase the coking coal industry within the country, and IHS
McCloskey go on to suggest that as the sector develops, even more
reserves are expected to be identified.
As well as these
underdeveloped and unutilized reserves, the disconnected nature of the
current coking coal industry in Colombia also offers significant growth
potential. Currently, ownership through the entire stream of coke
production is fragmented in Colombia, with the majority of mines being
small-scale and undercapitalized. Although there are a few major
producers, including Acerias Paz del Rio (CB: PAZRIO) and Votorantim
Participacoes (BZ: 1287Z), much of the current production is actually
coming from small, specialist companies, which have an almost artisan or
trade-vocational nature, naturally limited in the levels they can
produce and the economies of scale they can take advantage of – in turn
limiting their available investment into their concessions and
infrastructure surrounding the industry in Colombia.
At the same time however, the quality of Colombian coking coal is
very high, and is in fact one of few regions in the world to produce low
volatility coking coal. This leaves undoubtable potential for a well
financed and well organized producer to take advantage of the country’s
coking coal potential, by expanding either through stand-alone
operations, or joint ventures.
As highlighted, the current
logistics for coke production in Colombia are somewhat constrained due
to years of underinvestment, however there is still a firm
infrastructure in place for those companies entering the market, with
the potential for an expanded and more developed network as the industry
expands.
Firstly, Colombia has a large trucking fleet available
for the delivery of end products, combined with fairly competitive
tonnage rates (London Mining for example will pay $50 per tonne in
trucking costs, for the 1,000km journey from Socha to Atlantic ports).
Port access fees are themselves competitive, at around $10 per tonne.
Another
immediate and even cheaper option for coke delivery is the Magdelena
River, flowing through the western half of the country to the Atlantic
coast. London Mining have estimated the costs of shipping via the river
as between $30 and $35 per tonne, depending on the level of ‘backhaul’,
i.e. the possibility for the boats to bring cargo back on their return
journey.
Finally an underdeveloped area of Colombian
infrastructure, but one which with some investment, would be key for
coking coal producers, is the country’s rail network. As it stands, both
the Atlantic and Pacific railways in Colombia require significant
material refurbishment and investment before they become a reliable
delivery mechanism for coke producers, with a specific need to extend
capabilities in the regions where coking coal mines and producers
currently work.
Again taking London Mining as an example, their current ICC project
stands 16km away from the nearest private rail extension, and 60km away
from the national railroad. With some reasonable investment however,
this network could be improved and extended over the medium to long
term, providing another viable delivery system for any new coke
producers.
One last area to consider, although no less
significant, is Colombia’s geographical standing as far as global
exports and delivery are concerned. The country is well placed for coke
delivery on both Atlantic and Pacific routes, as well as more direct
delivery to South and North American countries. The country is perfectly
placed for direct shipping routes to the world’s two largest coking
coal importers: China and the European Union. Currently the majority of
the country’s coke is sold to US traders, but already some of the
biggest end product purchasers are more globally diverse, including US
Steel, Brazil’s CST and the UK’s Corus. As the global economic recovery
brings with it increased demand for steel, and in turn increased demand
for coking coal, Colombia’s global placement will allow coking coal
producers entering and developing in the country the perfect opportunity
to take advantage of these key links with the world’s largest coking
coal importers.
Focusing on this somewhat overlooked South
American country, it would appear the board at London Mining has seen
the potential it offers to the coking coal industry early. A well
financed and well led company could no doubt take advantage of the
opportunities that Colombia has to offer coking coal producers, and with
some investment back into the infrastructure and the country’s ill
invested industry, the relationship would seem to be mutually
beneficial, while highly profitable in the longer term for companies
such as London Mining.
Other London Mining news
- London Mining enters iron ore JV in Chile
2010-07-30 - London Mining's Chinese joint venture posts $6 million net earnings
2010-03-22 - London Mining AIM listing scheduled for November 2009
2009-10-16 - London Mining appoints adviser and joint stock broker to proceed with AIM listing, targets 20Mtpa production by 2018
2009-10-12 - London Mining wins key government endorsements for Sierra Leone project
2009-09-17
