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Analyst Rod Buckton Email rbuckton@bgfequities.com Issued 22.11.


Coal Price Outlook – Prices to remain robust

Key Points
1. We expect prices to remain robust through 1QCY2011, and provide our forecast
benchmark prices.
2. Possible production interruptions in QLD due to forecast wet weather conditions (Nov-Jan
probability of above median rainfall 70-80% in key QLD coal production area) could tighten
supply leading to further strength in prices.
3. In 2008, weather conditions in QLD which caused supply shortages lead to a spike in coal
prices, and importantly lifted coal prices to a new floor price reflecting production costs,
which have supported robust prices ever since.

Forecast benchmark prices for the March Quarter 2011 assuming business-as-usual:

Description Forecast Benchmark Current price

Hard Coking Coal US$205 US$209
LVPCI US$150 US$147-151
Semi-soft coking US$145 US$138-140
Thermal (6322kcal) US$100 Annual price negotiated with
Japanese utilities
Source: BGF Equities

Coal Outlook
The negotiations on 2011 contract thermal coal starting January for Japanese electric utilities are
expected to started in the last week of November, and conclude in mid-December at the earliest.
The expectation of the suppliers is for increases justified by high demand, tighter supply and
increasing costs. Much of the coking coal market has moved to quarterly pricing and negotiations
are now becoming routine.

Spot prices at Newcastle have recently risen as high as US$110.00 FOB with an increase of about
US$15.00 in the last month. There is no particular tightness in the market but recent rains in
Australia and Indonesia in September have interrupted shipments during the peak season for
buyers re-stocking for the Asian winter.

Higher domestic prices in China have triggered an increase in Chinese imports which has also put
upward pressure on thermal coal prices. Domestic thermal coal prices in China have reached as
high as US$124.50. The European spot has also breached the contract price since the beginning
of October also as European utilities stockpile for winter.

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BGF Equities Research Issued 22.11.10

However, while the supply position is not particularly tight, prices are expected to remain high for
the winter peakk but with increasing price volatility in the new year as the supply/demand balance
eases. This assumes no interruptions to supply.

Possible Interruptions in Queensland

The ‘wet’ season in Queensland may yet have a bearing on prices in the near term. The Australian
Bureau of Meteorology predict that the chance of exceeding median rainfall in the period from
November through January based on a consistently positive Southern Oscillation Index (SOI)
phase over September and October is 60-70%.
60 (see map below) This would be thet equivalent of
an extra 200mm of rainfall above the median over much of the Bowen Basin coalfields and 300-
400mm over the key coastal ports.

The high SOI since August and the persistent El Nina conditions also indicate an 87% higher than
average chance of increased Cyclone activity with 6-7
6 7 cyclones likely, compared to the average of

Similar SOI phases occurred in 2000 and most recently in 2008. In 2008 flooding disrupted coal
supply generally and which shut down part of the Ensham mine (see picture) with the loss of
perhaps 3-4Mt
4Mt of production. This event, along with a couple of other “micro-events”
“micro events” globally and a
perception (not a reality) of tightness in supply, caused the mother of all coal price spikes, where
Australian hard coking
king coal prices hit US$300/t and thermal coal tipped US$125/t. The miners will
remember this very well. Several were forced to declare “force Majeure” - BHP declared force
majeure from 24 Jan to 5 June 2008 such was the severity of the flooding.

Rainfall - Probability of exceeding Median Rainfall - November 2010 to January 2011

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acsimile +61 3 8688 9155
Sydney Suite 24 259 Clarence Street Sy
Sydney NSW 2000 Australia Telephone +61 2 9263 2700 Fac
acsimile +61 2 9267 0806
BGF Equities Research Issued 22.11.10

Ensham Pit January 2008 (Source unknown)

Price Forecast
While the GFC has moderated prices, there has been no return to the low prices from before the
2008 spike. Remember, hard coking coal was under US$50/t as recently as 2003. (see Price graph
below) The costs of exploration, acquisition and production have all risen sharply in recent years
and it is this new cash-cost
cost floor which has set the minimum coal price and
and it is the benchmark
thermal price which represents that floor.

There are reasons to be optimistic about sustained higher coal prices:

• Coal demand is expected to remain strong with growth in seaborne coal to increase form
around 700Mt to 1000Mt by 2020.
• Much of this growth in demand will come from India and emerging Asian economies with the
seaborne thermal and PCI markets will grow the most.
• Australia is in a good position with quality coal resources, dominance of the hard coking and
PCI product niches,es, and new mine, port and rail capacity able to gain a significant share of
the demand.
• BHP is expected to use its market power in the premium hard coking sector to push for a
move to monthly pricing to better take advantage of rapidly changing market conditions
including adverse weather and tightness in supply.
• The September rains have disrupted some Queensland suppliers and stockpiles have been
depleted. Further disruptions will adversely affect supply and put upwards pressure on price.

Melbourne Level 4 75-77 Flinders Lane Meelbourne VIC 3000 Australia Telephone +61 3 8688 9100 Fac
acsimile +61 3 8688 9155
Sydney Suite 24 259 Clarence Street Sy
Sydney NSW 2000 Australia Telephone +61 2 9263 2700 Fac
acsimile +61 2 9267 0806
BGF Equities Research Issued 22.11.10

• Loss of supply due to inclement weather in Australia and Indonesia cannot be easily replaced
by enhanced supply out of Africa, North and South America or Russia. All have infrastructure
constraints and if past performance is any guide, a tendency to drop the bundle when the
pressure is on.

Forecast benchmark prices for the March Quarter 2011 assuming business-as-usual:

Hard Coking Coal US$205 (Currently US$209)

LVPCI US$150 (Currently US$147-151)
Semi-soft coking US$145 (Currently US$138-140)
Thermal (6322kcal) US$100 (Annual price negotiated with Japanese utilities)

I would expect that prices will remain robust throughout 2011 and beyond.
In the longer term, prices will respond to the advent of large volumes of cheaper thermal and soft
coking coal reaching the market out of say, Mozambique and Mongolia. This new production is still
a fair way off and significant infrastructure and capital hurdles remain to be negotiated.

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