Australian Resources Weekly Preview

Submitted by Jim Thesiger on 6 May, 2008 - 01:28

Australian Resources Weekly preview from sharemarket analyst Macquarie Research Equities.

Australian Resources Weekly

Impact on RTEA of higher U.S. coal prices

UBS' U.S. Energy team has recently raised PRB forecasts:

Our US Energy team recently raised their long-term Powder River Basin (PRB) coal prices along with other U.S. domestic coal prices to US$18/st. Higher prices reflected 1) higher production costs; 2) impediments to production growth in the Appalachian region; 3) higher natural gas prices; 4) increased exports and declining imports; and 5) moderate demand growth.

RTEA is the largest producer of PRB coal:

Rio Tinto Energy America, formed in June 1993 after the acquisition of Spring Creek and Antelope mines, is the world's largest producer of low-sulfur, sub bituminous Powder River Basin coal, and the second largest U.S. coal producer by tonnage. On 8 November 2007, Rio Tinto announced that it was exploring options to sell some or all of RTEA as part of a groupwide strategic review

Impact on earnings and valuation:

We currently forecast PRB prices of US$11/t in our modelling of RIO which yields negative earnings and NPV forecasts. However, using the prices from our U.S. Energy team sees NPAT for RTEA of $25m in 2008 and $169m in 2009. Additionally, on a DCF, it values RTEA at c. US$6bn.