Modernisation drive leaves trail of ghost mines

PUBLISHED : Monday, 13 December, 2010, 12:00am
UPDATED : Monday, 13 December, 2010, 12:00am

Coal miners in Shanxi province, the nation's second-largest coal producing region, are investing billions of yuan to upgrade production facilities and management, in an industry consolidation ordered by the government to improve safety and efficiency.

Typically, the revamp order requires that a mine ceases operation and undergoes reconstruction for two years - a move that will cut regional output in the short term, but pave the way for larger-scale and more efficient and safer mining in the long term.

One example is the Youyi mine in Shanyin county, a district of Shanxi under the administration of Shuozhou city. The mine is being purchased by Hong Kong-listed King Stone Energy Group, a chemical and optical products maker that diversified into coal mining a year ago.

In Shanyin, 20 out of 21 mines have been ordered to shut down and be overhauled, said the mine's managing director, Sun Chuntian. The only mine that is allowed to continue production, called Shaoyaohua, has gone through a period of modernisation that began in 2006 itself.

Shops and restaurants near the Youyi mine are shut, creating a semblance of a ghost village. Reconstruction is slated to begin next March.

The industry's consolidation began before the Shanxi government's move last year to reduce 2,600 mines to 1,053, although the industry remained fragmented compared to developed economies. Now all mines under 300,000 tonnes of annual capacity have been ordered to close and be absorbed by larger operators.

'Years ago, we had over 300 mines in the county,' Sun recalled in an interview with Hong Kong media on Friday. 'This was reduced to 67 in 2007 and to 21 this year.'

The 'marriages' of the mines were arranged by local governments according to geological and mining considerations to maximise efficiency gains. Mine bosses had little say in the decisions, Sun said.

After the consolidation, each mine's annual production capacity will be at least 900,000 tonnes. The Youyi mine, with 450,000 tonnes of annual capacity previously, will be linked underground with an adjacent mine with 300,000 tonnes of capacity to create a bigger mine.

The revamp is expected to cost up to 800 million yuan (HK$934.24 million) in mining equipment purchase and infrastructure construction when completed by the end of 2012. The annual output capacity of the combined mine is planned at three million tonnes.

The Youyi mine has estimated recoverable reserves of 136 million tonnes, compared to 117 million tonnes at Shaoyaohua.

King Stone announced earlier this month it would acquire 60 per cent control over the two mines for HK$3.54 billion. It has an option to buy the remaining 40 per cent for HK$2.36 billion within nine months from completion of the current acquisition, which is expected to take place by late January, according to chief financial officer Edward Lee Tao-wai.

The purchases will be 34 per cent financed by cash for a total of HK$2 billion, with the rest by the issuances of shares and bonds convertible into shares.

The mines' vendor, Liu Yong, will have a 48.6 per cent stake in King Stone when all the bonds are converted into shares after both purchases are completed.

Liu has guaranteed the combined 2011 and 2012 net profit of the mines will not be less than HK$1.7 billion. The Shaoyaohua mine's net profit amounted to 106.2 million yuan in the first five months of this year, 97.4 million yuan last year and 186.3 million yuan in 2008.

The Youyi mine made a net loss of 1.7 million yuan in the eight months to May this year. Although it will not officially reopen until 2013, chief investment officer Winson Ip said Youyi will produce at least 500,000 tonnes of coal in each of the two years from digging work done during the reconstruction.

'This coal, together with some newly developed open-pit mining in Youyi, and a ramp-up in output in Shaoyaohua are the basis for the profit guarantee,' Ip said.

Sun said Shaoyaohua mine's output is expected to rise to 3 million tonnes next year from around 2.35 million tonnes this year.

Beijing has, meanwhile, frozen both annual contract and spot market prices to help rein in rising consumer price inflation, but Sun said the move would have little impact on selling prices of the mines' output, as the coal was sold in the spot market and price controls were imposed at a port level, and not at a mine level.

'Our ex-mine prices are not affected, and the policy is aimed at squeezing the fat profit margins earned in the logistics and distribution supply chain,' he said.

The mines' selling prices ranged from 410 yuan to 430 yuan a tonne this year, and production costs total around 200 yuan a tonne, he added.


Shanxi government aims to reduce the province's mines by more than half

Of Shanyin county's 21 coal mines, the number closed for reconstruction and revamp is: 20