China’s slowing growth in industrial output will not lead to softening demand for coal, according to Alexander Molyneux, CEO of China-focused coal miner SouthGobi Resources. But the company is nonetheless prepared for a demand pull back and has been cautious in its estimates.
“We actually project a roughly 7 percent increase in China's coking coal needs every year, which for the last decade has been running at 12 percent,” Molyneux told CNBC on Friday. “So in our whole business model, we are considering a slower growth outlook for China and for industrial production. But they don't have enough good quality coking coal resources left to meet whatever growth they have.”
SouthGobi sells metallurgical and thermal coal to customers in China, and owns the Ovoot Tolgoi Mine and two development projects in Mongolia. The company on Thursday posted a first-quarter net loss of $46.6 million despite a 44.8 percent jump in revenue, which Molyneux says was due to accounting rules, rather than operational causes.
“The bulk of our losses comes from a technical loss. We have a convertible debenture as part of our financing structure, and every quarter we have to mark to market that under its natural accounting rules,” he said.
The company’s focus on provinces with double-digit gross domestic product growth like Jiangshu and Xinjiang, will continue to be a key driver of profits, says Molyneux.
He brushed off concerns about the impact of fuel shortages in Russia, following the country’s recent move to curb fuel exports. Earlier this week, Southgobi announced that it had to secure alternative fuel sources after its supplier claimed force majeure due to the limits on exports.
“We were lucky in that we immediately went to secure alternative fuel supplies so we had 45 days continuous mining fuel supply. Most people carry about 2 weeks, we are now at 45 days,” he said. Fuel makes up about 25 percent of SouthGobi's costs.
“I think we are pretty good shape to see this crisis (through),” he added.