Wesfarmers' coal mining business is about to slip back into profit

Unloading waste coal and stone as smoke and steam rises next to an unauthorised steel factory in China. Kevin Frayer/Getty Images

The surging price of coal is pushing Wesfarmers’ resources business past the breakeven point.

The company says the resources business is expected to report EBIT (earnings before interest and tax) of between $135 million and $140 million for the first half of the 2017 financial year.

This exceeds guidance in October of a broadly breakeven EBIT for the six months. Coal prices have more than doubled over the past year, driven by demand from China.

Wesfarmers’ resources unit, hit by falling commodity prices, reported an operating loss of $310 million in 2016.

“The better than expected earnings result reflects strong production in the second quarter resulting from the implementation of recommendations from the productivity review, a new mine plan and opportunistic use of contract fleet to further increase volumes to take advantage of attractive coal pricing,” the company says in its latest production report.

“This increase in production supported higher than expected sales volumes aided by improved shipping timing and higher realised prices.”

Wesfarmers, Australia’s biggest private employer, in August posted a 83% fall in full year profit to $407 million, dragged down by impairments on Target stores and its coal assets.

The result was impacted by the writedown in the value of Curragh, a coal mine west of Rockhampton in Queensland, of $850 million.

Private equity firms are reported to be looking at buying the two coal mines owned by Wesfarmers, allowing the company to concentrate on its retailing portfolio, including Coles supermarkets.

In the December quarter, coal production at Curragh for the quarter was 3.203 million tonnes, 22.5% higher than the previous three months.

At Bengalla in the Hunter Valley, NSW, Wesfarmers’ share of coal production for the quarter was 902,000 tonnes, up 11.1%.

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