BHP Billiton , the world's biggest miner, reported a faster-than-expected recovery in production of steel-making coal from its flood-hit collieries in eastern Australia but warned it will take the rest of 2011 to return to full production.
BHP said output of steel-making or coking coal in April-to-June jumped 19 per cent to 7.9 million tonnes over the previous quarter, above forecasts for 7 million tonnes.
Output of iron ore and most of BHP's other commodities was in line or ahead of expectations, setting the stage for a record annual profit of around $21-billion (U.S.).
"It seems to be the case that BHP is moving quicker than expected on the coal front," said Colin Whitehead, a mining analyst for Fat Prophets in Sydney.
"Perhaps, they are adopting an under-promise, over-delivery strategy. I would think the market will take a more optimistic view on the back of this," Mr. Whitehead said.
Floods in Queensland between November and March crippled coal output from Australia, which provides two-thirds of global exports of steel-making coal, and contributed to the economy's biggest decline in two decades.
Coal miners had hoped operations would be back to normal by now, but the flooding of coal pits and damage to rail lines and ports proved worse than originally feared.
The drawn out recovery will keep coal prices close to the record levels seen since the flooding, particularly given the demand for higher-quality coals such as those mined by BHP, said Gero Farruggio, a coal specialist at research group Wood Mackenzie.
"The demand for the coal is already there and, going forward, the time it is taking for the recovery in Queensland will help keep prices at a premium," Mr. Farruggio said.
BHP's coking coal output was 28 per cent below year-ago levels as mines continue to operate below peak capacity.
"While production did improve in the June 2011 quarter … we continue to expect production, sales and unit costs to be impacted, to some extent, for the remainder of the 2011 calendar year," BHP said in the production report for April to June, its fiscal fourth quarter.
Merrill Lynch, which is "neutral" on BHP shares, said June quarter output was 32 per cent above its forecast.
BHP does not issue production guidance on its 10 product divisions, but its cautious remarks on the coal outlook are reflected elsewhere.
Last week, rival miner Rio Tinto cut its forecast for 2011 hard-coking coal output to 8 million tonnes from 9.3 million tonnes.
Australia's central bank said on Tuesday the recovery in coal exports was taking "significantly longer than earlier expected" and full output might not be achieved until early 2012.
The slower recovery would weigh on growth and keep economic expansion below forecasts, the central bank said. First-quarter GDP fell 1.2 per cent, the biggest drop in 20 years, data showed on June 1.
BHP's iron ore output jumped 7 per cent on the quarter to 35.5 million tonnes, in line with expectations. That lifted full-year production to 134.4 million tonnes , reflecting a rapid expansion program under way to meet strong demand from Asian steel mills.
The company said its mines produced at an annualized run rate of 155 million tonnes in the latest quarter.
BHP, the No. 3 iron ore producer behind Vale of Brazil and Rio Tinto, mines its iron ore from the deserts of west Australia, which were unaffected by the floods.
Although iron ore is BHP's biggest business - UBS expects the division to contribute $13.36-billion in fiscal 2011 earnings before interest and tax - analysts have focused mostly on coal because of the uncertainty of how quickly miners will be able to restore full production.
"Metallurgical coal was the other upside surprise, with operations bouncing back more strongly than we predicted after the recent flooding," Royal Bank of Scotland mining analyst Lyndon Fagan said in a client note.
RBS is forecasting a 2010/11 net profit after tax of $22.1-billion for BHP and has a "buy" recommendation on the stock.
The coal sector's recovery hinges on eastern Australia's next wet season, which is typically from November to March.
Meteorologists say the La Nina climate phenomenon that produced last season's deluge of rain is unlikely to be repeated this year. But they cannot rule it out, they say.
Miners such as Rio Tinto and BHP should continue to benefit from strong coal prices that resulted from the lost Queensland production through the September quarter before increased coal capacity starts to weigh on prices, coal traders said.
Anglo American has struck a benchmark-setting third-quarter sales price with Asian steel mills at $315 a tonne, which is just beneath the second quarter's record high of $330, UBS says.
"Supplies in Australia have not returned to their pre-flood levels and the market is still very tight, so that should keep spot and contract prices at above $300 a tonne in the second half of the year," said a coal trader in China, adding Mongolia, the United States and Canada have been filling the gap in supplies from Australia.
Wesfarmers Ltd. said on Wednesday that its coking coal production rose 24.1 per cent in the June quarter from the previous quarter as it too picked up from the flooding. Steaming coal output increased by 37.5 per cent.
Coal is Australia's second-biggest export earner after iron ore and is forecast by the government to generate $60-billion Australian ($64-billion) in exports in fiscal 2012.
Heavy rains and cyclones took the greatest toll early this year on Queensland's Bowen Basin, where BHP mines most of its steel-making coal in partnership with Mitsubishi Corp.
Rolling work stoppages are also affecting production at six of the BHP Billiton-Mitsubishi alliance's seven mines, as union workers press for greater job security.
These six mines have combined production capacity of more than 58 million tonnes per year of steel-making coal and account for about a fifth of global trade. Analysts have estimated the industrial action has resulted in lost production of between 500,000 tonnes and 1 million tonnes.