Miners pay the price for accidents globally - but China particularly hit

Mining accidents are costly in terms of lost production, government safety sanctions and higher commodity prices with China by far the most affected.

MUMBAI  - 

A string of mining accidents in China are set to have their say - ensuring not just production cutbacks at the mines themselves, but constrained supplies of coal, iron, copper and even gold - all of which could lead to sharply higher prices in the global market.

An immediate offshoot of most mining accidents is the slump in the concerned company's share price. Take the case of China's biggest gold producer and third biggest copper miner, the Zijin Mining Group, which has projects in seven countries and gold output accounting for 9% of the nation's total. The major tailings spill of July 12, wiped out $1.7 billion in value from Zijin, and its share price tumbled 17% in Hong Kong trading within a couple of days after the company said that 9.1 million litres of acid-laced waste spilled from its largest mine in Fujian Province.

On July 28, shares of Zijin continued to fall, after having been suspended for two-days earlier, and were down 1.4% at Wednesday's opening on the Shanghai bourse. The company has since been asked to limit production at a copper-gold mine in the area.  The firm has estimated that gold output, which was 75.4 tonnes in 2009, will be reduced by about one tonne this year due to the limit.

Considered the worst accident in Chinese gold mining since July 2008, when runoff from the Zhongjin Gold Corporation also caused serious river pollution, the Zijin accident has turned the spotlight on the impact on demand and prices, with analysts forecasting a significant impact on global spot prices in the short term.

With respect to Chinese coal, in a note to clients, David Khani, an analyst with FBR Capital Markets has estimated the benchmark price for metallurgical coal to hit $225 a metric tonne this year, up from $129 a tonne of the previous year.  Recent accidents in China are expected to have the biggest impact on demand and prices for metallurgical coal, he has said.

Share price slump

From the start of July, China has been struck by a series of mining accidents, with four separate fatal coal mining accidents occurring over just one weekend. The accident in central China at the Xinling Colliery run by the Zhengzhou Coal Industry Group, was the first in the series, followed by another at the Xiaonangou coal mine in Hancheng City, in the country's Shaanxi Province. Yet another accident occured at the Laobanshang Coal Mine, located in the Chenzhou City of Hunan Province, followed by a fourth at the Jijitaizi Coal Mine in Jiuquan City.

Reflecting investors' concerns, the stocks of all the firms have taken a beating, with Zijin's stock, for example setting a 15-month low in Hong Kong the day after the announcement of the tailings leak.

However, much the same holds true for every firm, regardless of the country of domicile. Shares of Vancouver-based Teck Resources fell almost 6% on June 29, the day of its reported coal mine explosion. The company had earlier forecast a 25% jump in coal production from about 20 million tonnes last year, largely due to the pickup in demand from China.

The April 5 explosion at the Massey Energy Company mine in West Virginia is another example. Considered the worst US coal industry disaster in 40 years, here too, investors drilled its shares. On July 27, the share price continued to slump 6.56%.

Similarly, South African Aquarius Platinum's shares continue to slide following two separate fatal accidents at its sites.

Patriot Coal Corp suspended production at a mine in West Virginia following an accident on June 15, the company's stock fell 4% and continues to be down.

Accidents also endanger proposed mergers and acquisitions. The Fujian government delayed approval of Zijin's planned $471 million buy of Australia's Indophil Resources for three months. Last month, Zijin cancelled the deal, which would have given it a stake in Philippines' Tampakan project, Southeast's Asia largest untapped copper and gold deposit. The company's ``low-cost, old mining methods'' had clearly paid the price. 

Illegal mines

Though India has a notoriously poor past safety record, it has been able to reduce mining accidents ``to less than 9% of China's current rate'', according to experts. China alone reportedly accounts for approximately 80% of the total deaths in coal mine accidents worldwide. And, like its coal production statistics, the safety record of China's coal industry is full of controversy as mine owners routinely falsify death counts in order to avoid mine closures or fines.

Though production shutdown constricts supply in the near term and hikes prices, it brings to the fore issues of illegal mining. Analysts have noted that in China there are illegal mines that are leeched off the large state-owned mines.

China, which gets more than two-thirds of its electricity from coal, has a vast coal mining industry, considered by most analysts to be one of the most dangerous in the world. According to official figures, 2,631 coal miners died in 1,616 mine accidents in China in 2009. Though the figure is down 18% from the previous year, 2010 is far from over!

April 2010 saw four deadly accidents. One of them was in a pit illegally operated by the private Guomin Mining Company in Yichuan County.

So far, 10 accidents have taken place in July, with three in illegal mines - on July 1 in Yunnan, on July 5 in Henan, and on July 18 in Hunan, respectively. 

 ``China's coal industry is coping with a difficult balancing act,'' Wang Xianzheng, deputy director of the State Administration for Safe Production  recently told the China Business weekly. Though China has large reserves, a large number of small mines are getting to the limit of their life. In a bid to replace them, miners have to go deeper, leading to more accidents.

Government figures have also indicated that more than half of the 16,000 coal mines operating in China are illegal. The Xinhua news agency recently quoted Zhao Tiechui, senior official in charge of coal mine supervision, as saying: ``Coal mines often experience the most serious accidents because so many of them are operating illegally. The industry also sees the most frequent covering-up of accidents.''

With coal accounting for around 80% of power generation in China, compared to 17% for hydro, the demand for more energy would only lead to more deaths in China's coal mining industry.

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