Is Coal A Sinking Ship? The CTI report " Carbon Supply Cost Curves: Evaluating Financial Risk to Coal Capital Expenditures" provides investors and coal companies with a tool – the carbon supply cost curve – which helps identify the projects where the most financial risk lies and direct capital away from them.

1. Carbon Supply Cost Curves:
Evaluating Financial Risk to
Coal Capital Expenditures
Launch Event
22nd September 2014
Bloomberg, New York, US

2. Anthony Hobley
Chief Executive Officer
Carbon Tracker Initiative

4. who
(CTI) is a non-profit financial think tank working to enable a climate secure
global energy market by aligning capital markets actions with climate reality.
ETA is an independent research group which analyses energy markets
in the context of a low carbon transition

5. Our work is aimed to align climate risk
with capital market risk...
...by translating climate science and policy
into the language of finance.
how

6. what
“Carbon Supply Cost Curves” research series on carbon and demand risk
exposure for capital expenditures in oil, coal and gas projects.
Oil report > May 2014, NRF in London with participation
From UNFCCC and financial institutions such as Storebrand,
F&C and JP Morgan
Coal report > September 2014, Bloomberg in New York
Gas report > December 2014
The 3 reports provide investors and companies with a tool – the carbon
supply cost curve – which helps identify the fossil fuel projects
where the most financial risk lies. Such tool represents a
key engagement resource.

7. 60
47.6
140
149.6
180
164.1
0
20
40
80
100
120
160
Aug-09
Nov-09
Feb-10
May-10
Aug-10
Nov-10
Feb-11
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Index Value (rebased to 100)
Bloomberg Global Coal index MSCI World Energy Index MSCI World Index
Faltering coal, oil and gas markets
Source: Wall Street Journal
Falling renewable energy costs
Source: Bloomberg New Energy Finance

8. Overall Takeaways
• The capital costs of fossil fuel projects is on the rise whilst the cost of clean energy
is falling;
• Many high-cost/high-carbon projects are destroying value today, putting over $1
trillion at risk over the next decade;
• The financial risks rise dramatically, to over $20 trillion by 2050, in a world of
ambitious climate policies.
• This is potentially wasted capital being deployed because the risk premium
associated with fossil fuel development is not yet transparent;
• So long as this continues the investment playing field will be tilted against clean
energy;
• We cannot burn all the fossil fuel resources creating so called "Unburnable
Carbon", neither can we switch off fossil fuel energy overnight:
• But Governments, regulators and the private sector all need a much clearer
understanding of the financial and climate risks at stake here;
• Including the costs to their economies and businesses of increasingly
expensive fossil fuels under a business as usual approach.
Talking points & research are to be found at
www.carbontracker.org

9. Carbon Supply Cost Curves:
Evaluating Financial Risk to
Coal Capital Expenditures
Launch Event
22nd September 2014
Bloomberg, New York, US

10. Mark Fulton
Founder ETA
Advisor to CTI

11. Carbon Supply Cost Curves:
Evaluating Financial Risk to Oil Capital Expenditures
How much thermal coal
investment is at risk globally?
Our research on coal consists of a package of
detailed analyses of coal supply, demand and
financial trends

12. The Context
Focus on thermal coal through 2035: We analyze supply and demand for thermal
coal through 2035 (longest available timeframe data allowed). Our focus is on the
US and Chinese domestic markets as well as the seaborne export market
(collectively 81% of current global demand).
Demand projections from IEEFA: Tim Buckley from the Institute for Energy
Economics and Financial Analysis (IEEFA) provides our demand projections.
Supply and cost data from Wood Mac: We source mine-level cost and supply data
from Wood Mackenzie’s Global Economic Model data base.
Focus on breakeven coal prices (BECPs) and associated capex, CO2: Combining
demand and supply estimates, we calculate the breakeven coal price (BECP) of
marginal suppliers in specific markets; we estimate potential production
below/above these key levels, and show associated capital expenditures (capex)
and CO2 emissions.

13. Thermal coal prices down 40% over last three years
July 2008 =
$192.5/t
Jan 2011 =
$138.5/t
Sep 2014 =
$68/t
250
200
150
100
50
0
Feb-00
Feb-01
Feb-02
Feb-03
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
Feb-16
Feb-17
Feb-18
US$/t
Newcastle FOB price, 2000-2018 (US$/t)
2018
forward
price =
$82/t

14. Thermal coal demand scenarios

15. 2014 Supply Cost Curve for the Thermal Coal Industry

16. Cost curve for potential seaborne export production
World export thermal cash cost & break even price (BECP) level (2014–2035)

17. Cost curve for China’s potential domestic production

18. US domestic cost curve by region
ETA-IEEFA 2014-2035 avg. annual demand = 610 Mtpa
Regional equivalent intersected price = $53/ton

19. Potential coal capital expenditures, 2014-2025
$112 billion in potential high-cost capex outside China

20. Geographical breakdown of potential export capex
above and below $75/t breakeven threshold

21. Potential production and capex out to 2035
‘Brownfield’ thermal capex (export and domestic)

22. Do we need new mines?
‘Greenfield’ thermal capex (export and domestic) out to 2035

23. Key Takeaways
Global thermal coal demand peaks in 2016: Demand for thermal coal (globally
and in China) will peak as early as 2016 and then decline through 2035. US
demand declines at a 2% CAGR. Drivers are efficiency, renewables, and policy.
Prices < costs for one-third of potential production: Globally through 2035, one-third
of potential production is above key long-term price levels of $53-75/tonne.
~80% of potential export capacity (including in US) looks uneconomic at estimated
price levels.
Excluding China, $112 billion in 2014-2025 financially risky potential capex:
Excluding China, high-cost production is associated with 2014-2025 potential
capex of $112 billion. Nearly half of this relates to development of new (i.e.
“greenfield”) mines for export markets.
Diverse company exposure to potential high-cost capex: Companies exposed to
potential high-cost capex include large diversified miners (BHP Billiton), major US
producers (CONSOL, Alpha Natural Resources), and Asian industrial conglomerates
Emissions related to non-China potential high-cost capex = 42 GtCO2: Pushing
thermal coal demand toward a 2°C trajectory will require stronger policy action.

24. Disclaimer
• CTI is a non-profit company set-up to produce new thinking on climate risk. CTI publishes its research for
the public good in the furtherance of CTIs not for profit objectives. Its research is provided free of charge
and CTI does not seek any direct or indirect financial compensation for its research. The organization is
funded by a range of European and American foundations. CTI is not an investment adviser, and makes no
representation regarding the advisability of investing in any particular company or investment fund or other
vehicle. A decision to invest in any such investment fund or other entity should not be made in reliance on
any of the statements set forth in this publication.
• CTI has commissioned Energy Transition Advisors (ETA)to carry out key aspects of this research. The
research is provided exclusively for CTI to serve its not for profit objectives. ETA is not permitted to
otherwise use this research to secure any direct or indirect financial compensation. The information &
analysis from ETA contained in this research report does not constitute an offer to sell securities or the
solicitation of an offer to buy, or recommendation for investment in, any securities within the United States
or any other jurisdiction. The information is not intended as financial advice. This research report provides
general information only. The information and opinions constitute a judgment as at the date indicated and
are subject to change without notice. The information may therefore not be accurate or current. The
information and opinions contained in this report have been compiled or arrived at from sources believed
to be reliable in good faith, but no representation or warranty, express or implied, is made by CTI or ETA as
to their accuracy, completeness or correctness. Neither do CTI or ETA warrant that the information is up to
date.
• The underlying analysis in this report, prepared by CTI-ETA, is based on cost and supply data licensed from
the Global Economic Model of Wood Mackenzie Limited. Wood Mackenzie is a Global leader in commercial
intelligence for the energy, metals and mining industries. They provide objective analysis on assets,
companies and markets, giving clients the insights they need to make better strategic decisions. The
analysis presented and the opinions expressed in this report are solely those of CTI-ETA.

25. Carbon Supply Cost Curves:
Evaluating Financial Risk to
Coal Capital Expenditures
Launch Event
22nd September 2014
Bloomberg, New York, US

26. Tim Buckley
Director of Energy Resource
Studies, Australasia
www.carbontracker.org
www.ieefa.org

27. GLOBAL THERMAL COAL IN STRUCTURAL DECLINE
• IEA NPS assumes 18%
growth over next 22 years
• IEEFA forecasts absolute
decline of 2% from 2013
levels
• Global thermal coal will
peak by 2016, coinciding
with a peak in China’s
domestic consumption in
2016
• Seaborne thermal coal
demand will average
850mtpa to 2035, down
15% on current levels
• Energy efficiency, energy
security and renewable
energy are key drivers
7000
6000
5000
4000
3000
2000
1000
0
2013-2020 CAGR = 2.9% 2020-2035 CAGR = 1.6%
New Policies Current Policies 450 IEEFA
2000 2005 2010 2015 2020 2025 2030 2035
Global thermal coal demand (Mtce)
Year
2013-2020 CAGR = 1.8%
2020-2035 CAGR = 0.6%
2013-2020 CAGR = -0.1%
2020-2035 CAGR = -0.1%
2013-2020 CAGR = -0.3%
2020-2035 CAGR = -2.7%

28. WHERE IEEFA DIFFER FROM THE IEA
• Lower forecasts for real GDP growth in China and India
• Long assumed life assumption for renewable generation
capacity
• Greater technology advances driving higher capacity
utilisation rates for wind and solar
• Greater capital cost reductions for onshore wind and solar
• Taxes at coal’s point of use have seen a material step up in
2014
• Faster removal of fossil fuel subsidies
• The US Clean Energy Plan is enacted largely as proposed

29. CHINA PEAKS IN 2016 BECOMING OPPORTUNISTIC EXPORTER
Energy security through diversity – power production to 2020

30. United States
Coal demand down 16% by 2020 on 2013 levels
• Coal’s share of power generation has declined from 49.8% in
2004 to 39.1% in 2013
• Energy efficiency to be scaled us significantly
• Addition of 39GW of wind power takes US installed base to
100GW
• Addition of 22GW of solar power takes capacity to 35Gw by 2020
• Gas revolution continues apace to substitute for coal
• These drivers combine with mercury and air quality regulations
and the US Clean Power Plan to close between 60GW-180GW
• US increases exports adding to seaborne oversupply

31. EUROPE
• Europe’s coal demand
set to fall by 24% on
2013 levels
• Large Combustion Plant
Directive followed by
Industrial Emissions
Directive are significant,
particularly in the UK
• Germany to move away
from reliance on
nuclear, thermal and
lignite
Germany
Poland
UK
Turkey
Other
Europe
100
90
80
70
60
50
40
30
20
10
0
2010 2015 2020 2025 2030 2035
Million tonnes (Mt)

32. INDIA does not materialise as the great white hope of the
coal export industry
A weak financial system and heavy subsidies can not support a low-making
power sector based on coal

33. Japan – A case study that energy efficiency can be
transformative
• Efficiency gains have reduced electricity demand 12% from 2010-
2013 despite 1%pa real GDP growth
• This equates to reduced electricity demand per unit of real
GDP of 5% pa.
• We forecast energy efficiency to continue reducing demand
• We forecast a modest restart of nuclear in Japan
• The FiT will create an additional 57GW of solar
• Ultimately, this means Japan’s coal demand will fall 49% by 2020.

34. Carbon Supply Cost Curves:
Evaluating Financial Risk to
Coal Capital Expenditures
Launch Event
22nd September 2014
Bloomberg, New York, US

35. Five observations for investors
on recent trends in the global
coal industry
Reid Capalino
CTI/ETA

36. Coal equities down 50% over last five years
180
160
140
120
100
80
60
40
20
0
MSCI World Index
= 163
MSCI World
Energy Index =
149
Bloomberg Global
Coal Index = 49
Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14
Index Value (rebased to 100)
36
Note: Bloomberg Global Coal Index encompasses 32 large coal producers.
Source: Bloomberg LP, CTI/ETA analysis 2014

37. $200 billion+ increase in net fixed assets since 2000 =
few opportunities for profitable new investment
250
200
150
100
50
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
billion USD (2012)
China US ROW
37
Note: Data for 83 publicly-listed coal miners with
market cap above $200 MM; includes net fixed
assets related to metallurgical coal production
(estimated as 28% of overall cumulative total).
Source: Bloomberg LP, CTI/ETA analysis 2014

38. Combined capex of listed coal miners declined in 2013 –
but still 3X dividends + buybacks
$35
$30
$25
$20
$15
$10
$5
$-
4x 5x
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
USD billion
Capex Dividends + net share repurchases
Note: Data for 83 publicly-listed coal miners. 38
Includes capex related to metallurgical coal production (estimated as 25% of 2013 total).
Source: Bloomberg LP, CTI/ETA analysis 2014
3x
3x
3x
3x
6x 3x
4x
3x
3x
9x
11x 10x

39. Several diversified miners selling thermal coal assets
Company Mine(s) Acquirer name Deal size
($MM)*
Country Year
Rio Tinto Clermont Glencore, Sumitomo $1,105 Australia 2013
Rio Tinto Jacobs Ranch Arch Coal $764 USA 2009
Rio Tinto Antelope,
Cordero Rojo,
Spring Creek
Cloud Peak Energy
(spin-off)
$459 USA 2009
Vale Colombian
mines
Goldman Sachs
subsidiary
$407 Colombia 2012
BHP
Billiton
Koornfontein Optimum Coal
Holdings
87 South
Africa
2010
BHP
Billiton
BHP Navajo
Coal
Navajo Tribal Council 85 USA 2012
BHP
Billiton
Khutala,
Klipspruit,
Middelburg,
Wolvekrans
Newco (spin-off) in progress South
Africa
2014
39*Includes net debt.
Source: Thomson One, company reports, CTI/ETA analysis 2014

40. US coal: upstream concentration may enhance potential investor impact
% of total US oil production, 2013
Combined EV of top 4 = $853 billion
% of total US coal production, 2013
Combined EV of Top 4 = $18.5 billion
54%
46%
Top 4 US coal Others
11%
89%
Top 4 US oil All other
40
Note: Production totals on a volumetric (as opposed to energy-adjusted)
basis. Coal includes both thermal and metallurgical coal. Oil includes
crude oil, natural gas liquids, and condensate only.
Source: Bloomberg LP ,company reports, EIA, Rystad Energy CTI/ETA
analysis 2014
Note: Top 4 US coal producers for 2013 were Peabody Energy, Alpha
Natural Resources, Arch Coal, and Cloud Peak Energy. Top 4 US oil
producers for 2013 were ExxonMobil, Chevron, ConocoPhillips, and
Occidental Petroleum.

41. 41
Appendix - Composition of Bloomberg Global Coal Index
CHINA SHENHUA ENERGY CO JIZHONG ENERGY RESOURCES
YANZHOU COAL MINING CO SHANXI XISHAN COAL & ELEC
CHINA COAL ENERGY CO CHINA SHENHUA ENERGY CO
NIPPON COKE & ENGINEERING CO YANZHOU COAL MINING CO
SHOUGANG FUSHAN RESOURCES GR CHINA COAL ENERGY CO
INNER MONGOLIA YITAI COAL INNER MONGOLIA YITAI COAL
ARCH COAL INC GUANGZHOU DEVELOPMENT GRP
ADARO ENERGY TBK PT SHANXI LANHUA SCI-TECH
ALPHA NATURAL RESOURCES INC YANZHOU COAL MINING CO
PEABODY ENERGY CORP YANGQUAN COAL INDUSTRY GRP
BUMI RESOURCES TBK PT HENAN DAYOU ENERGY CO LTD
CLOUD PEAK ENERGY INC CHINA SHENHUA ENERGY CO
CONSOL ENERGY INC SHAANXI COAL INDUSTRY CO L
EXXARO RESOURCES LTD PINGDINGSHAN TIANAN COAL
GEO ENERGY RESOURCES LTD SHANXI LU'AN ENVIRONMENTAL
HARUM ENERGY TBK PT CHINA COAL ENERGY CO
HARGREAVES SERVICES PLC SDIC XINJI ENERGY CO
HEADWATERS INC INNER MONGOLIA YITAI COAL
INDO TAMBANGRAYA MEGAH TBK P ADARO ENERGY TBK PT
JOY GLOBAL INC BANPU PUBLIC CO LTD
JASTRZEBSKA SPOLKA WEGLOWA S PEABODY ENERGY CORP
TAMBANG BATUBARA BUKIT ASAM BAYAN RESOURCES GROUP
FREIGHTCAR AMERICA INC CONSOL ENERGY INC
SHERRITT INTERNATIONAL CORP COAL INDIA LTD
SEMIRARA MINING CORP EXXARO RESOURCES LTD
WHITEHAVEN COAL LTD INDO TAMBANGRAYA MEGAH TBK P
WESTMORELAND COAL CO JASTRZEBSKA SPOLKA WEGLOWA S
WALTER ENERGY INC NEW HOPE CORP LTD
TAMBANG BATUBARA BUKIT ASAM SUNCOKE ENERGY INC
SEMIRARA MINING CORP WHITEHAVEN COAL LTD

42. Returns trending toward or below cost of capital =
weak value creation
25%
20%
15%
10%
5%
0%
2000
2002
2004
2006
2008
2010
2012
Return on Invested Capital
Balanced Met Thermal
42
Coal global
avg. WACC =
9.6%
Note: Data for 83 publicly-listed coal miners with
market cap above $200 MM; classified as
balanced/met/thermal according to revenue split
between thermal and metallurgical coal production.
Source: Bloomberg LP, CTI/ETA analysis 2014. WACC
estimate from NYU professor Answath Damodoran
using data from S&P Capital IQ.

43. Carbon Supply Cost Curves:
Evaluating Financial Risk to
Coal Capital Expenditures
Launch Event
22nd September 2014
Bloomberg, New York, US