BHP sells coal mines for US$1.2 billion to Stanmore

BHP (ASX:BHP) has sold its 80% stake in the BMC coal business to Stanmore Coal (ASX:SMR) for US$1.2 billion.

Confirming a report in Stockhead’s Sunday newsletter, Stanmore will pay US$1.1 billion up front, another US$100 million six months after completion and a potential US$150 million milestone payment in 2024 if coal prices hold up.

The Hail Mary nature of the deal cannot be understated. At an Aussie dollar value of around $1.6 billion, it comes in at an astonishing 5.8 times Stanmore’s $280 million market cap.

Stanmore was a modest ~2.4Mtpa miner, which leveraged the famous $1 acquisition of the Isaac Plains complex in Queensland’s Bowen Basin to become a sustainable junior coal miner, primarily owned by Singapore-listed Golden Energy and Resources after a takeover in 2020.

It now becomes the steward of one of Australia’s largest coking coal businesses. BMC includes the Poitrel and South Walker Creek mines in Queensland as well as the Wards Well hard coking coal development project.

Together they can produce up to 10Mtpa of met coal, increasing Stanmore’s pro-forma production profile for FY22 by 5.6 times to 11Mtpa. Much of it is low vol pulverised coal for injection or PCI, trading near historic highs at US$273/t last week.

BHP’s 80% share of BMC – the balance is owned by Japan’s Mitsui – generated US$174 million in EBITDA in the year to September 30. But that year only captured some of the record coal prices driven by post-pandemic demand in recent months.

On its September quarter results, BMC would turn over US$1.5 billion in revenue and US$696m in EBITDA on a 100%, full year basis.

Mix of debt and equity to fund BMC transaction

As news of the deal emerged over the weekend the key question became how would a company the size and scale of Stanmore fund such an ambitious acquisition.

A half-half mix of debt and equity was always the likely option, and Stanmore has the might of its Indonesian backers behind it on this one.

Along with US$625 million in debt, Stanmore will pull in US$600 million in an entitlement offer.

That will include a commitment for US$300 million from 75% owner GEAR, and underwriting for the other US$300 million from Sinar Mas, the Indonesian business dynasty whose member Fujanto Widjaja chairs GEAR.

“This is an exciting and transformative acquisition for Stanmore, and we are fortunate to be able to rely on the full support received from our controlling shareholders, GEAR as well as the Sinar Mas Group, to successfully execute this deal,” Stanmore CEO Marcelo Matos said.

“This transaction will see the Company become one of the leading metallurgical coal producers globally and provide Stanmore with a portfolio of tier 1 assets, with a significantly increased reserves and resources base and assets with an expected mine life exceeding 25 years production, positioning the company for substantial cashflow generation and future growth opportunities.”

“BHP have managed the BMC business competently and responsibly over the years, and as new custodians we look forward to integrating the BMC business into Stanmore with a continued focus on safety, and responsibly and sustainably producing high quality metallurgical coal products for our global customers”.

BMC deal share prices today:

BHP moving on from coal assets

BMA has tried to sell the BMC mines for over a year, along with its Mt Arthur thermal coal pit in New South Wales.

It plans to keep the seven mines that make up its BMA alliance with Mitsubishi, which produce high quality hard coking coal, due to its conviction met coal will remain central to the steelmaking process for years to come.

The Mt Arthur sale appears to have stalled as of late. BHP said today the review process is ongoing and it is considering all options.

The company has been trying to shave down parts of its portfolio that both it and investors do not see as ESG friendly.

BHP this year announced a deal to spin its US$20 billion petroleum business into Woodside (ASX:WPL).

The Pilbara iron ore business remains BHP’s big ticket item, but it has elevated energy metals divisions in copper and nickel, as well as the multi-billion dollar Jansen potash project in Canada into the spots once held by oil and gas and thermal coal.

Completion of the deal is expected by the middle of calendar year 2022. BHP Minerals Australia president Edgar Basto said the sale was consistent with BHP’s strategy and came in at an EV of 6.9 times EBITDA.

“As the world decarbonises, BHP is sharpening its focus on producing higher quality metallurgical coal sought after by global steelmakers to help increase efficiency and lower emissions,” he said.

“South Walker Creek and Poitrel are well-run assets that have been an important part of our portfolio for many years and we are grateful for their contribution to BHP.”

“Under this agreement, BMC will transition to Stanmore Resources, an ASX-listed company that has established relationships with Traditional Owners and strong engagement with their workforce and local communities.”

“Stanmore Resources share our focus on safety performance and culture and support Australia’s commitments under the Paris Agreement.”