Will record coal prices make BHP (ASX:BHP) think twice about its drawn out coal sales?

Bloomberg reported yesterday the big miner is reconsidering its position on the Mt Arthur coal mine, which last year the company announced its intention to sell amid plans to hive off its entire thermal coal business.

Since then thermal coal prices have staged a remarkable turnaround in the midst of a global energy shortage, rising industrial demand and supply constraints, defying even a ban on Australia’s product from China to run to record highs.

A year ago BHP engineered what appeared to be a major shift in the face of investor ESG pressure from thermal coal to battery metals like nickel and copper, elevating the latter’s status in its portfolio.

Despite soaring prices for the underlying commodity, little value is being ascribed to thermal coal projects by the majors.

Mt Arthur may be the largest coal mine in New South Wales, but BHP still wrote down its value from $550 million to a $275 million liability back in August.

That means BHP is likely to get far more value from running the operations than selling it for peanuts.

Bloomberg reporters claim inside sources in the sales process told them BHP is wary about coming out as the loser in another sale after it and Anglo American traded their share in Colombia’s Cerrejon mine to partner Glencore.

It will likely pay off the entire US$558 million sale price from cash flow this year.

Brazil’s Vale similarly bumped the value of its Mozambique assets by US$2 billion despite record prices, even though underperformance means it has struggled to hit the 12Mtpa target run rate from its Moatize coal mine.

Vale VP of finance and investor relations Luciano Siani Pires said the reality is coal assets are not priced on current market prices.

“So I’m saying all of this just to highlight that the business is running at $100 million per month run rate at today’s prices,” he said on a conference call last week.

“So the question might be, so why impair the assets? The issue here is that no potential buyer will buy the coal assets based on today’s prices, nor it will buy the coal assets based on the business plan that we have not yet delivered.”

 

Coal, except four times

Metallurgical coal from Queensland is paying around US$400/t for premium hard coking coal and US$340/t for hard coking coal, while thermal coal is fetching upwards of US$220/t.

All grades of coal are trading at three to four times what they were during the height of the pandemic.

That has been a boon for producing coal miners. Prices have been so hot Yancoal (ASX:YAL) made an early US$500 million debt repayment last week, cutting its overall finance costs by US$82m, despite losing US$129 million in the first half of the year.

“Yancoal’s decision to undertake an early debt repayment was made possible by our ongoing focus on low-cost production and the recent record coal prices,” CEO David Moult said.

“Yancoal’s scale of production provides substantial cash inflows during periods of elevated coal prices. As coal price strength persists, Yancoal will continue to evaluate how to balance the allocation of its financial resources, including through further early debt repayments.”

According to Bloomberg the BMC sale process for part of its Queensland metallurgical coal business is still on track, though that process too has been drawn out with preferred bidders understood to have been identified many months ago.

When he spoke to Stockhead a bit over a week ago LSE Group global coal market research lead analyst Toby Hassall said the recent run in thermal coal prices was unlikely to change buyers’ valuations of the Mount Arthur business.

“I suspect the current market environment will probably improve or lead to a greater level of interest particularly for the BMC met coal assets,” Hassall said.

“The medium and longer term profile for metallurgical coal is a more robust outlook than for thermal coal.

“I think even when it comes to that, when it comes to Mount Arthur and that divestment of that asset, even in the current environment for thermal coal, there’s a limited number of potential buyers in the market.

“Even with current prices, you know, that we’re not going to see interest from other major diversified miners.”

Bloomberg also suggested investor expectations that big miners should run down fossil fuel businesses rather than sell them to companies planning to operate them for years – cough, BHP-Woodside, cough – was playing a role in the delay.

 

ASX iron ore stocks

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CODE COMPANY PRICE 1 WEEK RETURN % 1 MONTH RETURN % 6 MONTH RETURN % 1 YEAR RETURN % MARKET CAP
EFE Eastern Iron 0.053 8 51 430 416 $ 48,674,379.01
IRD Iron Road Ltd 0.215 8 23 -26 67 $ 162,891,010.27
MGU Magnum Mining & Exp 0.071 4 8 -57 48 $ 33,805,854.15
BCK Brockman Mining Ltd 0.048 4 4 -23 92 $ 445,403,142.29
HIO Hawsons Iron Ltd 0.078 3 0 65 115 $ 56,489,183.05
MAG Magmatic Resrce Ltd 0.095 2 -10 -47 -51 $ 24,430,732.61
HAW Hawthorn Resources 0.051 2 -12 -9 -50 $ 17,009,296.26
TLM Talisman Mining 0.145 0 -9 0 26 $ 27,222,216.92
TI1 Tombador Iron 0.04 0 0 -58 29 $ 44,718,013.52
MDX Mindax Limited 0.05 0 -2 1567 1567 $ 93,341,852.98
LCY Legacy Iron Ore 0.013 0 -7 -28 86 $ 83,261,600.72
FEL Fe Limited 0.034 0 -24 -40 13 $ 30,138,932.78
CZR CZR Resources Ltd 0.008 0 0 -38 -38 $ 26,147,424.58
ACS Accent Resources NL 0.055 0 0 45 450 $ 25,631,500.57
RLC Reedy Lagoon Corp. 0.031 -3 35 48 182 $ 16,740,811.15
FMG Fortescue Metals Grp 13.99 -4 -4 -38 -19 $ 44,121,567,274.94
MGT Magnetite Mines 0.024 -4 0 -57 167 $ 75,483,359.30
VMS Venture Minerals 0.046 -4 -8 -56 35 $ 63,720,843.76
SRK Strike Resources 0.11 -4 -12 -64 25 $ 29,025,000.00
HAV Havilah Resources 0.185 -5 0 -18 0 $ 56,661,287.18
FEX Fenix Resources Ltd 0.2225 -5 3 -38 78 $ 106,248,132.00
GEN Genmin 0.165 -6 -18 -48 $ 46,577,495.25
BHP BHP Group Limited 35.6 -6 -3 -25 5 $ 107,418,653,255.54
EQN Equinoxresources 0.215 -7 $ 9,675,000.22
ADY Admiralty Resources. 0.014 -7 -7 -30 8 $ 18,250,108.14
DRE Drednought Resources 0.038 -7 6 81 58 $ 104,778,898.51
RIO Rio Tinto Limited 88.66 -8 -9 -27 -4 $ 33,769,538,987.58
SHH Shree Minerals Ltd 0.01 -9 0 -38 -17 $ 10,632,368.92
MIO Macarthur Minerals 0.38 -10 -10 -16 -28 $ 54,882,539.30
MGX Mount Gibson Iron 0.405 -10 -9 -56 -40 $ 502,385,733.70
JNO Juno 0.125 -11 -17 $ 16,957,250.13
CIA Champion Iron Ltd 4.25 -11 -8 -38 26 $ 2,314,667,873.32
GRR Grange Resources. 0.54 -11 5 -5 120 $ 648,109,670.88
PLG Pearlgullironlimited 0.115 -12 -32 $ 6,466,311.48
MIN Mineral Resources. 37.54 -13 -10 -21 50 $ 7,391,597,258.54
AKO Akora Resources 0.2 -13 3 -45 $ 10,468,691.20
SRN Surefire Rescs NL 0.013 -13 0 -52 -66 $ 14,356,035.32
PFE Panteraminerals 0.29 -17 -6 $ 10,010,000.00
FMS Flinders Mines Ltd 0.69 -21 -14 -38 -23 $ 116,505,518.13
RHI Red Hill Iron 2.91 -28 1 453 1692 $ 181,910,224.65
GWR GWR Group Ltd 0.11 -29 -19 -64 -24 $ 33,306,508.73

 

 

China clamps down on coal prices

How long the current situation will last remains to be seen, with China appearing to get its coal shortage under control since the middle of October.

It has attacked “speculation” in the futures market and ordered domestic miners to ramp up production to reduce the threat of blackouts and factory restrictions.

That has seen coal futures in China halve on the Zhengzhou exchange in the past week.

“Coal importers from China are also expected to receive subsidies to balance their losses,” Commbank’s Vivek Dhar said in a note yesterday.

“That means that imported prices will likely remain at a premium to local prices. But with local coal prices expected to be capped soon and domestic output maximised, incentives to import coal are deteriorating quickly.”

That could have an impact on Australian coal prices indirectly despite China’s ban on Aussie coal, if it means more supply is available on the seaborne market.

Conditions are still likely to be good though due to expectations a cold northern winter will drive demand higher in other Asian markets.

Commbank updated its forecasts for met coal and thermal coal yesterday, predicting coking coal will average US$360/t in the December quarter before sliding to US$280/t in March, US$200/t in June and US$150/t in September with a long run target of US$165/t.

The CBA’s analysts are more bearish on thermal, saying it will average a record US$210/t in December before falling to US$160/t in March, US$120/t in June, US$80/t in September before hitting a long-term price of just US$70/t from 2023 on.

 

Iron ore hit by steel cuts again

Also copping a hammering in recent days have been iron ore prices and futures.

That has come off the back of more bad news for the Pilbara miners about steel production in China.

China was up 2.4% year on year as of the end of September, but has restricted production directly and indirectly in a number of provinces in a bid to keep steel output no stronger this year than last.

End demand is also softening, with Rebar prices falling on Monday to two-month lows.

Data from the China Iron and Steel Association suggests production of steel may have been down again in October, after September’s output slid a remarkable 20.3% year on year.

Port stocks are at multi-month highs as Dalian iron ore futures trading down to their 10% limit yesterday, following a 3.7% move in Fastmarkets MB’s benchmark 62% iron ore price of US$103.43/t.

The recent action in the iron ore market has brought the bears back.

The iron ore market still remains a wait and see proposition at the moment, with the Chinese Government yet to reveal its plans for the steel market post 2021.

The Beijing Winter Olympics in February looms as a key date for the market, with the Chinese Government’s industrial curbs at least partly related to the aim of reducing smog in the lead-up to the Games.

 

ASX coal stocks

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CODE COMPANY PRICE 1 MONTH RETURN % 6 MONTH RETURN % 1 WEEK RETURN % 1 YEAR RETURN % MARKET CAP
JAL Jameson Resources 0.085 6 -11 0 -23 $ 25,783,210.65
PAK Pacific American Hld 0.017 0 -21 0 -24 $ 5,097,358.40
LNY Laneway Res Ltd 0.005 0 -17 0 -29 $ 19,520,329.67
NAE New Age Exploration 0.011 0 -45 0 -15 $ 15,794,888.01
NCZ New Century Resource 0.15 -3 -19 -3 -9 $ 175,579,964.08
SMR Stanmore Resources 1.03 16 55 -3 46 $ 286,630,721.46
PDZ Prairie Mining Ltd 0.24 -13 14 -4 17 $ 55,525,221.36
AHQ Allegiance Coal Ltd 0.47 -30 -25 -4 57 $ 163,837,327.64
TIG Tigers Realm Coal 0.023 28 188 -4 123 $ 274,400,749.73
BRL Bathurst Res Ltd. 0.78 -9 117 -6 100 $ 135,051,782.17
ATU Atrum Coal Ltd 0.042 -9 -14 -7 -84 $ 29,572,748.45
BCB Bowen Coal Limited 0.175 9 184 -8 226 $ 212,131,493.35
CRN Coronado Global Res 1.28 -6 125 -8 79 $ 2,254,830,266.85
CKA Cokal Ltd 0.16 7 150 -9 171 $ 149,933,170.08
YAL Yancoal Aust Ltd 2.73 -9 31 -9 39 $ 3,895,296,339.15
AKM Aspire Mining Ltd 0.084 0 -1 -10 12 $ 44,672,054.68
WHC Whitehaven Coal 2.385 -29 86 -16 124 $ 2,705,527,887.84
NHC New Hope Corporation 1.875 -23 61 -16 75 $ 1,639,743,451.54
MCM Mc Mining Ltd 0.1 -20 -29 -20 0 $ 18,530,346.60
TER Terracom Ltd 0.18 9 86 -20 16 $ 139,417,411.55

 

WA Government backs green steel

WA’s state government has become the latest body to enter the green steel field, on Monday announcing a $527,445 contract award for GHD Group and partner ACIL Allen to investigate a green steel and iron ore supply chain in WA.

It falls in line with plans from Fortescue Metals Group (ASX:FMG) founder Andrew Forrest, who revealed his plans to make FMG into a green steel and iron producer earlier this year.

The McGowan government has announced, like the Feds belatedly did last week, its intention for WA to be a net zero state by 2050.

Its biggest headache is its remote, off-grid mining and oil and gas operations.

The state is in a difficult position; it relies on its mega mining and energy projects to power what has become the strongest economy in Australia.

But that makes companies operating in WA some of the biggest emitters in the country and the world when Scope 3 emissions are taken into account.

FMG, BHP and Rio’s steelmaking customers pump hundreds of millions of tonnes of CO2 into the atmosphere each year from blast furnaces.

“As the world’s largest supplier of iron ore, Western Australia has a significant role to play in understanding the viability of green steel,” WA Mines Minister Bill Johnston said.

“The lead time for Western Australia to capture this emerging opportunity means there is a need to start planning now.

“By investigating these opportunities, we are taking action to reduce climate-related risks, while also positioning the state as a preferred supplier to global markets and a sought after destination for investment.”

Best of luck, Bill.