Ground Breakers: BHP plans to run Australia’s largest thermal coal mine into the ground, on purpose
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BHP (ASX:BHP) will cancel its planned sale of NSW’s largest thermal coal mine after failing to find a buyer and in response to pressure from green investors and ESG groups.
Instead BHP will run the Mount Arthur operation in the Hunter Valley down, but has requested an extension on its planned end date from 2026 to 2030 when the mine will shut and BHP will assume its environmental liabilities.
That is expected to take 10-15 years and cost around $700 million.
“We thoroughly reviewed potential options for NSWEC including divestment and future investment requirements,” BHP Minerals Australia president Edgar Basto said.
“Seeking approval to continue mining until 2030 avoids closure in 2026 and enables BHP to balance the value and risk of those considerations and our commitments to our people and local communities.”
The outcome will no doubt have some private equity players and coal miners crying into their tea, their hopes of getting a large, money-spinning coal asset on the cheap scotched.
It’s apparent none matched BHP’s valuation of the asset, especially as thermal coal prices for 6000kcal Newcastle coal have spiked to above US$400/t early this year in response to the energy crisis prompted by Russia’s invasion of Ukraine.
Mt Arthur, which will produce 13-15Mt of coal this financial year, generated US$458 million in underlying EBITDA in the first half of 2022, reversing a US$130m half year EBITDA loss 12 months earlier.
Its second half, coming amid an energy crisis overseas and on the east coast driven by high prices for coal, oil and gas, will be even more spectacular.
Australian thermal coal is currently fetching around US$386/t.
Given those prices it makes sense BHP would rather keep the mine and milk its last few profitable years than accept a lowball offer, two years after beginning the process of divesting its unwanted coal businesses.
Last year BHP and Anglo American sold their stakes in the Cerrejon mine in Colombia to Glencore for US$588 million, only to see Glencore make that back in under a year as coal prices spiralled out of control.
BHP also sold its 80% stake in its Poitrel and South Walker Creek met coal mines in Queensland for around US$1.3 billion to Stanmore Coal (ASX:SMR), which sell large quantities of semi-soft coking coal and PCI, but has maintained its commitment to the BMA coking coal JV with Mitsubishi due to its conviction premium hard coking coal will be needed for decades in a growing global steel industry.
The merger of its petroleum division into Woodside also completed this month, with BHP having a stated aim of increasing the share of EBITDA coming from ‘future facing commodities’ like copper, nickel and potash.
The Australasian Centre for Corporate Responsibility criticised BHP for sitting on the decision to wind up the mine for “far too long”, saying it should have made the decision earlier to avoid extending its life to 2030.
“Following repeated concerns raised by investors, ACCR and civil society, BHP has finally made the right call by abandoning its pursuit of the Mt Arthur thermal coal mine extension to 2045 and its plans to divest the mine,” ACCR climate lead Harriet Kater said.
“Use of asset divestment as a tool to lower carbon footprints and avoid responsible closure is not acceptable.
“BHP has sat on this decision for far too long. If it had been willing to act sooner, affected communities would have avoided a prolonged period of uncertainty and the mine extension from 2026 to FY2030 could have been avoided.”
The ACCR also questioned whether its $700m provision for clean up was enough to rehabilitate the mine, as well as its plans to progress environmental approvals for the 8Mtpa Blackwater South met coal mine in Queensland.
“BHP has an opportunity to draw on the returns from current record high thermal coal prices to properly fund high quality remediation,” Kater said.
“We remain concerned that BHP is still seeking to open a new greenfield coal mine, Blackwater South, to operate for 90 years in Queensland. It’s time for BHP to stop proposing new and expanded coal mines.”
There seems little chance of BHP bending to pressure there given its public support for metallurgical coal and conviction that blast furnaces which use high quality coking coal will be the dominant technology in steelmaking for decades to come.