Monsters of Rock: Not everyone is happy with Stanmore’s BHP coal buy
Link copied to
Since BHP (ASX:BHP) announced plans to divest fossil fuel assets in August last year – setting a 2 year time frame to achieve it – unease has grown from green activists about the logic of the sales.
In their eyes BHP is moving a problem dog from one owner to another.
While BHP has the heft and capacity to potentially manage down the assets over time, it is instead selling them to companies more committed to maintaining oil, gas and coal assets and extending their lives.
Woodside (ASX:WPL), a pure play oil and gas company, will become the new steward of BHP’s $20 billion petroleum business.
Glencore now owns all of the Cerrejon thermal coal mine in Colombia, and is arguably the only diversified major to be enthusiastically buying in the space – Rio has already sold out of coal and Brazil’s Vale is trying to do the same.
All this means BHP’s assets could have a longer life in the hands of other owners less receptive to ESG pressures. The Australian Centre for Corporate Responsibility has just that take on the US$1.2 billion BMC deal, which will see Stanmore take control of BHP’s stake in the Mitsui joint venture.
It includes the 10Mtpa Poitrel and South Walker Creek mines in Queensland as well as development assets at Bee Creek, Nebo West and Wards Well.
While he did not point to specific statements by Stanmore, Dan Gocher said the junior “has repeatedly proven its disregard for the Paris Agreement.”
“The BMC assets include several planned new coal mines – Bee Creek, Nebo West and Wards Well – and in all likelihood, Stanmore will seek to develop these projects despite the IEA and the IPCC concluding that we simply cannot afford any new coal projects if we are to maintain a safe climate,” he said in a statement.
“Rather than make the hard decisions to wind these assets down, BHP is running for the door.
“Along with the proposed BHP Petroleum merger with Woodside, these are not the actions of a climate leader. BHP should retain these assets and decline production in keeping with a 1.5°C pathway, in accordance with just transition principles.”
BHP is likely to have a harder time flogging the final asset on its trade table, the Mt Arthur thermal coal mine in New South Wales.
Unlike Mt Arthur, BMC is substantially a metallurgical coal business.
Rather than supplying coal fired power stations, it supplies coking coal for use in steel mills across Asia.
That’s an important distinction, because while the replacement technologies for coal power are largely understood – renewables are grabbing larger shares of power grids in Australia and across the world – commercial steel production processes that do not use coke could be decades away.
Stanmore has well over a decade at BMC on current reserves (up to 25 years at South Walker Creek) on top of its existing Isaac Plains, Isaac Downs and Millennium mines, while BHP is itself keeping hold of its BMA met coal mines, which produce a high quality hard coking coal.
While BMC is considered by BHP to produce a ‘lower quality’ product, Australian met coal prices for all products are near record highs. Based on its September quarter results, the BMC business Stanmore is buying would generate almost US$700 million in EBITDA.
RBC’s Kaan Peker said the investment bank had a US$2 billion valuation on the BMC assets.
But that comes down to US$1.3-1.4b, slightly above the initial purchase price, once the costs reported by Stanmore are included.
RBC estimated the mines’ costs at US$65/t, while Stanmore has reported FY22 costs of US$75/t. It expects South Walker Creek’s PCI product and Poitrel’s product, a blend of 70% semi-hard coking coal and 30% PCI, to get around 70% realisation of the Australian hard coking coal index.
He said quality of product was the key reason why BHP wants to divest BMC and keep BMA, with steel producers expected to seek out higher efficiency coking coals that reduce their emissions intensity in the coming years.
“BHP is continuing its orderly (and lengthy) exit from coal, but this is a BHP-scale business consisting of numerous large and long-life assets, which have been in the portfolio for a long period,” Peker said.
“Over the next few decades, BHP anticipates higher-quality metallurgical coal to benefit as the steel industry increases focus on blast furnace efficiency as a means to decarbonise.
“BHP’s messaging to the market will continue to be one of differentiation, advocating the variance between metallurgical coal and thermal coal (and now between met coal types, i.e. high vs. low quality), from both an ESG and economics perspective.”
Peker values Mt Arthur at only US$300-400 million with around US$500m in closure liabilities.
While BHP has been keen to shift climate liabilities off its books with its divestment review, he says BMA will likely see a long-term, managed decline dependent on technological advances.
“Following the divestments above, only the BMA assets would remain in the coal segment,” Peker said.
“We value BMA at US$14b, c.14% of BHP’s NAV, generating 10-13% of group EBITDA. Over the next 1-2 decades, BMA should be a story of a managed decline – running the assets to maintain coal quality and maximising near-term cash flow.
“The pace of decline will be determined by how quickly the steel industry decarbonises, investor sentiment changes, and abatement technology advances.”
BHP was up 0.8%, while Stanmmore gained ~14% on a day gold stocks carried the materials index to a 0.55% gain on stronger prices.