BHP Looks to Higher Quality Coking Coal
By Jo Clarke
September 16, 2020 - UK-Australian resources firm BHP will focus on higher quality coking coal and longer life mines when it sells its 80pc stake in Australia's BHP Mitsui Coal (BMC) joint venture and focuses on its BHP Mitsubishi Alliance (BMA) assets.
BHP has given itself two years to sell its BMC assets, which include its 80pc share of the 6mn t/yr South Walker Creek and 4mn t/yr Poitrel pulverised coal injection (PCI) grade and semi-hard coking coal mines in Queensland, possibly in a package with its thermal coal assets in New South Wales (NSW) and in Colombia.
South Walker Creek is predominantly PCI grade coal and Poitrel is lower quality hard coking coal than many of the mines contained in the BMA joint venture. Poitrel also has only around 49mn t of measured resources, giving it a shorter mine lifespan than other options in the BMA portfolio.
BMC also contains the Wards Well underground hard coking coal project, which has sat on BHP's books for over a decade and not been developed because it has not passed BHP's stringent investment criteria.
The decision to sell BMC came as more of a shock to investors than the well signposted move out of thermal coal. But is part of BHP's move away from fossil fuels to focus on "future minerals" that support emissions cuts. Renewables such as wind turbine towers and solar panels also require steel and currently coking coal is required to make steel from iron ore. It needs be high-grade coking coal for BHP to meet its new emissions targets, which include goals that it has set for its customers such as steel producers.
This emissions-based argument for selling BMC marries with BHP's outlook that lower grade coking coal face a lower priced outlook as the world looks to decarbonise, which is reflected in pricing movements during 2020. The price for premium hard coking coal held up better than lower grade metallurgical coal during the first wave of Covid-19 lockdowns. It has also been the first to show signs of recovery as blast furnaces outside of China return to production.
The problem for BHP may be in finding a buyer for these lower grade BMC assets, particularly if they are lumped together with its thermal coal mines. Shareholders are increasingly demanding that firms cut carbon emissions, excluding most listed firms with a large proportion of institutional shareholders. That leaves state-controlled or family-owned businesses, such as Yancoal but it may face competition issues given it is already Australia's largest independent exporter of coal.
BHP could instead create a new separately listed firm similar to South32, which it created in 2015 to hold non-core assets, including its Illawarra metallurgical coal business in NSW. But this could be difficult without the support of major institutional investors.