BHP to exit thermal coal on low returns, sticks to coking

Coal Insights Bureau

Global mining major BHP has decided to exit thermal coal assets due to falling and even negative returns while staying with coking coal where margins are still high and are likely to sustain on steel sector recovery, Chief Executive Officer, Mike Henry recently told investors during the half yearly earnings release.

“Today, we’ve also been clear about our intent to focus the coal portfolio on higher quality coking coals and to divest BMC (BHP Mitsui Coal), New South Wales Energy Coal and Cerrejon, which are some great assets and they have growth options, but they’re unlikely to compete for capital within BHP,” Henry said outlining company’s decision to exit thermal coal.

Cerrejon is one of the largest surface mining operations in the world and mines high quality thermal coal for the export market of about 550 million tons of a year employing more than 12,000 employees and contractors.

BMC owns and operates two open-cast metallurgical coal mines in Bowen Basin – South Walker Creek Mine and Poitrel Mine and is 80 percent owned by BHP with Mitsui and Co controlling 20 percent.

“These are large-scale and long life assets. They produce good cash flow through-thecycle and have the potential for value growth, including through productivity driven volume growth, further cost reductions and embedded expansion options.

BHP is looking at unlocking the value in the assets by selling off, the official indicated.

“We see more upside opportunity in the higher quality hard coking coals. Whilst we see thermal coal being used by the world for a long period of time, these being great assets, on balance, there’s less upside skewing in the market scenarios that we run than there is for some other commodities,” Henry said.

BHP’s thermal coal exposure comprises a very small portion of overall asset portfolio or about three percent of net asset base. BHP owns two assets, a 100 per cent share of the New South Wales Energy Coal asset and a 33.3 per cent stake in the independently operated Cerrejón mine in Colombia.”

BHP’s met coal business contributed EBITDA of $1.9 billion, at a margin of 36 percent which would have been better but for a 27 percent fall in price.

Why coking coal is a better bet?

The collective need to reduce emissions globally will create advantage for higher quality steel-making raw materials (both in iron ore and in met coal), as steel makers seek to reduce the emissions intensity of blast furnace steel production.

Over time, BHP sees premium quality coking coals at an advantageous position given the drive by steel makers to improve blast furnace productivity, partly to reduce emissions intensity.