Why BHP may send power station coal to corporate Siberia

BHP’s move to spin-off or sell off its thermal coal mines – which litter the landscapes of South Africa, Colombia and Australia – is just the latest signal that one of the world’s largest coal producers thinks that the glory days are over for power station coal.

Last week BHP Billiton confirmed that it was seriously considering dispatching its thermal coal assets to the relative Siberia of a new company or even selling some or all of its mines off altogether. Whichever option it pursues, the underlying message is the same: if a mining company wants to make serious money, thermal coal is the wrong commodity to invest in.

BHP-Billiton is one of the world’s big thermal coal miners, producing some 73 million tonnes of in 2013 worth approximately US$4.4 billion. In South Africa, over half of the 32 million tonnes produced via BHP Billiton’s South African subsidiary is delivered to the notoriously polluting power stations of Eskom, the government-owned utility. The rest is shipped to Chinese and Indian customers.  While two of the company’s four mines have a potential life of over twenty years, the other two have at best only seven years life left in them.

In New South Wales, BHP Billiton operates the huge 18 million tonnes a year Mt Arthur mine in the Hunter Valley. A little over a million tonnes a year from this mine is supplied to Macquarie Generation’s adjoining Bayswater power station and the rest is mostly exported to Japan and China. It is a huge operation which could run for another 40 or more years, but only if the global export markets hold up.

In Columbia, BHP Billiton’s share from the Cerrejon joint venture is approximately 13 million tonnes a year, which is dispatched to the US, European and Asian markets.  In the US, BHP Billiton’s sole remaining asset is the ailing San Juan mine, which supplies the nearby San Juan Generating Station. With only five years reserves left and its power station supply contract expiring at the same time, the mine is hardly a big selling point for investors. (At the end of last year BHP Billiton offloaded its Navajo mine – which has only three years life left – to the Navajo Nation, a deal opposed by some within the tribe.)

All up, BHP Billiton’s thermal coal mines look like a rather motley collection.

The writing on thermal coal’s wall

The writing has been on the wall for BHP Billiton’s thermal coal mines for some time.

Back in 2012 BHP Billiton’s then coal division chief executive, Marcus Randolph, told the Australian Financial Review that “in a carbon constrained world where energy coal is the biggest contributor to a carbon problem, how do you think this is going to evolve over a 30- to 40-year time horizon? You’d have to look at that and say on balance, I suspect, the usage of thermal coal is going to decline. And frankly it should.”

It was a finely wrought fudge: a hat-tip to the reality of climate change by acknowledging what pretty well everyone knows – that thermal coal’s coal’s use-by date is approaching – but suggesting that it was sufficiently far off into the future as to not affect the asset value of BHP Billiton’s portfolio of mines, a few of which could run for decades more.

In late May last year BHP Billiton toured a group of analysts around some of their metallurgical coal projects in Queensland. But in their presentations it was clear that BHP Billiton really didn’t want to talk much about the prospects of thermal coal.

Earlier this year, in a presentation to investment analysts, BHP Billiton signalled that new projects would have to target an average rate of return of over 20% to be taken seriously by senior management and the board. It is a threshold becoming more hopelessly out of reach by the week for new thermal coal projects let alone existing ones.

In late March the first of the annual Australian-Japanese coal contracts was signed between Glencore and the Japanese utility for of at just under US$82 a tonne, a cut of 14% on the previous year’s contract. It was the lowest global price for thermal coal since the heady boomtime days of 2009. Except for the most starry-eyed coal boosters, few analysts think thermal coal prices are likely to recover much anytime soon.

With thermal coal prices likely to languish, BHP Billiton has little interest in pouring billions of dollars into new thermal coal mines. BHP Billiton’s list of near-term projects (see page 37) touted to analysts includes no new thermal coal mines or expansions beyond those nearing completion.

The reason is pretty clear. For each US$1 fall in the tonne of thermal coal, US$25 million gets wiped off the company’s after tax profit. In 2013 alone, BHP Billiton’s income from thermal coal dropped by over US$787 million or a whisker over fifteen per cent.

Last drinks?

Last week Dean Dalla Vale, the President of BHP Billiton Coal, complained before an audience of corporate movers and shakers that he felt that “coal is often maligned and misunderstood.”  He then went on to proclaim that thermal coal demand could grow by as much as an extra 900 million tonnes over the next twenty years.

If growth is going to be as strong as he claims, why is it that BHP Billiton want to either spin off or ditch thermal coal altogether?

Having decided that thermal coal is not going to be one of the four or five key commodities for the company, BHP Billiton’s challenge is to have investors support the spin off and/or sell off strategy while doing as little as possible to spook potential buyers. From BHP Billiton’s perspective, there is little to be gained from talking down the coal neighbourhood while trying to sell some real estate.

The company’s announcement this week that it is going to press ahead with getting approvals for the 10 million tonnes a year Caroona Coal Project in the Liverpool Plains – a project strongly resisted http://ccag.org.au/  by local farmers – appears to be just another part of its deck-clearing program. If it seems that BHP Billiton may be able to get approval from the NSW government for a big new long-life project, then it may help entice some otherwise wary buyers out of the woodwork.

Undoubtedly BHP Billiton also see a PR benefit in shunting its thermal coal assets off somewhere else too. Ian Dunlop’s high-profile bid last year to be elected to the Board of Directors on a climate change and governance platform was a PR disaster for BHP Billiton. By spinning their thermal coal assets off to a separate company, Dunlop would be confined to raising coal and climate at the AGM of BHP Billiton’s cast offs company. From a PR perspective, it would leave the main company’s annual general meeting from having to discuss climate or, if it did, be largely confined to the company’s preferred terrain of defending metallurgical coal.

But what happens with BHP Billiton’s over 13 billion tonnes of thermal coal resources matters immensely to the global climate. With each tonne of coal producing approximately 2.7 tonnes of carbon dioxide, BHP Billiton’s thermal coal assets contain over 35 billion tonnes of carbon dioxide – roughly equal to the total annual emissions from the burning of all fossil fuels.

While BHP Billiton professes to have “long accepted the findings of the Intergovernmental Panel on Climate Change” its actions hardly square with a recognition that having blown the carbon-budget long ago it is time to bring Big Coal’s binge burning to an end.

Bob Burton is co-author with Guy Pearse and David McKnight of Big Coal: Australia’s dirtiest habit (NewSouth Books, August 2013). He is also a Contributing Editor of CoalSwarm, a coal wiki and a director of The Sunrise Project, an Australian group promoting a renewable energy economy. You can follow his Twitter feed here.