BHP Coal Assets worth a Billion Less than Just 2-Yrs Ago: Report

UK’s biggest public pension fund NEST has withdrawn funds from Australian mining giant BHP recently because the company is profiting ‘from digging coal’, said the Institute for Energy Economics and Financial Analysis (IEEFA).

August 10, 2020. By Manu Tayal

UK’s biggest public pension fund NEST has withdrawn funds from Australian mining giant BHP recently because the company is profiting ‘from digging coal’, said the Institute for Energy Economics and Financial Analysis (IEEFA).

This follows BHP being put on a watch list by the Norwegian Sovereign Wealth Fund as a firm not adopting business strategies aligned with the Paris Agreement, said IEEFA in its report.

On the back of investors’ pressure to commit to global decarbonisation, BHP has put its last two loss-making Australian and Columbian thermal coal operations up for sale at a time when buyers are wary and global financial institutions are increasingly refusing to fund thermal coal, added the report titled Divestment vs Sterilisation: What to Do With BHP’s Stranded Coal Assets.

The report further added that, both Adani Australia and Yancoal made offers well below expectation for BHP’s Mt Arthur mine in Australia, signalling a dramatic change in market expectations and the realisation of stranded asset risk in the coal sector, and growing rehabilitation liabilities.

According to Tim Buckley, director of energy finance studies at IEEFA and author of the report, the deterioration of the thermal coal market coupled with increasing stranded asset and climate risk has put BHP into a tight spot.

“Investor pressure of leading companies to align with the Paris Agreement has encouraged BHP to put its last two thermal coal assets on the market, yet buyers are coming in under expectations,” said Buckley.

He further added that “BHP is in the unfortunate position of again being struck with asset write-downs.”

“Although it signalled a consideration of exit from the declining coal sector in 2018, BHP failed to divest its thermal coal mining operations quick enough,” the author commented.

“Any buyer of its thermal coal assets would be well aware of previous optimistic valuations suggesting a price tag could reach over USD 2 billion just for Mt Arthur just 2-3 years ago. Today, the market could be well under USD 1 billion, even if a strategic buyer with a strong balance sheet can be located. Net of a sinking fund for rehabilitation costs, this figure could be halved,” Buckley analyzed.

He sais coupled with the massive but necessary cost of mine rehabilitation due at each mine’s end of life, BHP faces a choice between retaining, selling or spinning-off the mines.

“Retaining the loss-making businesses as best they can to keep the mines efficient and safe and to fund the cash costs of massive rehabilitation effort ahead is one option,” says Buckley.

“Another option is for BHP to sell to Adani, making room for Adani to cease its near-decade long delayed Carmichael thermal coal mine debacle in the Galilee Basin in Queensland,” he suggested.

Buckley further analyzed that “a common theme in the fossil fuel divestment strategies we’ve examined is that each has involved strategic and/or financial errors of judgement resulting in massive hundreds of millions or billions of dollars of capital write-offs. BHP could well face the same outcome.”

“An alternative and climate sensitive solution would be for BHP to retain a controlling minority stake in a listed spin-off of Mt Arthur and Cerrejón combined, with an investment sinking fund established and funded, with top-up contributions from ongoing operations to address the massive rehabilitation task ahead,” he added.

“Implementing this strategy, with an aligned, fit-for-purpose corporate governance structure, could set a globally important precedent for the best way to address stranded assets in the fossil fuel industry as decarbonisation accelerates.”

Buckley says BHP must minimise the likelihood that investors – and public taxpayers – will cop the rehabilitation bill for its stranded coal mine assets, a cost likely to reach into the billions across both mines over the next few decades.

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