BHP coal assets fall $1 billion in 2 years

 From IEEFA

Another global investor, the UK’s biggest public pension fund NEST, has withdrawn funds from BHP this week because the company is profiting “from digging coal”.

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.

Pressured by investors 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.

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.

Tim Buckley, director of energy finance studies at the Institute for Energy Economics and Financial Analysis (IEEFA) and author of a new report: Divestment vs Sterilisation: What to Do With BHP’s Stranded Coal Assets, says 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,” says Buckley.

“Reading the rapidly deteriorating fundamentals of the gas market, BHP sold its U.S. shale gas for US$10.6bn in July 2018, taking an asset write-off of US$2.94bn in the process.

“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.

“Any buyer of its thermal coal assets would be well aware of previous optimistic valuations suggesting a price tag could reach over $2bn just for Mt Arthur just 2-3 years ago.

“Today, the market could be well under $1bn, 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 says 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.

Stranded assets

Source: Lazard
My estimate for a grid 50/50 wind/solar (green line)

For a few years now, analysts have been warning those involved in coal, either as miners or as operators of coal fired-power stations, that the rapid cost declines in wind, solar and batteries would led to coal assets becoming worthless, long before the debt raised to buy them was repaid.  What is happening with BHP's [Australia's largest mining house] as it attempts to offload its coal interests is a good example.

When you’re in the business of buying and selling, timing is everything. That’s the costly lesson facing BHP Group, which is looking at options to divest its thermal coal assets according to a report by Thomas Biesheuvel of Bloomberg that cited people familiar with the matter.

Arch-rival Rio Tinto Group raised $2.7bn selling mines in the Hunter Valley north of Sydney to Yancoal Australia Ltd., in a process that started in 2016. BHP could get far less: Macquarie Group Ltd. estimates $1.6bn. That’s despite the fact that BHP’s Mount Arthur and Cerrejon mines, in the Hunter Valley and Colombia, post roughly the same Ebitda as the ones Rio Tinto sold.

What’s changed? More or less everything.

Back in 2016, coal was still the lowest-cost way of delivering new generation in most major markets. The slumping price of wind and solar generation since then has changed the game. Thermal coal will fall to 11% of U.S. generation by 2030 from the mid-20s at present, S&P Global Ratings wrote in a report; outside of Spain and Germany, most European coal-fired plants will be retired by 2025.

North Asian markets supplied by Mount Arthur look like an exception, with Japan, South Korea and China making up about 80% of Australia’s thermal coal exports. The first two countries are rare cases where falling renewables costs have failed to undercut the black stuff.

Even there, though, the picture is dimming: Japan’s coal-fired capacity will go into decline starting 2023, and actual demand should fall faster since its most recent plants use fuel more efficiently, according to a report this week by the Institute for Energy Economics and Financial Analysis, a research group opposed to fossil fuels. South Korea now has taxes on coal amounting to $60 a ton and imports will fall by half by 2040, according to the IEA.

[From IEEFA]

Something similar is going to happen with oil and eventually with gas, too.  As sales of EVs grow, oil demand will decline, and only low-cost oil producers will remain profitable.  In the USA, we've already seen how plunging coal demand and prices has led to bankruptcies.  This trend is likely to extend world wide.