BHP considers $7bn coal exit

Buyers are said to be interseted in BHP’s coal assets.

Parties are said to be considering an acquisition of the unloved parts of the world’s second-largest miner, BHP, that have been earmarked for a $7bn-odd sale or demerger.

The understanding is that China’s Yancoal still has an appetite for at least some of the assets slated for divestment, while institutional investors are also understood to be pulling together so-called “black funds” to invest in such opportunities.

BHP announced last year that it would sell or demerge its Mount Arthur thermal coalmine operation in NSW, the stake it owns in its Cerrejon thermal coal mine in Colombia and two metallurgical coalmines in Queensland held as part of an alliance agreement with Mitsui Coal known as BMC.

It comes at a time that coal assets are out of favour with investors due to their negative impact on the environment.

Sources say the China-backed Yancoal, which is believed to have made low-ball offers for the Mount Arthur mine in the past, is said to remain keen to buy the BMC mines that produce metallurgical coal used for making steel, unlike the thermal coal generated from Mount Arthur.

But the challenge for the Australian-listed group that is mainly supported by Chinese interests would be gaining permission from the China government to buy coal assets from Australia or gaining Australian Foreign Investment Review Board approval at a time relations between the two nations remain tense.

The understanding around the market is that BHP is only prepared to sell all of the assets in one line. BHP has always maintained that a demerger of the business would take up to two years to complete.

But a black fund set up by an institutional investor that is keen to get its hands on the out-of-favour assets at a cheaper price could provide the answer for BHP. The idea behind the funds, say sources, is that they acquire assets that are out of favour due to their negative impact on the environment and offer a solution for the problematic investments over time.

The funds put a proposal to their own investors where they indicate that they can wind down the un-environmentally friendly coalmines faster than they otherwise would be if they were retained by their owners or come up with new technology to extract coal in a cleaner form.

In August, analysts at stockbroking firm Shaw and Partners put the collective value of the portfolio at about $7bn, with Mount Arthur worth $3.224bn, Cerrejon $656m and the two Bowen Basin Queensland mines — South Walker Creek and Poitrel — at $3.185bn.

Working on the demerger and possible sale of the assets are Goldman Sachs, UBS, JPMorgan and Macquarie Capital.

The other asset that is expected to be on the agenda for BHP is a 50 per cent interest in the Gippsland Basin oil and gas development in Bass Strait, which is known to have major remediation costs.

This asset could also appeal to a black fund.

BHP was believed to be reluctant to sell Mount Arthur to private equity groups when it had earlier been for sale and was said to have rebuffed a consortium from Southeast Asia looking at the mine in 2019.

This was due to the fact that it could be on the hook for contingent liabilities related to rehabilitation costs.

Mount Arthur Coal Australia is the largest individual coal production site in the NSW Hunter Valley.

The mine is one of the largest surface mining operations in the world and produces high-quality thermal coal for the export market, moving 550 million tonnes of material annually.

The BMC assets, of which BHP owns 80 per cent, do not produce premium coking coal and therefore do not fit well into BHP’s portfolio.

Most believe that a collective demerger of the BHP thermal and coking coal assets is the most logical option. The Mount Arthur Mine and Cerrejon mine were held in the former “Billiton” part of the business which came after a merger between Billiton and BHP and there are $600m of tax losses within the structure that could be wiped clear with the sales.