BHP rethinks value of its coal assets with commodity prices strong

Sources say that BHP has had a change of heart about the price at which the company is prepared to part with its coal assets. Picture: Bloomberg

Speculation is mounting that mining giant BHP is rethinking how much money it is willing to accept for its coal assets as the price of the commodity remains at sky high levels.

There has been little news on the developments of BHP’s sale process for its coal assets of late.

In August, the world’s second-largest mining company by revenue was thought to be on the cusp of a deal to sell its mining assets to Peabody Energy.

However, no transaction was announced at its results briefing that month and the understanding is that negotiations have continued.

Sources say that since that time, BHP has had a change of heart about the price at which the company is prepared to part with the assets.

This is as coal prices continue to soar, as does the amount of cashflow coming from the coal mines owned by BHP.

It is understood that, while Peabody was earlier the preferred bidder for the assets, now other parties that had earlier been circling – BUMA and Sinar Mas Group out of Indonesia – are back in the race.

The portfolio was earlier thought to be worth about $2bn and consists of BHP’s Mt Arthur thermal coal mine in NSW and two metallurgical coal mines in Queensland held as part of an alliance agreement with Mitsui Coal known as BMC.

BHP has already sold a stake in the Cerrejon thermal coal mine in Colombia to existing owner Glencore.

Peabody, which is based in St Louis but has a sizeable coal mining business in Australia, has been taking advice from Bank of America and Amicaa.

It counts Elliott Management as its major shareholder.

Sinar Mas Group is the controlling company of Golden Energy in Singapore, which owns most of Australia’s Stanmore Coal.

New Hope is not thought to be in contention. This is after earlier raising funds for what investors thought could be a move to buy part of BHP’s portfolio.

Final bids were originally due at the end of July.

But a possibility is that BHP is keen to retain the assets for the strong cashflow they produce and run them down over time.

Working on BHP’s Australian coal assets have been Macquarie Capital, UBS and Goldman Sachs.

The BMC metallurgical coal assets are considered the more favourable part of the portfolio.

Coking coal price futures on Friday were at $US338 a tonne while thermal coal was at $US238.60 a tonne.

Analysts from Macquarie have this year attributed the strong performance to China being “very short of coal” and more of the commodity being used in Europe due to a “dangerously low” gas supply and soaring prices.

Some market experts believe BHP would be best to sell its assets now while the coal price is high.

Otherwise, it risks being in a position further down the track when it cannot offload the assets because there are no buyers.

They also face large remediation liabilities for the assets in the future.

BHP’s mining rival Rio Tinto staged an exit from the coal market from 2016 by selling New Hope its 40 per cent interest in the Bengalla thermal coal mine in 2016 for more than $800m, its Coal & Allied Hunter Valley thermal coal business in 2017 to China’s Yancoal for about $US2.5bn and, the following year, its Kestrel coking coal mine to EMR Capital and Adaro Energy for $US2.25bn.

Despite coal’s profitability right now, institutional investors and major lenders are not keen to back coal companies due to the damage the commodity causes to the environment through emissions from the burning of coal.

Peabody had earlier entered Chapter 11 bankruptcy, although its Australian portfolio of coal assets was quarantined from the action.

Elliott, which has $US41.8bn ($55bn) worth of assets under management and 30 per cent of Peabody Energy, has bought a half share in the world’s largest mining services provider, Thiess, from CIMIC.

Thiess services the coal mining industry, so having exposure to the BHP coal mines may have benefits.