Coal mining on the nose but prices slow sale rush by Downer and BHP

Thermal coal on Wednesday made even further gains, up 1.4 per cent to $US166.40 a tonne while coking coal futures are up 0.5 per cent to $US219.50.

The surging price of coal may be causing some companies to rethink assets related to the commodity that they have had up for sale.

While delivering its full-year earnings results on Thursday, Downer told investors it was yet to sell its Open Cut East mining services operation.

Downer has made an exit from most of its mining services division, but that part has been the most difficult for the group to offload because it primarily services the coal mining sector, one out of favour with institutional investors and financiers, concerned about its impact on the environment.

That may be so, but the unit has been performing strongly, as coal prices are trading at record highs.

Thermal coal on Wednesday made even further gains, up 1.4 per cent to $US166.40 a tonne while coking coal futures are up 0.5 per cent to $US219.50.

 

There was a suggestion during question time with Downer investors on Thursday that Downer may retain the unit if a buyer does not come forward with the right price.

Downer said the business comprises four profitable contracts, which are scheduled
to complete between 2022 and 2024.

The unit’s carrying value is $180m, and given the booming coal price, the theory is that the unit can generate such earnings over the next few years and Downer just wind down the business as contracts end over time. This approach may be more valuable to the company than a sale.

There is a similar theory with respect to the sales process of BHP’s coal mining assets.

One suggestion being floated is that BHP may only sell its two metallurgical coal mines in Queensland held as part of an alliance agreement with Mitsui Coal, known as BMC and retain its Mt Arthur thermal coal mine in NSW.

While the talk in the market is that Peabody Energy is the preferred bidder in the competition, New Hope Group is still doing some work, as is Indonesia’s BUMA.

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

There is a suggestion that New Hope’s focus is on the Mt Arthur thermal mine, given its Bengalla thermal coal mine in the Upper Hunter Valley is close and could extract synergies.

However, the thinking is that New Hope is unlikely to pay up for the asset or want to stomach the billions of dollars in remediation costs and capital spending needed.

There is talk BHP may retain that asset, as it may be more valuable to the resources giant to extract cash from the mine and wind it down over the coming years, benefiting from tax losses attached to the asset related to BHP’s Billiton merger in 2001.