High coal price inspires Wesfarmers to look at $2bn sale of mines

Wesfarmers wants to sell its two east coast coalmines for $2 billion to take advantage of surging prices.

Coking coal prices have surged beyond all expectations since the start of July.

Perth conglomerate Wesfarmers is to put its two east coast mines on the auction block in an attempted $2 billion sale to take advantage of surging prices that see coal again challenging for the mantle of the nation’s biggest export.

Dramatic spikes in the price of coking coal — up 200 per cent since the start of July to $US310 a tonne — and thermal coal — up 125 per cent this year to $US109 — have turned on its head the fortunes of what was just a few months ago an industry in which most mines were struggling to stay afloat.

Now, with coal prices high, closure talk has been replaced across the industry with talk of reopening and potential expansion. And sale is on the cards for the two Wesfarmers assets, which are the Curragh coking coalmine in Queensland’s Bowen Basin and a 40 per cent stake in the Bengalla thermal coalmine in the NSW Hunter Valley.

Coking coal is used to make steel, while thermal coal is used in power stations.

Illustrating the speed of the turnaround, just three months ago Wesfarmers managing director Richard Goyder said he was reviewing the then loss-making Curragh in the wake of an $850 million writedown on the mine. At the time he said Ben­galla, the second-lowest cost coalmine in the nation, was not subject to the review.

But yesterday, the company declared the review had been extended to Bengalla.

“Wesfarmers is continuing to consider a broad range of options, from operational to divestment initiatives, including recently seeking expressions of interest from external parties who may want to acquire the coal assets,” the company told the stock exchange.

“There is no certainty this ­process will lead to a transaction and Wesfarmers will update the market further if and when appropriate.”

It is understood UBS is running the sale for Wesfarmers and that both selling the mines separately or together will be entertained.

Any exit from coal would put Wesfarmers further down the path of a pure-play retailer with its flagship brands including hardware operator Bunnings and its Coles supermarkets business. Wesfarmers also operates a chemicals and fertilisers business and in recent years the conglomerate has sold its insurance underwriting arm.

Coking coal prices have surged beyond all expectations since the start of July, hitting a five-year high as China, the world’s biggest coal producer, curbed overcapacity at its mines, and as steel demand remained strong.

Thermal coal prices have also rallied on the lower production out of China.

In both coking and thermal coal, analysts have been surprised not only at how disciplined Chinese producers have been in the face of rising prices, but how little new production in other countries has been fired up in response to the high prices.

The small amount of new production is partly because it is not easy or cheap to restart mothballed mines and most analysts and industry players do not expect the high prices, particularly in coking coal, to last.

At current prices, coking and thermal coal are delivering about the same export revenue for Australia (assuming half of the ­nation’s coking coal is sold at spot and half at contract prices of $US200 a tonne) as iron ore, which took over from coal as the nation’s biggest export during the China boom.

If current prices extended for a year, iron ore and coal would contribute about $60bn each, based on Department of Industry production forecasts.

While high prices are not seen as being sustainable, analysts are starting to change their forecasts to reflect the unexpected longevity of the price gains.

ANZ commodities strategist Daniel Hynes yesterday boosted his 2017 average coking coal forecast by 72 per cent to $US178 a tonne and his 2018 forecast by 42 per cent to $US135.

“High spot prices will induce a global supply response (led by North America); however, that’s not likely to occur until the second half of 2017 and will be muted until there is a significant increase in capital expenditure,” Mr Hynes said.

Bengalla is one of the nation’s lowest-cost thermal coalmines and produced about 8 million tonnes of coal last year. It has approval to produce 15 million tonnes a year.

At the start of the year, New Hope bought Rio Tinto’s 40 per cent stake in Bengalla for $805m. With thermal coal prices more than doubling since, Wesfarmers will be wanting a far better price than that for its stake.

Curragh produces 8 million tonnes of coking coal and 3 million tonnes of thermal coal a year and is believed to be worth about $1bn. As well as being higher cost, it has obligations to Queensland state power generator Stanwell, including below-cost domestic thermal coal, that last year cost it $148m.

A problem for Wesfarmers and UBS will be getting some sort of agreement on future coal prices with potential buyers, who until recently have been bargain-hunting and will argue little has changed in the long-term outlook.

The differences in the expectations of buyers and sellers has been evident in Anglo American’s so far unsuccessful recent attempts to sell its top-tier Grosvenor North and Moranbah mines, where it has reportedly rejected offers as too low in the wake of recent price increases.

Potential buyers of one or both of the mines include Apollo Global Management, which recently made an unsuccessful offer for Anglo American’s Queensland coalmines, Yancoal, Whitehaven, New Hope, Shenua Coal, Resource Capital Fund and Posco.