High price to pay as BHP puts community first with Mt Arthur mine decision

Whether BHP is keeping or closing a coal mine might depend on which side of the coal culture wars you sit, but doing the right thing in the Hunter Valley may pay future dividends.

BHP chief executive Mike Henry. Picture: Mike Goldwater

BHP’s rush to quit its fossil fuel operations in the last year has repeatedly gifted asset buyers billions in windfall earnings.

From a purely commercial perspective BHP’s sale of its stakes in the Cerrejon coal mine in Colombia and coking coal mines in Queensland is unlikely to be chalked up in the win column for chief executive Mike Henry.

To be fair to BHP, nobody foresaw the extraordinary heights the coal price revival would reach – the east coast power grid might be in slightly better shape if they had.

But in hindsight, the $US294m ($422m) received for its 33.3 per cent stake in Cerrejon, and the $US1.2bn it received from Stanmore Resources for its 80 per cent operating share of BMC, appear laughably low in light of current coal prices. How much BHP left on the table with BMC won’t be clear until Stanmore releases its next set of financial results.

But Glencore agreed to pay a combined $US588m to BHP and Anglo American for the two-thirds of Cerrejon it did not already own. Glencore finalised the acquisition in January, but the sale was effective from the start of 2021. Glencore noted in its last annual financial report that, when annual dividends to Cerrejon’s owners were taken into account, it actually only forked out $US101m to close out the deal.

Since then Glencore has presumably been laughing all the way to its Swiss bank.

At least BHP shareholders got Woodside shares in the deal to sell off its oil and gas assets, so they still get the benefit of resurgent prices.

Which brings us to Mt Arthur. Rather than sell a good asset just ahead of the coal price revival, this time BHP has elected to hang on to a marginal asset as the market peaks. There’s no doubt Mt Arthur will make a bomb for BHP this year. But that will undoubtedly change as the coal price falls in future years – currently Mt Arthur struggles to make a profit when the coal price drops below $US70 a tonne, and costs are only going to rise until 2030.

To work out why BHP thinks keeping Mt Arthur is arguably the better option, it’s worth going back to the social value framework outlined by then BHP corporate affairs boss Geoff Healy in October 2019. Healy effectively argued that BHP needed to set aside decades of MBA-driven thinking, and set its value to the communities in which it operates alongside returns to shareholders when it makes decisions.

In other words, leave a bit more cash on the table for communities, taxpayers, the environment and workers, and maybe a bit less for shareholders.

Having set its strategy to take advantage of global energy transformation, BHP now needs to find a way to grow its business.

That means developing new mines – in the face of tougher environmental regulations, more scrutiny from investors, and increasing resistance from communities concerned about the environmental risks posed by mining.

BHP is taking a risk of future losses by hanging onto Mt Arthur. But the example it sets by doing the right thing in the Hunter Valley will also be a marker for BHP to point to as it argues to governments and communities across the world that it is the most trustworthy option to develop new mines.