A fair chunk of the $US1.15bn ($1.5bn)-$US1.25bn writedown, after tax, will be the value of tax losses locked into Mount Arthur’s company structure. With the asset on the block for sale or a spinout into a separate company, BHP won’t be able to transfer that value across to those of its operations that actually make money.
But a large proportion also comes from a straight-up writedown of the value of the asset.
BHP put a net operating value of $US841m on Mount Arthur at the time of its full-year financial results in August, and said it would probably carry a value of $US250m-$US350m in its February half-year results.
While there will be some fiddling about with tax values and other items along the way, the size of the impairment implies that BHP expects to eventually shed about $US760m worth of tax credits with the divestment of Mount Arthur, with the value of the actual asset to be written down by $US500m-$US600m.
It’s not yet clear how much of that is about BHP’s long-term outlook for the coal price — in August, BHP was still forecasting that total demand for thermal coal would continue to rise for some time to come.
And certainly the way BHP has been mining at Mount Arthur will have devalued the asset as well. The company as much as admitted this on Wednesday, when it said the impairment reflected “current market conditions for Australian thermal coal, the strengthening Australian dollar, changes to the mine plan and updated assessment of the likelihood of recovering tax losses”.
BHP has been cherry-picking the best bits of Mount Arthur for at least the last two years. It first disclosed the strategy in its June quarter production report in 2019, flagging lower production from Mount Arthur as its mine managers moved to “optimise our mine plan to focus on higher-quality products given widening quality differentials”.
That’s code for high-grading the deposit — taking out the good bits and leaving the low-priced stuff, a shift designed to maximise short-term profits at the expense of mine life.
Mount Arthur produced 16 million tonnes of coal last financial year, down from 18.1 million tonnes in the 2019 financial year, and only 6.9 million tonnes in the first half of the current fiscal year — though BHP maintained full-year guidance at 15-17 million tonnes.
Presumably, pumping up Mount Arthur’s bottom line by high-grading the deposit was aimed at helping BHP get the most use out of banked tax credits within Mount Arthur’s corporate structure before any sale.
But the pandemic ensured the strategy did not pay off, sending prices for thermal coal tumbling, with BHP receiving an average of only $US44.35 for its energy coal (including coal sold from the Cerrejon coal mine in Colombia) in the first half of the year.
Mount Arthur may well fetch more than the book value that BHP now ascribes to it, as those tax credits will be worth something to a new owner. But Wednesday’s quarterly report suggests that, whatever BHP’s new long-term outlook for thermal coal is, its own short-term strategy has helped devalue the mine as well.
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BHP’s decision to slash the value of its Mount Arthur thermal coal mine says plenty about the way the company views the outlook for energy coal.