What’s behind BHP’s sovereign risk investment strike?

Australia’s biggest mining giant has suspended new investment in its coal mines in both Queensland and NSW and it has nothing to do with climate change or demand.

The country’s biggest and most globally exposed company BHP has raised the issue of serious sovereign risk of doing business in Australia, for the first time since the Whitlam years.

Indeed, it has already gone beyond risk to reality: BHP has suspended new investment in its coal mines in both Queensland and NSW. These investment strikes have got nothing to do with climate change – the demand that companies exit coal. Indeed, with NSW, it’s the exact opposite.

In Queensland’s case it is all about the Palaszczuk Labor Government’s greed.

“As a result of the Queensland government’s decision to raise coal royalties to the highest maximum rate in the world, the fiscal environment is no longer competitive or predictable (my emphasis),” BHP said in its interim report. BHP was being polite; to me those words and BHP’s actions spell sovereign risk, a government threatening effective asset expropriation.

As a direct consequence BHP is not making significant new investments in Queensland and further, is not even providing annual sustaining capital expenditure guidance at this time. That second part is explosive: it’s a step away from BHP basically being prepared to walk away from spending any money on the mines; just letting them run down and out.

Something you would have thought was utterly unimaginable, as they are among the highest quality met coal mines in the world.

The position is NSW is similar but for a very different reason: the move by the Perrottet Liberal-National government to impose a price cap of $125 a tonne on coal for power stations, and forcing mines to divert coal from export to supply those stations.

So, BHP is “actively reviewing operational plans, existing commitments and logistical practicalities”.

BHP chief executive Mike Henry. Picture: Colin Murty

Further, BHP points out that the $125 proposed price cap is below the cost of producing the coal.

That would mean forcing BHP to mine coal and sell it at a loss to keep NSW lights on: if that’s not a form of expropriation – and from a supposedly Liberal-led government - I don’t know what is.

This is where it also gets weird, very – as in, fundamentally stupid and insanely irrational – weird, over climate change. BHP only has approval to keep its NSW mines operating until 2026. The NSW government was quite happy to let them close when they were only exporting the (wicked) coal to foreigners. But now the NSW government wants BHP, and all the other miners, to divert some of that - no longer quite so-wicked – coal to local power stations. And at that capped price.

To keep the lights on and power bills from soaring even higher. BHP had wanted to keep its NSW mines operating until 2030 – yes, because they are suddenly hugely profitable, with foreigners prepared to pay as much as $500 a tonne, to keep their lights on.

But it’s a slow process wending its way through mountains of red and green tape. Bottom line: BHP won’t allocate another dollar to investment in the mines to produce more coal than the world desperately wants and is prepared to pay top dollar for. While the NSW government will confiscate some of what it produces.

Insanity and stupidity wrapped up in one.

BHP put it all more politely. Where I say ‘sovereign risk’, BHP’s CEO Mike Henry says other nations are going gangbusters to encourage new mines.

On the actual BHP numbers, a funny thing happened on the way to the stock exchange.

Last week CBA announced a 9 per cent profit rise and a 20 per cent dividend hike.

Its share price dropped 9 per cent.

BHP announced a 32 per cent profit fall and a 40 per cent dividend cut and its share price fell? All of just one-third of one per cent.

Go figure

Originally published as What’s behind BHP’s sovereign risk investment strike?