Anglo sale puts Queensland coal mine emissions in the spotlight – and in Wall Street’s hands

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Anglo American mine ownership selling for US$3.8 billion.

St Louis-based Peabody Energy has been announced as the successful bidder for Anglo American’s metallurgical (met) coal mine assets. Peabody will pay up to US$3.32 billion (AU$5.1 billion) for majority stakes in the Moranbah North, Grosvenor, Aquila and Capcoal mines, in Queensland’s Bowen Basin. In addition, Indonesia’s BUMA will pay US$455 million for a stake in the Dawson mine.

The Peabody transaction is for US$2.32 billion in cash and up to US$1.0 billion contingent on coal revenues over a five-year period and the restart of the Grosvenor mine.

According to Peabody President and Chief Executive Officer Jim Grech, it enables the company to “reweight our portfolio toward seaborne metallurgical coal”. The same approach has been taken by other pure-play coal miners recently, such as Whitehaven and Stanmore Resources.

Peabody is mainly a thermal coal miner but has some met coal mines in Queensland, which produce lower-grade met coal for pulverised coal injection (PCI). With 80% of Anglo’s mines producing (premium) hard coking coal, Peabody is expected to be producing about 20 million tonnes per annum of mostly coking coal by 2026, making it one of the larger coal miners in Queensland.

Some of Peabody’s mines are nearing the end of their useful lives. Faced with impending closures around 2030, Peabody has lodged mine life extension plans for state and federal approvals at most of its mines in Queensland and New South Wales. Acquiring the Anglo mines provides a fresh supply of coal resources. According to Peabody, “The acquired mines have an average mine life greater than 20 years with 306 million tons of marketable reserves and an additional 1.7 billion tons of coal resources.”

Managing methane emissions 

Coal mine methane emissions are released during mining. Their intensity is highest in the deep underground met coal seams such as Anglo’s mines.

Anglo has for many years drained the coal mine methane gas prior to and during mining and, with partners EDL, it has used gas-fired power stations to utilise waste methane and provide sustainable power to the Moranbah North and Grosvenor mines and to provide for domestic gas sales.

According to Anglo’s June 2024 half-year financial report, it “invested significantly over several years, in excess of [US]$100 million per annum, in methane capture infrastructure” at its underground metallurgical coal operations. This enabled it to capture gas before and during mining to abate approximately 60% of its reported emissions in 2023. Anglo set itself a goal of abating the remaining 40% of methane emissions from its operations and was investigating installing ventilation air methane (VAM) oxidising systems, to abate the remaining methane emissions at its underground mines.

Peabody’s Board of Directors intend to establish new long-term targets (for sustainability and emissions) following the sale in the coming months. In doing so, they should continue Anglo’s progression towards fully abating these mines’ methane emissions. They should also add the recently restarted Centurion mine, which has high methane emissions potential, to these abatement goals.

Restoring Grosvenor operations 

Anglo closed its Grosvenor mine in June due to a methane fire underground, yet Peabody will pay Anglo US$450 million if it can get it back into production. Peabody is well qualified to attempt this, as it can apply lessons learned from restarting North Goonyella mine, some six years after its closure due to a similar fire.

Peabody’s Centurion mine, now under development and due to reach production in 2026 will be its immediate priority. It reported in its September quarter results that it has spent approximately half (US$250m) of its US$489 million project capital expenditure already.

Met coal profits coming under pressure 

Profitability in the metallurgical coal segment has recently come under some pressure, following a period of supernormal profits.

In the most recent quarterly results, for the three months to September 2024, its EBITDA margin for its Seaborne Metallurgical segment declined to 11% from 32% just a year earlier, on reduced coal prices. Peabody assumes an approximate 33% EBITDA margin will be achieved on the Anglo assets acquired.

Balancing capital management 

In its announcement, Peabody stated that the acquisition enabled it to continue to balance capital allocation between returns to shareholders and reinvestment in the portfolio.

Higher demands on capital are expected to force some capital rationing. The burgeoning claim includes:

• Share buy-backs. In 2023 Peabody announced a US$1 billion share buy-back program. As of 30 September 2024, it has purchased US$530.4 million, leaving US$469.6 million remaining.
• Acquisition financing interest expense and fees. Peabody indicated it would finance the acquisition initially with a US$2 billion bridge facility, but it intends to obtain permanent financing, perhaps with a mix of debt and equity. High interest costs are to be expected.
• Centurion project capex. With another approximately US$250 million to spend on the Centurion project, there remains potential for further payments such as private royalties payable to Stanmore Resources (to complete the recent project tenement acquisition).
• Restart Grosvenor capex. The cost of restarting the Grosvenor mine is not known but will be in addition to payment to Anglo of US$450 million.
• Maintenance capex. Peabody expects to spend between US$200 million to US$250 million a year to maintain the acquired assets.
• Methane mitigation capex. Anglo has spent more than US$100 million per annum for a number of years on gas drainage infrastructure at its underground mines. It had ambitions to completely eliminate emissions through VAM abatement. This form of coal mine methane emissions abatement is necessary to eliminate underground coal mine emissions. It is costly, technically uncertain and can inflexibly tie up capital for long periods before any financial returns are realised. The investment case is challenging. This is where the Queensland Government’s Low Emissions Industry Partnership (LEIP) AU$0.5 billion program can provide investment support.
• Fund mine closure rehabilitation. If Peabody is denied its mine extension approvals, it will need to prepare for mine closure and accelerate land rehabilitation. In its December 2023 10-K annual financial report it estimated the cost for Australian mines to achieve this at US$332.8 million. Peabody inherits an additional US$230 million reclamation liability with Anglo assets.

Key stakeholders and ESG priorities

Peabody’s largest shareholders are Wall Street institutions. The “Big Three” asset managers BlackRock, Vanguard and State Street are in its top four shareholders. Integral to the global financial ecosystem – they have faced backlash for their environmental, social, and governance (ESG) commitments. In 2024 they watered down their ESG ambition. For example, Blackrock lowered its support of environmental and social shareholder proposals to 4% in 2024, down from 21% in 2021. Vanguard in Australia was fined $12.9 million for greenwashing earlier in the year.

Peabody needs to consider more than returning funds to shareholders and servicing of its new debts. It has a responsibility to Queensland, with coal mine greenhouse gas emissions and mine closures looming.

The Queensland Government can play its role. It can oversee a safe return to mining at Grosvenor, require abatement of the mines’ emissions, and that it if mine extensions are not granted, speed up progressive mine rehabilitation.

There are many stakeholders in this acquisition. Peabody shareholders, the Queensland Government and the Australian Federal Government will all need to align priorities. Reducing greenhouse gas emissions are essential for the industry to be sustainable.