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BHP’s Latest Numbers Offer a Window on an Industry in Decline

January 26, 2015
Tim Buckley

The recent half-year production numbers out of BHP Billiton are more than a snapshot of one giant energy company: They’re a window on the world’s larger ailing coal-mining industry.

The figures show that BHP—like other big miners that include Rio Tinto, Vale S.A., and Anglo American—is gradually exiting its under-performing coal group.

BHP executives are no doubt well aware that any new coal project proposal will face a significantly increased level of scrutiny given the dramatically reduced commercial viability of such endeavors. As a result—and as can be seen in these new numbers—the company is scaling capital expenditures back significantly in a trend that will not easily be reversed.

One of the most notable takeaways from this latest report comes from what wasn’t said: BHP made no mention of new coal projects beyond those already under construction.

Also of note:

  • The company puts its 2014-15 thermal coal production at 73 metric tons for the year, showing no growth over 2013-14.
  • During the second half of 2014, the company received on average US$60/tonne for thermal coal, down 19 percent from the previous year.
  • Prices were down by a similar magnitude for metallurgical coal, and price weakness in general shows no sign of a let-up this year.
  • The company says its US$1.5 billion expansion of Hay Point Coal Port in Queensland, Australia, is only now being completed —nine months behind scheduleIEEFA views this as reflection of lack of growth in demand..
  • The company has yet to receive payment on the December 2013 sale of its Navajo Coal Co. mine in New Mexico, a sale that wisely halved BHP’s exposure to U.S. coal.
  • The company’s proposed spinoff of a new company called South32 that enables it to gracefully exit its 30-metric-ton-per-year South African thermal coal production operation and its 8 metric-ton-per-year Illawarra coking/thermal coal unit in New South Wales, Australia. The spin-off will most likely be approved at a shareholder vote in May.

All of these developments reflect the larger truth that coal production, as a going concern, is not what it used to be.

In the case of BHP, in particular, IEEFA expects the company to stall or adopt a go-slow approach on any new coal-production proposals related to its sizeable holdings in Indonesia or in Caroona in New South Wales.

Tim Buckley is IEEFA’s director of energy finance studies, Australasia

Tim Buckley

Former Director Energy Finance Studies, Australasia, Tim Buckley has 25 years of financial markets experience, specializing in equity valuation, including as a top-rated analyst and as co-founder and managing director of Arkx Investment Management.

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