The UK’s biggest public pension fund National Employment Savings Trust (NEST), has withdrawn funds from BHP this week because the company is “profiting from digging coal”.
The news follows BHP being put on a watch list by the Norwegian Sovereign Wealth Fund as a firm not adopting business strategies aligned with the Paris Agreement.
Recently, BHP put its Australian and Columbian thermal coal operations up for sale, however, the offers made by Adani Australia and Yancoal are well below expectation for BHP’s Mt Arthur mine (the largest individual coal production site in the Hunter Valley, NSW).
Tim Buckley, Director for Energy Finance Studies at the Institute for Energy Economics and Financial Analysis (IEEFA) and author of a new report, Divestment vs Sterilisation: What to Do With BHP’s Stranded Coal Assets, says the decline of the thermal coal market coupled with increasing stranded asset and climate risk has put BHP into a tight spot.
“Investor pressure of leading companies to align with the Paris Agreement has encouraged BHP to put its last two thermal coal assets on the market, yet buyers are coming in under expectations,” commented Mr Buckley.
“BHP is in the unfortunate position of again being struck with asset write-downs.”
“Reading the rapidly deteriorating fundamentals of the gas market, BHP sold its U.S. shale gas for US$10.6bn in July 2018, taking an asset write-off of US$2.94bn in the process.”
“Although it signalled a consideration of exit from the declining coal sector in 2018, BHP failed to divest its thermal coal mining operations quick enough,” he said.
“Any buyer of its thermal coal assets would be well aware of previous optimistic valuations suggesting a price tag could reach over $2bn just for Mt Arthur just 2-3 years ago.”
“Today, the market could be well under $1bn, even if a strategic buyer with a strong balance sheet can be located. Net of a sinking fund for rehabilitation costs, this figure could be halved.”
Coupled with the massive but necessary cost of mine rehabilitation due at each mine’s end of life, Mr Buckley says that BHP faces a choice between retaining, selling or spinning-off the mines.
“Retaining the loss-making businesses as best they can to keep the mines efficient and safe and to fund the cash costs of massive rehabilitation effort ahead is one option,” he shared.
On the other hand, selling the mines doesn’t deal with the underlying problem of global investor pressure on fossil fuel companies to reduce carbon emissions in line with the Paris Agreement, says Mr Buckley.
“A common theme in the fossil fuel divestment strategies we’ve examined is that each has involved strategic and/or financial errors of judgement resulting in massive hundreds of millions or billions of dollars of capital write-offs. BHP could well face the same outcome.”
Mr Buckley suggested that an alternative and climate-sensitive solution would be for BHP to retain a controlling minority stake in a listed spin-off of Mt Arthur and Cerrejón combined, with an investment sinking fund established and funded, with top-up contributions from ongoing operations to address the massive rehabilitation task ahead.
“Implementing this strategy, with an aligned, fit-for-purpose corporate governance structure, could set a globally important precedent for the best way to address stranded assets in the fossil fuel industry as decarbonisation accelerates,” he said.
Critically, Mr Buckley notes that BHP must minimise the likelihood that investors – and public taxpayers – will cop the billion-dollar rehabilitation bill for its stranded coal mine assets, a cost likely to reach into the billions across both mines over the next few decades.
“BHP needs to factor into acknowledging and funding mine rehabilitation costs into whichever strategy they choose to reduce the economic and environmental pain for all stakeholders,” he said.
‘Divestment vs Sterilisation: What to Do With BHP’s Stranded Coal Assets’ by Tim Buckley, Director for Energy Finance Studies at the IEEFA, can be found online here.