What's next for big coal?

BHP and Mitsubishi selling their Daunia and Blackwater coal mines in central Queensland to Whitehaven for a higher than expected price of US$4.1 billion (including deferred and contingent payments) was the culmination of a process commenced almost two years ago.  

They had to prepare the mines for sale, have the Queensland Government change some laws to facilitate the sale, and then run a typical two-stage sale process with multiple bidders vying for the prize until the very end.  

With the curtain finally coming down on this latest transaction, the question is, ‘What’s next for big coal?’

Exit, stage left

Until a few short years ago the four largest global diversified miners – BHP, Rio Tinto, Glencore and Anglo – all had substantial investments in the Australian coal sector.

As ESG pressures started to mount in the early 2010s, Rio Tinto was the first of the big four to look for the exit door.  

Over the course of several years in the mid to late 2010s, Rio Tinto ran a number of separate sale processes which resulted in the sale of Mt Pleasant to Indonesian billionaire Anthony Salim, Bengalla to New Hope, Hunter Valley Operations (HVO) to Yancoal and Glencore, Kestrel to EMR, Hail Creek to Glencore, and Winchester South to Whitehaven. At the end of these various sale processes, Rio Tinto had completely exited their active coal sector investments.

Around that same time, Anglo started its plans to sell its premium Australian coal assets.  But when coal prices rebounded, those plans were promptly shelved.  With coal prices remaining strong, there do not appear to be any current signs of the Anglo coal assets coming onto the sale block any time soon.

BHP was the last of the three to begin its exit, with a process for the sale of its interests in Mt Arthur, BMC (Poitrel and South Walker Creek) and Cerrejon kicking off in 2021. That process culminated in BHP selling BMC to Stanmore and Cerrejon to Glencore, but deciding to keep Mt Arthur against a backdrop of skyrocketing thermal coal prices and a new plan to run Mt Arthur through to an early closure in 2030.  The extension of their permits to allow them to do this is still a work in progress.

The recent sale of Daunia and Blackwater was the first of the seven mines BHP owns in a 50/50 joint venture with long-term partner Mitsubishi Developments, known as the BHP Billiton Mitsubishi Alliance (or BMA). 

What is not yet clear, and is a source of much conjecture in the industry, is whether the sale of Daunia and Blackwater represents the start of a process of selling off all of the BMA coal mines in bite-size pieces.  Or whether it is simply a case of separating the wheat from the chaff, and selling off the non-premium assets to enable 100% focus on what are no doubt the five jewels in the crown which still remain.  Only time will tell.

Glencore has taken a different path from the other three mining majors in that it is not selling-out but buying-in, with its acquisitions of HVO, Hail Creek and Cerrejon in recent years.  Shortly after making those major acquisitions, Glencore announced a cap on global production, which seemingly saw it sit on the sidelines in the latest round of BHP mine sales. 

But then, not even a month later, Glencore has announced that it is acquiring 77% of the Teck Resources coal business for US$6.93 billion, doubling down on coal once again ahead of a planned demerger of the coal business within two years.

So in the end it seems that Glencore will indeed exit coal, but in doing so will create a brand new, very large global coal mining company.

While there have been plenty of sellers in recent years, there have also been (and continue to be) buyers.  

Pure play coal companies Whitehaven, Peabody, Yancoal, New Hope, Stanmore Resources and M Resources all seem to be strong believers in a future for coal for some time yet, and were all rumoured to have participated in BHP’s latest round of coal mine sales (alongside strategic Asian investors and mining contractors).  

While equity and debt are both becoming much harder (and much more expensive) to come by for coal mine acquisitions, it seems the well is not dry yet.  And with new supply becoming increasingly constrained, and demand continuing to hold firm, it seems prices might remain stronger for longer (if high school economics has taught me anything). Global unrest in Ukraine and the Middle East also contributes to keeping prices high.

What next?

So what will be the next big thing in coal mine sales?

Within days of the Daunia and Blackwater sale being announced, there was speculation that EMR might look to take advantage of the great price secured by BHP, and put its Kestrel mine up for sale.  

There has also been ongoing speculation about South32 looking to sell its Illawarra coal mines, along with its interest in the undeveloped Eagle Downs project in Queensland. 

With Idemitsu having recently sold its Ensham mine in Queensland, and becoming more active in the critical minerals space, will the Boggabri coal mine in New South Wales be next on the sale block – to complete the Idemitsu coal exit?

Will Anthony Salim look to sell all or part of his highly profitable Mt Pleasant coal mine in New South Wales now that he has approval to double production to 20 million tonnes a year?

Will Whitehaven look to sell a large (albeit minority) interest in its newly acquired coking coal assets, or perhaps an interest in some or all of its thermal coal mines?

And finally, we wait to see the next move (if any) by BHP and Mitsubishi in terms of their remaining five BMA mines.  

Only one thing is for sure – there is plenty of life left in the coal sector M&A market.

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