Climate bad bank concept has ideal test case

MELBOURNE, June 29 (Reuters Breakingviews) – The recent bull market in coal may have come at the right time for BHP (BHP.AX), (BHPB.L). The miner on Monday sold to joint-venture partner Glencore its one-third stake in a Colombian mine, one of several fossilised assets it wants to offload. Potential suitors for the rest, such as Australia’s Whitehaven Coal (WHC.AX) or Elliott Management-backed Peabody Energy (BTU.N), are sitting on healthier valuations. BHP boss Mike Henry has a better option, though.

Despite the price rally over the past few months, coal is generally a tough sell as climate-change concerns burn bright. Whitehaven and New Hope (NHC.AX) executives complained in Australia’s parliament last week, for example, that it’s harder to get insurance and borrow money.

Recent deals in South Africa are also instructive. South 32 (S32.AX), itself spun out of BHP in 2015, took almost two years to flog assets there, and had to pay $250 million to help cover long-term costs. Thungela Resources (TGAJ.J), which Anglo-American hived off in June, trades at less than 1 times its EBITDA even after a 60% runup in the stock price.

The lower-grade, Australian coal assets that Henry has put on the block should be worth more than Thungela’s. RBC analysts reckon they could generate up to $500 million in EBITDA, a mere 1.4% of BHP’s estimated total this financial year. On a blended Whitehaven and New Hope multiple, a sale could reap as much as $2.7 billion, excluding the Colombian stake, and allow BHP to cut its in-house carbon emissions by 10%.

That would just pass the greenhouse buck, however. A better option would be for Henry to shovel the unwanted coal into a climate version of a bad bank. BHP could provide the initial funding and pledge the cashflow for two uses: to reduce emissions on site, in power stations or at smelters with investments in carbon capture and the like, or to develop renewable replacements; and to safely wind down the units.

If successful, the entity could house BHP’s higher-grade metallurgical coal assets someday. What’s more, it might even win the backing – whether financial, moral or both – of climate-conscious investors. It would be a far bolder form of action than firing and forgetting, and provide an admirable model for others to follow.

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CONTEXT NEWS

– BHP and Anglo American on June 28 each agreed to sell their one-third stakes in the Cerrejon thermal coal mine in Colombia to Glencore, which owns the rest of the joint venture. The headline price each of the sellers will receive is $294 million, although that will be reduced to reflect any payments made between the end of December 2020 – the effective date of the transaction – and the deal closing. Glencore expects to pay just $230 million in total.

– The Cerrejon mine stake is one of several coal assets BHP put up for sale last year. The rest are: its Mount Arthur thermal coal operations in New South Wales; its 80% stake in a joint venture with Mitsui, called BMC, which includes two metallurgical coal mines in Queensland; and its 28% stake in a coal port in Newcastle, New South Wales.

– Potential bidders have until the end of July to submit an offer for them, The Australian reported on June 8. Australia’s Whitehaven Coal and New Hope put in offers, according to the newspaper, as did hedge fund Elliott Management via its 30% stake in Peabody Energy.

– Selling all the assets would halve the amount of coal BHP produces, leaving just higher-grade metallurgical coal in its portfolio.

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Editing by Jeffrey Goldfarb and Katrina Hamlin