The concept of bad climate bank has an ideal test case
MELBOURNE (Reuters Breakingviews) – The recent coal bull market may have come at the right time for BHP. The miner on Monday sold to his joint venture partner Glencore his one-third stake in a Colombian mine, one of many fossilized assets he wants to unload. Potential contenders for the rest, like Australian Whitehaven Coal or Peabody Energy, backed by Elliott Management, are relying on healthier valuations. BHP boss Mike Henry has a better option, however.
Despite the price rally in recent months, coal is generally a tough sell as concerns about climate change burn. Leaders in Whitehaven and New Hope complained to Australia’s parliament last week, for example, that it’s harder to get insurance and borrow money.
The recent agreements in South Africa are also instructive. South 32, itself out of BHP in 2015, took almost two years to put assets there and had to pay $ 250 million to help cover costs in the long run. Thungela Resources, which Anglo-American parted with in June, is trading at less than once its EBITDA, even after a 60% rise in the share price.
The substandard Australian coal assets Henry put on the block are expected to be worth more than Thungela’s. RBC analysts estimate they could generate up to $ 500 million in EBITDA, just 1.4% of BHP’s estimated total for this fiscal year. On a mixed multiple of Whitehaven and New Hope, a sale could bring in up to $ 2.7 billion, excluding Colombia’s stake, and allow BHP to reduce its internal carbon emissions by 10%.
However, this would only reverse the responsibility for the greenhouse effect. 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 financing and pledge the cash flow for two uses: to reduce emissions on site, in power plants or in foundries with investments in carbon capture and the like, or to develop renewable replacements; and to safely relax units.
If successful, the entity could one day house BHP’s high-grade metallurgical coal assets. What’s more, it might even gain the support – whether financial, moral, or both – from climate-conscious investors. It would be a much bolder form of action than shooting and forgetting, and would provide an admirable role model for others to follow.
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– BHP and Anglo American each agreed on June 28 to sell their one-third stake in the Cerrejon thermal coal mine in Colombia to Glencore, which owns the remainder of the joint venture. The overall price that each of the sellers will receive is $ 294 million, although it is reduced to reflect all payments made between the end of December 2020 – the effective date of the transaction – and the closing of the transaction. . Glencore expects to pay just $ 230 million in total.
– The stake in the Cerrejon mine is one of the many coal assets of BHP put up for sale last year. The others are: its thermal coal operations at Mount Arthur 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, NSW.
– Potential bidders have until the end of July to submit a bid for them, The Australian reported on June 8. Australian firms Whitehaven Coal and New Hope made offers, according to the paper, as did hedge fund Elliott Management through its 30% stake in Peabody Energy.
– Selling all assets would halve the amount of coal produced by BHP, leaving only top quality metallurgical coal in its portfolio.
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(Edited by Jeffrey Goldfarb and Katrina Hamlin)
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