Australian thermal coal dilemma deepens

Record-high thermal coal prices and record-low asset values are creating a complex conundrum for Australian coal producers, as they try to navigate how best to sustain their operations.

Australian high-grade thermal coal prices are at highs only briefly seen in the mid-2008 spike, yet the medium-term outlook is poor given the increasing push to carbon neutrality. In this environment, UK-Australian mining firm BHP has put a negative value on its thermal coal assets and all but admitted that it may have missed the boat to get out of its 20mn t/yr Mt Arthur mine and associated infrastructure in the Hunter Valley region. At the same time strong cash margins are incentivising firms with existing operations to push up output. It is a balance to capitalise on record-high prices without overcapitalising on assets that could become a liability.

There are several different approaches to managing this risk. The first is to get out of thermal coal, as BHP is trying to do.

The second is to continue as normal, maintaining production and focusing on improving product quality to attract as much of the price premium available for high-grade coal as possible. This is the approach of Chinese-owned Yancoal, which is Australia's biggest independent exporter of thermal coal. Yancoal has maintained its attributable coal production guidance for 2021 at 39mn t, but implemented a "washing harder" policy to reduce ash content in its thermal coal as it targets markets outside of China.

The third option is to try to creep up production or extend mine life through low-cost mine planning and productivity improvements. This is the approach taken by smaller Australian coal producers, including TerraCom, which has extended the life of its 2mn t/yr Blair Athol thermal coal mine by 10 years, accessing an additional 19mn t of coal. The firm reported a cash margin of A$58/t ($42/t) for the mine in July, making it more economic to mine certain areas that may have previously fallen outside of the mine plan.

UK-Swiss mining and trading firm Glencore's approach is to acquire thermal coal assets in the hope that the profits made in the high-price period will more than cover the cost of closing and remediating the mines in the future. Glencore has so far focused on acquiring stakes in assets that it already owns. It has agreed to buy its joint-venture partners BHP and Anglo American out of the 28mn t/yr Cerrejon coal mine in Colombia at a price that forced BHP to write $466mn from the value of its 33.3pc stake. It has also been mopping up minority stakes held by Japanese firms keen to exit thermal coal, with the acquisition of 100pc of Rolleston.

Glencore argues that it will run these operations well and close them properly, rather than simply selling out and allowing others to take responsibility for the carbon emitted. It will be interesting to see if it is prepared to acquire assets it does not already have a stake in, particularly if asset values continue to decline and coal prices are sustained.

The final option is growth regardless of asset prices. This is the approach taken by India's Adani, which is continuing to develop its 10mn t/yr Carmichael coal mine in the Galilee basin in Queensland through its Bravus subsidiary. The mine is expected to cost around $4bn plus infrastructure, which is considerably more than the firm would have to pay to buy the significantly higher-grade 20mn t/yr Mt Arthur mine from BHP.

By Jo Clarke

Thermal coal prices $/t