BHP mulls lower grade Australian thermal coal sales

Australian resources firm BHP will review mine plans and logistics to allow lower grade coal sales from its 20mn t/yr Mount Arthur mine in New South Wales (NSW), to allow for the state government's plan to impose a 5pc coal reservation policy on its operations.

The firm will consider reducing processing and targeting lower grade portions of Mount Arthur to produce the 5,500 kcal/kg coal that is required by domestic power utilities, despite the NSW government cutting its reservation requirement for the mine to 5pc from 10pc. The firm produced coal closer to 6,000 kcal/kg during July-December to capture the around $230/t price differential to 5,500 kcal/kg, which was up from around $70/t for July-December 2021, BHP said in its half-year results. This price differential returned to $72.97/t on 17 February, according to Argus assessments.

The emphasis on producing high-grade coal contributed to an 67pc increase in costs during July-December compared with a year earlier. Costs rose to $101.07/t, which is above both its 2022-23 guidance of $84-91/t released last month and the NSW government price cap for reserved coal of A$125/t ($86/t).

BHP chief executive Mike Henry does not believe that the NSW reservation policy will have the desired impact of curtailing Australian power prices, although it has prompted BHP to reassess its plans to keep Mount Arthur producing until 2030. "It adds to complexity, risk and reduces the economics of the asset," he added.

BHP stopped domestic sales of thermal coal in 2019 after a contract expired, allowing it to redirect around 500,000 t/yr of coal to export markets. Mount Arthur is an old and large site in the Hunter valley and it will be difficult politically for the state, and potentially federal, governments if BHP was to close it suddenly, given the resulting job losses.

New South Wales Energy Coal contributed $1.78bn in earnings before interest and tax to BHP's $22.4bn profit in the 2021-22 fiscal year to 30 June, largely because of higher export coal prices. This compared with a loss of $231mn in 2020-21 and a loss of $171mn for 2019-20 when coal prices were below $100/t fob Newcastle. BHP on 21 February reported underlying earnings before interest, tax, depreciation and amortisation for its coal division, which includes its Queensland coking coal assets, of $2.63bn for July-December compared with $2.64bn a year earlier.

Argus last assessed high-grade 6,000 kcal/kg NAR thermal coal at $190.82/t fob Newcastle on 17 February, down from $410.17/t on 9 December and from a peak of $444.59/t fob on 9 September last year. It assessed lower grade 5,500 kcal/kg NAR coal at $117.85/t fob Newcastle on 17 February, down from $200.81/t on 2 September and from a peak of $287.15/t on 11 March last year.

By Jo Clarke

Australian thermal coal prices ($/t)