BHP Billiton’s commitment to coal has been questioned by investors, who believe the division should be included in the demerged entity that will likely be created this week.
The natural resources giant is poised to undergo its biggest structural change in 13 years, after confirming on Friday that it wants to divest its non-core assets through a demerger.
While not yet confirmed, board meetings over the next 36 hours are expected to rubber stamp the creation of the new entity, which is expected to contain at least BHP’s struggling aluminium division, its viable but small manganese division and the nickel assets it has been trying to sell in recent weeks.
Several top executives in those divisions have changed roles in recent months, including a move by the Brisbane-based asset president of Australian Manganese Bryan Quinn, who has relocated to Perth in a senior business optimisation role.
BHP has not listed the assets that are bound for divestment, but effectively identified most of them when it named the divisions it wanted to keep as ‘‘pillars’’ of its future.
‘‘We believe that a portfolio focused on our major iron ore, copper, coal and petroleum assets would retain the benefits of diversification, generate stronger growth in cash flow and a superior return on investment," the company said in a statement.
Pengana Capital fund manager Tim Schroeders said coal was fortunate to be included on the list of ‘‘pillars’’ that will be kept by BHP.
‘‘Arguably assets that should be looked at that aren't going to be included in that spinout are things like the coal assets. Over the long term it is structurally very difficult to defend those assets as being ‘tier one’ and part of BHP’s long-term future,’’ he said.
Andrew Corbett from Perpetual Investments did not single out coal but agreed that ‘‘some of the assets within the four or five pillars could be stripped out’’.
BHP is the world’s biggest producer of seaborne coking coal, and also a significant producer of thermal coal.
Both types of coal were making attractive margins during the first phase of the mining boom, but both are now struggling to remain profitable under very low prices and fierce competition.
The coal division delivered just $US746 million of the $US21.12 billion earnings before interest and tax that BHP reported for the 2013 financial year.
Deutsche analyst Paul Young predicts that figure will fall to $US526 million when the 2014 financial results are published on Tuesday, and be lower again by the end of the 2015 financial year.
Retention of the division also attracts the ire of environmental campaigners, who say its survival is at odds with BHP’s stated position to accept the mainstream science on fossil fuels’ role in climate change.
An increasing number of ‘‘ethical’’ investment funds are avoiding investment in coal producers, while an independent panel in Norway will decide later this year whether the nation’s sovereign wealth fund should also be banned from fossil fuel investments.
The Norwegian fund is the world’s biggest and among the biggest five shareholders in BHP.
BHP has previously defended its retention of the coal division on the grounds the sector is expected to bounce back in the long term, plus its Queensland coking coal assets are considered among the best quality in the world.
The coal division has a large number of individual mines across several countries, and insiders say there is a significant range in quality across the assets, meaning some could be thrust into the demerged entity while others, like the coking coal mines in Queensland's Bowen Basin, are certain to be kept by BHP.
The thermal coal assets in South Africa have been touted as likely candidates for a demerger.
RBC analyst Des Kilalea said despite the tough times, the coking coal business was justifiably a core asset of BHP.
‘‘When it comes to steel making and so on it is inescapable that metallurgical coal is necessary,’’ he said.