THE giant Mount Arthur open-cut lost $US50 million in the last six months of 2019 and was likely to record even bigger losses when owner BHP reported its full-year financials next week, an analysis of the mine has found.
The Institute for Energy Economics & Financial Analysis and its Australian director Tim Buckley are known for their robust criticisms of the coal industry but BHP declined to challenge any of the report when given a copy before publication.
The report landed just as the country's biggest thermal coal producer, Glencore, announced it was shutting its mines for a fortnight next month to try to tighten supply and so drive up prices from their rock-bottom lows.
Last week's edition of the Australian Coal Report showed top-quality (6000kilocalorie) Newcastle thermal coal bringing just $US47.60 a tonne, down from $US73 a year ago. High-ash coal often sold to China had fallen from $US51.75 to $US36.78 over the year.
The low prices and the Glencore move have caught the attention of the federal government, with "patron" Senator for the Hunter, Hollie Hughes, saying there was "room for optimism" for thermal coal despite the price impacts of COVID-19.
"The Morrison Government continues to be a big supporter of the coal industry in the Hunter because we recognise that it's the lifeblood of the region," Senator Hughes said.
The IEEFA report said that low coal prices, a likely $US1 billion end-of-mine remediation bill and the growing institutional backlash against companies investing in thermal coal meant BHP would struggle to sell Mount Arthur, valued in its books last year at $US901 million.
It noted reports that Yancoal (the Hunter's second biggest miner) and Adani had submitted bids "well below BHP's expectations".
IEEFA says BHP could try to "spin off" Mount Arthur and its stake in Columbia's Cerrejon mine to shareholders - as it did with the Newcastle steel mills and Whyalla steelworks when it listed the OneSteel company on the stock exchange in 2000. It also found one possible positive in a Mount Arthur sale.
"A potentially positive outcome would be for BHP to sell to Adani, in return for Adani agreeing to cease its near-decade long delayed Carmichael high-ash, low energy, thermal coal mine proposal in the Galilee Basin in Queensland," the report says.
"This could be a win for BHP (exiting a problem asset), a win for Adani (securing a long term high quality thermal coal supply for its Indian import coal-fired power plants), and a win for the planet (by not opening up the Galilee and subsequent carbon emissions avoided).
"But financial assurance will be a major roadblock."
BHP has been trying without success to sell Mount Arthur, which it acquired when it merged with Billiton in 2001.
It owns 28 per cent of the Newcastle Coal Infrastructure Group (NCIG) coal loader on Kooragang Island. Cerrejon, owned in equal portions by BHP, Glencore and Anglo American, is its only other thermal coal asset.
The report said three main factors influenced the price a buyer would pay for Mount Arthur: the remaining life of the seaborne coal market in the face of ever-cheaper renewable power, the near-term coal price, given the mine was losing money at present prices, and the cost of remediating the mine's "4266 hectare hole in the ground".
It said "a non-fire-sale valuation" of Mt Arthur would be between $US700 million to $US1.4 billion, or 0.75 to 1.5 times book value, based on a multiple of two to four-times average earnings in recent years, plus its share of NCIG.
"However, from this, one would need to deduct the net present value (NPV) of rehabilitation liabilities, which could leave the net value close to nil," the report said.
On short-term prices, BHP said last month that prices for high-quality (6000kilocalorie) coal "recently fell below the values reached in the 2015/16 downturns", and that "two-thirds of seaborne supply was likely to be earning negative margins".
"China's policy in respect of energy coal imports remains a key uncertainty," BHP said in its quarterly operational review.
The Australian Coal Report quoted market predictions that China would import just over 203 million tonnes of thermal coal this year, down 16 million tonnes on 2019.
Electricity generation 'dipped dramatically" at the peak of China's COVID-19 outbreak", but bounced back quickly, with coal still accounting for 72 per cent of the country's electricity generation.
It predicted Asian thermal coal imports would fall by 7 per cent this year.
The IEEFA report says "coal lobbyists have tried to distract attention from the terminal trajectory for seaborne thermal coal".
While you're with us, did you know the Newcastle Herald offers breaking news alerts, daily email newsletters and more? Keep up to date with all the local news - sign up here
IN THE NEWS: