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BHP’s Mt. Arthur link illustrates the mining coal dilemma

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MELBOURNE – As the BHP Group weighs options to spin off or sell its thermal coal assets, the miner faces pressure from climate-conscious investors who want divergent paths even before undertaking the difficult task of finding a buyer.

The world’s largest miner has been in talks with stakeholders about its plans to sell the Mt. Arthur thermal coal mine, its involvement in a steelmaking coal project with Japan’s Mitsui, and a stake in a thermal coal mine in Colombia.

Some large shareholders are pressuring the miner to withdraw immediately, while other investors want a slower exit, to ensure the mine is liquidated responsibly.

How BHP, which faces around $ 1 billion in cleanup costs at Mt. Arthur alone, the divestitures could be a model for other miners, including Glencore Plc and Anglo American, who are also considering ways to ditch coal assets .

BHP’s spin-off, South32, agreed this month to pay up to A $ 250 million (AU $ 194.70 million) to smooth the sale of its thermal coal business in South Africa, partly financing environmental cleanup costs over a decade. .

“The best BHP could do is set a global precedent for how to exit responsibly,” said Tim Buckley, director of the Austrian think tank Institute for Energy Economics and Financial Analysis (IEEFA).

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BHP said it had already rehabilitated more than 1,211 hectares at Mt. Arthur and that transparency was “fundamentally important” to any mine rehabilitation. It said it could not speculate on the outcome of a possible divestment of the Mt. Arthur asset.

BHP’s exit from thermal coal would satisfy investment criteria set by the Norwegian government pension fund, which owns about 5.58% of BHP’s London-listed arm.

It placed BHP under observation for a possible foreclosure if it did not address its coal use or production last year before increasing its stake after BHP announced divestment plans.

The Norwegian wealth fund declined to comment.

MINING LICENSE ESTABLISHED TO EXPIRE

Shareholder proposals that pressure companies to move away from fossil fuels without regard for rehabilitation needs do not solve the problem, said Alison George of investment adviser Regnan, part of the Pendal Group, which manages about 97,400. million Australian dollars.

“We have been concerned that (the proposals) are not really well targeted to address system risk, nor are they likely to make the company better manage that risk,” he said.

BHP is considering smaller buyers and dividing assets, and offers are due in the coming weeks, said a banker familiar with the matter who declined to be named because the information is not public.

While it would be a blow to a small company, BHP prefers a buyer who can take on long-term responsibilities, the banker added.

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In 2016, Rio Tinto sold its Blair Athol mine in Queensland to coal mining company Terracom for A $ 1, in addition to providing a rehabilitation fund of A $ 80 million.

The fund now stands at about A $ 50 million after the state government cut its rehabilitation requirements at Terracom’s request and allowed Terracom to withdraw A $ 27 million in exchange for a guarantee from the insurer.

One obstacle to a sale has been the expiration of BHP’s mining license, set for June 2026. BHP said in March that it will apply to extend operations until 2045.

The miner reduced its Mt. Arthur coal business by $ 1.2 billion this year and made a minor reduction in its coal asset in Colombia, Cerrejón.

A listing also can’t deliver the value that BHP wants, as recent coal IPOs attract tepid demand in Australia. RBC recently valued any spin-off at $ 2.7 billion.

As part of any spin-off, the IEEFA think tank has proposed that BHP establish a sinking fund of $ 1 billion to cover future rehabilitation obligations.

That would cause BHP to retain a controlling minority stake to prevent vulture funds from stripping the fund or cash flow and with invested capital to reward shareholders with dividends and any land resale.

An institutional investor, approached about the proposal through a third party, said the model carried high risk because it was untested and might not offer the security of returns that his organization was seeking.

Pressures from competing shareholders are adding to BHP’s coal headaches for a business that has become problematic for miners amid action from environmental activists and with banks and insurers reducing funding due to concerns about global warming.

“The question is, how do you ensure that you clean up the mess you’ve created in a socially responsible way?” said IEEFA Director Buckley. ($ 1 = 1.2840 Australian dollars)

(Additional reporting from Gwladys Fouche in Oslo; edited by Raju Gopalakrishnan)

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