Investors may have dropped coal from their portfolios but it still darkens BHP’s balance sheet. In a quarterly trading update published on Wednesday, BHP impaired the value of its coal assets by as much as $1.25bn. This is mere nutty slack compared with estimated 2021 ebitda 25 times that amount. But it has taken BHP too long to divest these stranded assets, diminishing shareholder value in the meantime.
To be fair, newish chief executive Mike Henry did announce in August that BHP would exit thermal coal and dispose of its 80 per cent share in a joint venture with Mitsui. This produces lower quality Australian coking coal used in steelmaking.
This week’s impairment is linked to the effect of lower expected coal prices on mines’ future value. It may also have something to do with the exhaustion of tax loss credits BHP carried for the coal mines, which partially offset any loss of worth.
No one expects corporations to ignore tax benefits that boost the bottom line. But BHP should have got out of coal earlier when the price was better. Regardless of its recent ESG problems, rival Rio Tinto did at least see the light at the top of the mine shaft. It began to sell off coal mines from 2015.
BHP’s coal assets will attract few high bids now. These provided some $4.4bn of ebitda (almost a fifth of total) as recently as 2018. Coal will make about a quarter of that this year, on Jefferies estimates. BHP is likely receive a low multiple of those earnings.
In next month’s annual results, Mr Henry will tout booming profits from iron ore and copper units. A restart of the Brazilian Samarco joint venture, following the 2015 dam disaster, will add valuable iron ore tonnes. That hints at the next issue ahead. Unless steelmakers can find a way to decarbonise steel production, Mr Henry’s next challenge will be dealing with the climate change impact of BHP’s main product.
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