BHP/Whitehaven: coal divestment slims BHP’s blast furnace footprint

Inveterate shoppers are well acquainted with the sinking feeling known as buyer’s remorse. In the coal mining sector, regret has worked the other way around.

Thanks to a strong run in coal prices in 2021 and early 2022, companies that pared back their exposure — see BHP’s and Anglo American’s 2021 sale of the Cerrejón mine to Glencore — experienced the regret of an early seller.

Does this fate again await BHP? On Wednesday, it announced the sale of two metallurgical coal mines, Blackwater and Daunia, for up to $4.1bn including earn-outs, to Australian miner Whitehaven. BHP will receive $2.1bn in cash on completion, plus $1.1bn in cash over three years after completion. Add to this, a possible $900mn in a price-linked earn-out payable over three years.

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Despite the interest in its assets, BHP has not achieved a knockout valuation. Whitehaven reckons it paid 2.9 times next year’s ebitda, using its own assessment of broker consensus assumptions for both coal prices and exchange rates. It claims that peers trade at a near-25 per cent premium to that valuation. Whitehaven’s stock price, up 11 per cent after the announcement, seems to support this conclusion. 

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The sale makes strategic sense for BHP. The group has already exited most of its thermal coal businesses and is running down the rest. This exit slims its portfolio of metallurgical coal assets, of which it is one of the biggest producers in the world. Yet BHP does not plan to get rid of the rest of its assets, based on the fact that metallurgical coal is essential for steelmaking. It will continue to be required for a long time to come. 

That means that, even post-sale, BHP will be overwhelmingly exposed to “blast furnace” commodities. At current spot prices, iron ore and coal will account for roughly 70 per cent of 2024 earnings according to Liberum, a broker.

In the short term, that looks like a headwind. Demand for metallurgical coal has been propped up by Chinese blast furnaces, running at full throttle. With the tiles coming off the country’s property sector, betting on this continuing requires nerves of steel.