The basis for the claim is not just the long decline of the business but the risk associated with coal assets and the potential decarbonisation of the steel sector, or green steel, something BHP recently said was several decades away.
However, it has also hedged its bets by investing in new ways to produce steel without coal, such as hydrogen.
Divesting of coal would reduce the company’s carbon emissions by 25 per cent, according to RBC.
BHP’s prized coking coal division is a joint venture with Mitsubishi and known as BMA.
It’s not only the state’s biggest coal producer, but a major employer and royalties payer.
The company has already flagged the sale of its thermal coal assets into a South 32-style spin-off and it was also likely to throw in its lower quality coking coal mines held in another joint venture BHP Mitsui Coal (BMC)
RBC said this was likely to occur in the next 18 months in a deal that could be worth about $US2.7 billion ($3.5 billion).
“In our view, the inclusion of BMC assets is to support the profitability of the thermal coal assets, which alone could be viewed as unfunded rehabilitation liabilities, jeopardising ESG credentials,’’ RBC said..
“Also, BMC’s inclusion indicates steel sector decarbonisation is happening faster than BHP initially expected.’’
After the sale or spin-off of the thermal and lower quality coking coal, only the BMA assets remain in the coal segment.
“We value BMA at $US13.5b, or about 12 per cent of BHP’s net asset value, generating 10-13 per cent of group EBITDA.
“Over the next one to two decades, BMA is a story of managed decline; running the assets to maintain coal quality and maximising near-term cash flow, waiting for a favourable market to divest assets.
“The pace of decline is to be determined by how quickly the steel industry decarbonises, investor sentiment and abatement technology.’’
The broker said BHP will still produced low-quality met coal at Blackwater and Daunia and an increased focus on coal quality could see these assets also divested. However, stripping out individual assets from BMA may be difficult; affecting costs, coal quality and optionality.
“A key market concern appears to be the possibility of a de-rate if BHP retains exposure to coal,” RBC said.
“We estimate a demerger of all coal would reduce BHP’s standalone net asset value by $US11 billion, decrease key financial metrics and cash-flow by $US2-2.5 billion pa, but reduce carbon emission by 25 per cent.’’
BHP has been asked for comment.
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