Broker sees BHP edging closer to coal exit after Saraji closure

Panmure Liberum maintains a 'hold' rating on BHP Group after the miner announced the closure of its Saraji metallurgical coal mine in Queensland, effective November. This decision, driven by sharply increased Queensland royalties (now 8x profit on coal sales), falling prices, operational issues, and environmental pressures, is seen by Panmure as a potential precursor to BHP's broader exit from the coal sector. The closure reduces BHP's BMA joint venture to just three mines, valued at $10.3 billion, prompting questions about further divestments amidst a cautious long-term coal price outlook and a competitive landscape where Glencore is expanding.

Analysis

BHP Group's decision to close its Saraji metallurgical coal mine in Queensland is a significant strategic move, which Panmure Liberum interprets as a potential precursor to a complete exit from the coal sector. The closure is officially attributed to falling coal prices and a substantial increase in Queensland's royalties, which BHP states have pushed its royalty bill to eight times its profit on local coal sales. However, analysis suggests deeper underlying factors are at play, including aging infrastructure, operational challenges like water management, and the structural shift in global steel production towards less coal-intensive methods. This divestment is also consistent with broader ESG pressures on major miners to decarbonize their portfolios. The closure reduces BHP's presence in the BHP Mitsubishi Alliance (BMA) to just three mines, with the remaining assets valued at approximately $10.3 billion. This strategic retreat contrasts sharply with competitors like Glencore, which has expanded its footprint by acquiring Teck's coal assets, positioning itself as a dominant price-setter. Panmure's long-term forecast for hard coking coal remains cautious at $176 per tonne, significantly below recent spot prices, underscoring the bearish long-term view on the commodity despite potential for short-term price volatility as supply is removed from the market.

Key Decisions for Investors

• Investors in BHP should monitor for further announcements regarding the potential divestment of its remaining $10.3 billion in BMA joint venture assets, as the Saraji closure signals a clear strategic pivot away from coal.
• Consider the divergent strategies within the sector; BHP's retreat from coal may enhance its ESG profile but contrasts with Glencore's consolidation, creating a potential relative value trade for those with a specific view on the future of metallurgical coal.
• Factor in the cautious long-term price outlook for metallurgical coal, with analyst forecasts at $176/tonne, which could pressure the profitability of remaining assets and justify BHP's strategic exit despite potential short-term supply-driven price spikes.