July 16, 2019 / 1:24 PM / a month ago

Breakingviews - Miner exits shift coal spotlight to Anglo American

Coal is sorted into a pile at a warehouse of the Trypillian thermal power plant in Kiev region, Ukraine November 23, 2017. REUTERS/Valentyn Ogirenko

HONG KONG (Reuters Breakingviews) - There’s a rush for the exits in thermal coal. Miner BHP has become the latest heavyweight to consider a sale, according to Bloomberg. That’s sensible, given weak prices, environmental pressure and a business that is barely material for the world’s largest digger. But it shifts the spotlight to Anglo American, for whom the power station fuel matters more.

It’s been a painful fall from grace for thermal coal, with benchmark prices down nearly 40% from last July’s highs. That’s thanks to excess production, cheap gas, waning demand in developed markets and a rapid deterioration in investor sentiment. Rio Tinto’s decision to sell out, with sales wrapped up last year, now looks prescient. Glencore, one of the world’s largest coal exporters, said in February it would cap production, prompted by oversupply as much as green worries.

If BHP can find buyers for its thermal coal operations - once it uses up outstanding tax benefits in Australia – it would make sense. The mines constitute only 3% of the $138 billion company’s asset base. Colombia’s Cerrejon, of which it owns a third along with Anglo and Glencore, feeds the battered Atlantic market. There’s plenty of downside.

For Anglo, where thermal coal made up 12% of mining EBITDA in 2018, the picture is less clear. Over five years, the big diversified miner has already reduced its output from 80 million tonnes to an expected 30 million this year, having sold mines serving South Africa’s less-lucrative domestic market, and closing others.

Still, it’s hard to see why CEO Mark Cutifani should now elbow his way to the door. True, there could be credible buyers: Glencore could bid for its partners’ Cerrejon stakes, given exceptions to its self-imposed limit. But Newcastle coal trades at just $74 a tonne. Anglo may prefer to wait for things to improve: minimal investment today means less future supply.

Anglo’s green record might look a little smudged. But from a sustainability point of view, large listed players are less incentivised than smaller local players to crank up production, and are at least easier to hold to account. All of which may encourage Cutifani to stay put.

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