The acceleration of the global energy transition has led to growing pressure for mining companies to divest from coal mining assets. Pressure to dissociate from coal extraction has now begun to extend beyond the abandonment of thermal coal operations to include metallurgical coal. This pressure has mostly affected diversified miners.
The
trend runs counter to the apparent need for metallurgical coal in the medium to
long-term as the commodity remains a critical input for the steel necessary to
enable continued economic growth in developing countries.
As
a higher-value commodity than its thermal counterpart, a significant portion of
metallurgical coal comes from more expensive underground mines, which also tend
to have a higher carbon footprint.
For
diversified miners, these ESG considerations have led to diversified miners
taking action to partition their coal operations from other segments of their
business. Various strategies have been adopted to achieve this goal. The most
common are the sale of coal assets to external entities and the creation of a
spin-off company comprising a diversified mining company’s coal assets.
In
the case of a spin-off, the established spin-off company operates independently
of the parent company. However, the parent company may retain a share of its
spin-off or retain a claim on cash flow from the spin-off’s assets.
The
Givers
BHP
is leading the vanguard for divestment from metallurgical coal. This is despite
the company’s current role as the world’s largest contributor to the
metallurgical coal export market. The company’s divestment strategy has been in
the works since 2015, when it began preparing to offload thermal and
lower-quality metallurgical assets.
In early
May 2022, BHP sold its 80% interest in its joint venture with Mitsui, BHP
Mitsui Coal Pty Ltd (BMC) to Stanmore Coal. BMC is the owner of the Poitrel and
South Walker Creek Mines in Queensland. The mines produced a combined 8.7Mt of
coal in 2021.
BHP
has continued its divestment strategy by confirming that it is intending to
sell two more assets in Queensland: Daunia and Blackwater. The two mines
produced a combined 15.1Mt of coal in 2021. The mines produce the
lowest-quality metallurgical coal amongst BHP’s remaining assets.
The
company’s six other remaining assets in Queensland predominantly produce
premium hard-coking coal. BHP maintains that these remaining assets have a
long-term place in BHP’s portfolio. The lower carbon intensity of their coal when
used in steelmaking makes their retention more palatable from an environmental
perspective.
Of
the assets to be retained by BHP in Queensland, Peak Downs is the most
significant. The site, which produced an estimated 11.1Mt of premium hard
coking coal in 2022 is expected to form an important part of BHP’s portfolio as
the source of carbon-efficient
Teck
Resources, the world’s second-largest supplier of metallurgical coal to the
export market, is also making concerted efforts to divest from its coal operations.
Unlike BHP, which is seeking to sell its lower quality metallurgical coal
assets outright, Teck has opted to spin off its coal assets in the form of a
new entity: Elk Valley Resources. Shares in Elk Valley Resources will be
distributed to existing Teck Resources shareholders.

Elk
Valley Resources will hold stakes in nine coal mines across Canada, all of
which produce metallurgical coal. The largest of these mines is Elkview, in
which Teck currently has a 95% stake. The mine produced an estimated 8.3Mt of
metallurgical coal in 2021. Teck estimates that production on an equity basis
across its metallurgical coal mines will be between 24.0 and 26.0Mt in 2023.
Teck’s
non-coal assets will form a new entity known as Teck Metals. Teck Metals will
retain ownership of Teck’s copper and zinc assets. The corporate restructure
effectively results in a split of the parent entity into two companies: one
focused on steelmaking coal, the other on the energy transition.
The
Takers
Arrayed
against diversified miners seeking metallurgical coal divestment such as BHP
and Teck Resources, are miners who specialise in coal. These coal-focused
miners have reinforced their commitment to the coal sector by acquiring coal
assets sold by their larger diversified counterparts.
This
is particularly the case when the asset for sale is a metallurgical coal mine,
as many coal-focused miners are seeking to increase the proportion of
metallurgical coal in their operations in anticipation of a long-term dampening
of thermal coal demand over the coming decades.
Stanmore
Resources, controlled by Indonesian company Golden Energy and Resources,
acquired BHP’s stake in BMC in 2022. The company’s profits soared in the
aftermath, reaching US$727m in 2022, up from US$7m in 2021. The result was
fuelled by the additional revenue from its newly acquired assets and volatility
in the coal price in the aftermath of Russia’s invasion of Ukraine.

The
upcoming sale of BHP’s stake in Daunia and Blackwater has generated a flurry of
speculation about which coal-focused miner will step in to take BHP’s place.
Stanmore
Resources has emerged as a leading contender to acquire one of BHP’s offered
assets. Similarly, following a profitable year for Coronado Global Resources, a
metallurgical coal-focused miner, the company has also been identified as a
potential purchaser of metallurgical coal assets for sale.
The
Future
The
confidence which coal-focused miners have in acquiring metallurgical coal
assets offered for sale is based on strong fundamental demand for metallurgical
coal in the medium to long term.
Demand
growth for metallurgical coal is expected to be concentrated in developing
countries, where the majority of steelmaking capacity additions are expected to
be in the form of blast furnaces.

AME
estimates that 65% of global steelmaking capacity will come from blast furnaces
in 2030. Although this represents a decrease from an estimated 69% in 2022,
blast furnace capacity is expected to grow in absolute terms from around 1350Mt
to around 1475Mt in 2030.
With
metallurgical coal requirements for blast furnaces ranging from 700kg to 800kg
per tonne of steel, there is expected to be considerable underlying demand for
metallurgical coal in the medium term.