Hogsback takes a look at the revival underway in BHP's coal division

THE devil is supposed to be in the detail but when Hogsback took a look at the latest corporate presentation from BHP Billiton he found that the detail about coal was less devilish than he expected – and it was not actually in what company executives said.

Staff Reporter

The real detail was found later in reports from investment banks which attended the first of several capital market days designed to coincide with BHP Billiton’s London and Adelaide annual meetings.

Iron ore and petroleum were the divisions closely examined in London on Monday. Coal and copper will be the major themes at the Australian capital markets day event after the Adelaide meeting on November 20.

To save readers waiting until next month for BHP Billiton to reveal more about its coal business The Hog thought it would be interesting to examine what was said in London and then see how analysts interpreted what was said.

The key message from the company’s chief executive, Andrew Mackenzie, was that coal would retain its position as one of four key divisions in the group, and it would benefit from an increasing level of capital investment designed to cut costs and boost profits.

In the Queensland metallurgical coal business costs are already down by 43% over the past two years, with more to come.

“We expect to reduce unit costs by a further 10%, to below $US90 a tonne in the 2015 financial year as we continue to increase throughput from our installed infrastructure,” Mackenzie said.

Over the past three years the cost to BHP Billiton of producing a tonne of metallurgical coal has fallen from more than $US160 a tonne to slightly less than $US100/t, with next 10% cut likely to take the cost below $US90/t.

“Coal is moving sharply down the cost curve” was the heading on one graph shown to people attending the London markets day with key facts in achieving the lower unit costs being the removal of 6.8 million tonnes of higher-cost coal at the Norwich Park and Gregory operations and the optimisation of stripping operations at Goonyella and Blackwater.

The net result is that even before the next 10% is removed from the cost base all BHP Billiton metallurgical coal operations are now “cash positive in a low-price environment”

The future, while not as bright as it once was when coal prices were higher, is much better than it has been at any time over the past three years, largely as a result of the cost cutting and also because 21 million tonnes of metallurgical coal has been removed from the global supply chain as high-cost mines are closed.

Mackenzie expects more metallurgical coal to be removed from the market, but BHP Billiton plans to keep on growing. In the current financial year, despite mine closures and cost cutting, the company’s total metallurgical coal output is expected to rise by 4% to 47Mt.

More detail about coal operations will be released when management meets analysts at the Australian edition of BHP Billiton’s markets day but before then it’s worth looking at what investment banks make of the coal sector with the information released so far.

UBS, an investment bank which has always kept a close eye on BHP Billiton reckons that it can see higher profits for the company’s coal operations from next year.

According to its latest divisional performance breakdown UBS is tipping that BHP Billiton’s metallurgical coal operations will post a pre-tax profit of just $US87 million in the current financial year before rebounding to $US433 million next year.

The profit generated by energy coal operations is expected to rise from last year’s $US158 million to $US234 million this year, and then up again to $US338 million.

Other investment banks can also see better times ahead.

J P Morgan, for example, is even more optimistic than UBS though it treats coal as a single division. It sees the current year as the bottom of the cycle with coal profits falling to $US180 million before rising sharply to $US745 million next year, and then rising even more sharply to $1.18 billion in the 2017 financial year.

The bank forecasts are just that – forecasts. But they’re worth noting if only because it’s been a long time since The Hog saw anything quite so optimistic about coal.

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