Hogsback discovers profits in coal that most people have overlooked

PROFITS are not generally associated with coal during these days of over-production and low prices which is why Hogsback was delighted to discover that the latest financial accounts of Australia’s biggest coal miners revealed surprisingly high levels of pre-tax earnings.

Staff Reporter

A boom it certainly is not but neither is it the complete bust that the increasingly shrill anti-coal campaigners have been claiming.

BHP Billiton, which lodged its annual result with the stock exchange earlier this week, said it managed to post a small profit from coal on an EBIT basis – earnings before tax and interest.

Whitehaven was another coal miner in the black, financially speaking, on an EBITDA basis (earnings before interest, tax, depreciation and amortisation) for the year to June 30.

The same pattern of modest pre-tax profits from coal can be found in the latest accounts of Rio Tinto, Glencore and Anglo American – with those three reporting half-year results.

More numbers soon but before numbing everyone with statistical mumbo-jumbo there are two important points to be made from The Hog’ deep dive into the financial side of the coal industry.

Firstly, it is clear that even with coal prices at rock bottom the best miners are managing to keep their heads above water, just. Heavy-duty cost cutting and a total focus on productivity is keeping the industry alive.

Secondly, the slimmed down operations of the big miners means they are well prepared to ride out the current low prices, and generate strong profits when the coal glut is absorbed and prices rise.

There is a third interesting element to the five sets of results which went into this back-of-the-envelope analysis and that’s the number produced by adding up the results to arrive at a remarkably impressive US$1.5 billion in pre-tax earnings.

That number is the eye-catcher in this exercise, but it’s also only useful as a rough guide to the underlying conditions of the coal sector, which are unquestionably tough but not as bad as some people claim.

Now for the detail, with the financial reports in US dollars, except for Whitehaven which reports in Australian dollars.

* BHP Billiton’s coal division reported annual underlying earnings before interest and tax of $348 million from revenue of $5.9 billion, a miserable return of less than 6%, which was worse than last year when a pre-tax profit from coal of $575 million was earned from sales revenue of $6.56 billion.

* Whitehaven, the other coal miner to lodge its annual accounts, generated EBITDA of A$130.3 million (converted to US$93.8 million to make a comparison easier), up 44% on the A$90.4 million earned in 2014. The pre-tax and other charges profit was swamped by non-cash items which included writing off early-stage exploration and debt-refinancing costs, which led to a bottom line loss of $483.3 million.

* Rio Tinto’s reported a half-year coal profit on an EBITDA basis of $267 million, down slightly on the $288 million earned in the first six months of the previous year.

* Glencore reported pre-tax profits of $86 million from coking coal mined in Australia, up slightly on the $82 million of the previous corresponding period, and $459 million from Australian thermal coal, down on the previous period’s $595 million.

* Anglo American’s coal division reported an underlying half-year EBIT of $267 million, up 3% on the first half of last year.

Add those five pre-tax full and half-year pre-tax profits and you arrive at the $1.5 billion EBIT mentioned earlier, a number which financial purists would consider misleading – but at least it’s not a loss.

None of the results is much to excite investors, though that’s stating the obvious as low coal prices meant no-one was expecting much.

But, what the pre-tax profits do show is that the industry is not in the parlous condition that seems to have become the widespread perception thanks to repeated attacks on coal mining.

What becomes quite interesting is that mines which are riding out the current downturn, are well placed for any upturn.

The question, of course, is when that upturn might occur and while opinions are divided it was encouraging to hear BHP Billiton’s chief executive, Andrew Mackenzie, argue that the world’s biggest commodity consuming country, China, appears to be over the worst of its slowdown, with better times ahead.

“As we look at things today, there are signs that the Chinese economy has begun to bottom out and that the second half will be stronger than the first,” Mackenzie said.

That view does not signal and imminent rebound but it is a sign that someone with deep connections with the raw materials world can see the beginning of a recovery.

If Mackenzie is correct then the modest pre-tax profits from the coal miners should be replaced by better numbers at this time next year.