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What’s Driving Unit Cost Reduction for BHP’s Coal Segment?

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Coal costs

In a falling coal price environment, the cost of coal is one of the key factors BHP Billiton (BHP) (BBL) controls to an extent. Improvement in cost structure helps miners lower their cost of doing business, which is vital in a depressed commodity price environment. In this article, we’ll have a look at BHP’s cost-cutting efforts in its coal segment.

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Reduction in unit costs

  • BHP’s Queensland Coal unit costs fell 23% year-over-year in fiscal 2015, to $65 per ton. This is 50% below the peak.
  • The reduction in costs was due to increased equipment and wash-plant utilization rates, a reduction in labor, contractor, and maintenance costs, and a favorable exchange rate.
  • The company mentioned that lower coal prices alone reduced EBIT (earnings before interest and taxes) by $1 billion in the period. Still, it managed to deliver EBIT of $348 million. This was due to the unit reduction in costs.
  • During fiscal 2015, BHP saved ~$400 million on controllable cash costs and another ~$200 million on fuel and energy in its coal segment, which drove positive EBIT despite a huge drop in prices.

Costs to fall further

  • At Queensland Coal, unit costs are expected to fall to $61 per ton in fiscal 2016. This reduction will represent almost a 60% reduction in four years.
  • It’s important to note that this is despite the exhaustion of operations at Crinum, which were relatively lower cost than the average of the rest of the coal operations. Embedded productivity initiatives and a stronger US dollar underpinned this fall in unit costs.

A reduction in unit costs will help BHP weather the depressed coal price environment. Other coal producers (KOL), including Peabody Energy (BTU), Arch Coal (ACI), and Cloud Peak Energy (CLD), are also working to reduce their costs. Cloud Peak forms 3.0% of the SPDR Metals and Mining ETF‘s (XME) holdings. XME gives exposure to the diversified metals and mining space.

Copper is another pillar of BHP’s four-pillar strategy. In the next part, we’ll see how BHP’s copper volumes and costs are doing.

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