In a falling coal price environment, the cost of coal is one of the key factors that 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. Coal is one of the key commodities for BHP and contributes 15% of its revenues. In this article, we’ll have a look at BHP’s cost-cutting efforts in its coal segment.
Reduction in unit costs
- BHP’s Queensland Coal unit costs fell 17% year-over-year in the first half of fiscal 2016, to $59 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 stronger dollar (USDU).
- This offset inventory write-downs due to weaker coal prices, higher than usual maintenance shutdowns, and the closure of its Crinum mine as it approached the end of mine life.
- 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 remain flat
- At Queensland Coal, unit costs are expected to remain at $59 per ton in fiscal 2016. BHP mentioned that favorable currency movements will offset the removal of low-cost volumes from the Crinum mine.
- The company maintained during the call that there are still more efficiencies in the long term and that it will continue to cut down and push productivity up. The company, however, doesn’t see much recovery happening in prices over the short to medium term.
A further reduction in unit costs could 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 costs. Cloud Peak forms 3.0% of the SPDR Metals and Mining ETF (XME). 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.