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What’s Driving Unit Cost Reduction for BHP in Its Coal Division?

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Coal costs

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 costs 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 part of the series, we’ll take 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 15% YoY (year-over-year) in fiscal 2016 to $55 per ton. This is more than 50% below peak costs.
  • The reduction in costs was due to increased equipment and wash-plant utilization rates as well as a reduction in labor, contractor, and maintenance costs, and a stronger dollar (USDU).
  • New South Wales Energy Coal (or NSWEC) unit costs came in at $41 per ton, a decline of 2% YoY. This is despite lower volumes.
  • Productivity improvements at NSWEC will partially offset the divestment of BHP’s New Mexico coal assets.
  • BHP’s coal EBITDA came in at $635 million for fiscal 2016, a decline of 49% YoY. The EBITDA margin was 17%.

Costs to decline further

  • At Queensland Coal, unit costs are expected to decline further to $52 per ton in fiscal 2017. According to the company, this reflects continued productivity improvements.
  • Unit costs are also expected to decline more by 7% to $38 per ton in fiscal 2017 for NSWEC.

BHP believes that demand improvement in metallurgical coal will be moderate while supply will adjust slowly. It expects the energy coal market to remain oversupplied in the near 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.

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