In a volatile coal price (KOL) 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 21% of its revenues and 20% if its underlying EBITDA (earnings before interest, tax, depreciation, and amortization).
Reduction in unit costs
BHP’s Queensland Coal unit costs fell 4% year-over-year in the first half of fiscal 2017, to $56 per ton. This is 53% below the peak costs. The reduction in costs was due to increased equipment and wash-plant utilization rates, a reduction in labor, contractor, and favorable inventory movements.
This offset stronger Australian dollar over the half year. During the fiscal half, BHP reported coal EBITDA of $1.8 billion as compared to $122 million in the same period last year.
Revised cost guidance
At Queensland Coal, unit costs are now expected to be $54 per ton for fiscal 2017, as compared to the earlier guidance of $52 per ton. The increase in guidance is mainly due to the unfavorable exchange rate movements.
The company maintained during the call that there are still more efficiencies and the revision in guidance is only related to FX movements.
A return to marginal costs?
BHP believes that prices for metallurgical coal should return to the marginal cost and that supply constraints in China should ease. A further reduction in unit costs could help BHP weather the volatile coal price environment.
Other coal producers (KOL), including Peabody Energy (BTUUQ), Westmoreland Coal (WLB), and Cloud Peak Energy (CLD), are also working to reduce costs. Notably, Cloud Peak makes up 3.0% of the SPDR Metals and Mining ETF (XME). XME has 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.