BHP: Tough times ahead for coal miners

BHP Billiton’s (ASX: BHP) Coal briefing and Queensland site tour for analysts today has confirmed the headwinds facing the coal industry. With coal accounting for 21% of BHP’s production and 14% of its earnings before interest and tax, it is an important contributor to the group’s performance. BHP has coal assets in North and South America, South Africa, Indonesia, NSW and Queensland.

Coal price pain

With the fall in hard cocking coal prices to around US$150/tonne today from US$300/tonne in 2011, BHP management has acted decisively, stripping over $800 million in annualised costs out of the coal business so far. These cost saving have been achieved in a number of ways including the closure of high cost mines and the announced sale of New Mexico-based coal assets. Management has also announced there will be no new major projects which will substantial reduce development expenditure. At the same time, the Queensland assets which are currently producing at 100% will expand capacity by 40% by 2015; this will go some way to balancing the lost revenue from lower coal prices and closures.

BHP’s presentation comes hot on the heels of New Hope Coal’s (ASX: NHC) decision to reduce production at its higher cost Jeebropilly mine in Queensland. Whitehaven Coal (ASX: WHC) which mines coal in NSW is also being affected by lower coal prices which are lowering its demand for contracted rail and port services for which it is still forced to pay.

Asciano (ASX: AIO) and Aurizon (ASX: AZJ) (formerly QR National) both have significant exposure to the coal industry through their provision of haulage services in NSW and Queensland to the coal miners. Luckily these two freight operators enjoy long-term contracts which are of a nature which has so far protected them from exposure to the falling coal price.

Foolish takeaway

Owning single mine companies and single resource producers exposes investors to significant risks. Instead, investors should consider investing in low-cost, diversified miners to reduce their investment risk.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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