Can BHP shares keep cashing in on coal?

BHP Group Ltd (ASX: BHP) shares have been on most investors’ radars this week. That’s as the S&P/ASX 200 Index (ASX: XJO) mining giant reported its full FY22 results yesterday.

And those results were impressive.

The highlights included a record dividend payout. It also included a 16% increase in underlying earnings before interest, taxes, depreciation and amortisation (EBITDA) from continuing operations. EBITDA reached US$40.63 billion in FY22, also a record high.

BHP shares closed up 4.3% yesterday.

What you may not know about BHP shares and coal

While BHP shares are generally connected with iron ore, and to a lesser extent copper and nickel, some 23% of the miner’s FY22 EBITDA came from coal.

The big year-on-year leap in its coal earnings was driven by soaring prices for the other black gold, amid a broader global energy crisis spurred by Russia’s invasion of Ukraine.

In the financial year just past, BHP shares did take a step away from coal. The miner completed the sales of its interests in the BMC and Cerrejón energy coal assets. However, BHP opted to retain and operate its New South Wales Energy Coal business until mine closure in 2030.

And the company doesn’t appear to have any intention of exiting the coal business, stating:

Long term, we believe that higher quality metallurgical coals will still be used in blast furnace steel making for decades based on our bottom-up analysis of likely regional steel decarbonisation pathways.

However, BHP has moved its coal project plans in Queensland to the back burner.

Queensland moves the mining royalty goal posts

In June the Queensland Government surprised miners by tying the royalties it receives from them to the rising price of coal. By some estimates, this could see the miners paying as much as three times the prior tax levels.

This has seen BHP hit the pause button on its Blackwater South coal mine project, which has a 90-year mine life.

Commenting on the decision to reporters (courtesy of the Australian Financial Review), BHP CEO Mike Henry said:

There’s been a significant increase in the sovereign risk associated with Queensland. Which has caused us to say, ‘Well, we really can’t deploy further capital into that business for the time being’.

Henry added that the regulatory processes BHP has engaged in with the Queensland Government for approval of the coal mine simply offered the miner that option, not the obligation to invest:

It gives you the option to make a decision to invest. Since then, we’ve had changes to the Queensland royalty regime that were quite sudden and didn’t involve any engagement with industry. We’ll go back and reassess what the plans for the business are going forward.

How have BHP shares been tracking?

BHP shares have come off their April highs amid lower iron ore prices. Year to date the BHP share price is down 4%, compared to a 2022 loss of 6% posted by the ASX 200.

The post Can BHP shares keep cashing in on coal? appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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