Queensland Coal Shock

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“Stunned, shocked, surprised,” was one broker’s response to the Queensland government’s significant coal royalty increase. What impact on coal miners?

-First royalty increase in ten years
-Far greater than ever feared
-Likely to put upward pressure on coal prices

By Greg Peel

Right now the Queensland Labor government collects royalties on the state’s thermal and metallurgical coal production, net of insurance and freight, of 7% up to a price of [AUD] $100/t, 12.5% for $100-150/t, and 15% above $150/t. The current price of met coal is $545/t and the five-year average is $290/t, UBS informs us.

See an opportunity? The Queensland government certainly has.

Included in this week’s Queensland budget, as of July 1 the new royalty levels will be 20% on $175-225/t, 30% on $225-300/t and 40% above $300/t. It’s the first time in ten years the Queensland royalty tiers have been altered.

The NSW Coalition government also released a new budget this week, and kept its coal royalty levels at 6.2-8.2%.

The Queensland government introduced its new levels without any consultation with the industry. The Minerals Council of Australia notes that after adding a 30% federal income tax to the 40% royalty on Queensland coal at current prices, the state has the highest taxing mining jurisdiction in the world.

Coal miners with Queensland operations include BHP Group ((BHP)), Coronado Resources ((CRN)), New Hope Corp ((NHC)), Bowen Coking Coal ((BCB)), TerraCom ((TER)) and Yancoal Australia ((YAL)), as well as Anglo American and Glencore.

Whitehaven Coal’s ((WHC)) Queensland development won’t start production until after 2026, while South32’s ((S32)) coal production is all in NSW.

Goldman Sachs suggests of the group above, only BHP and Coronado will see major impacts, given 60-70% of their coal production is in Queensland. The broker has thus lowered its price target on BHP to $42.10 from $42.90, and Coronado to $2.70 from $3.10.

Among the seven FNArena database brokers (of which Goldman is not one) covering BHP, only four have to date responded to the new royalties and the consensus target has fallen to $46.05 from $47.79.

The consensus target among the three database brokers covering Coronado has fallen to $2.77 from $3.06.

“Stunned, shocked, surprised … I don’t think there is any other response,” was the reaction from Shaw and Partners’ coal analyst (Shaw is also not a database broker). “The potential impact on jobs, industry growth, investment decisions should not be underestimated – BHP has asserted that in its initial response. We do acknowledge that natural resources are owned by the state and managed on behalf of the electorate. But this move has gone way beyond…”

Disincentivation

Brokers agree the royalty hike will disincentivise any new coal developments in Queensland. On that basis, it is likely coal prices will come under more upside pressure.

This will provide an offset for the likes of BHP and Coronado if price increases increase earnings.

There remains a question, nevertheless, as to whether there was any great incentive to pursue new coal production development anyway. Investors and financiers have shied away from coal from an ESG perspective.

A week ago BHP decided to abandon its plan to sell off its Mt Arthur thermal coal mine in the Hunter Valley (NSW) and keep it operating until 2030, because it couldn’t find a buyer.

Perhaps the recent east coast energy debacle may encourage further coal production, but globally thermal coal remains on the nose.

The next question is as to whether the federal Labor government’s first budget, due in October, may include a commodity super-tax.

So far, no signs.

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