BHP says it has no appetite for new investments in thermal coal, regardless of how lucrative those investments may be, but has also signalled it is unlikely to invest in commodities like lithium and cobalt.
The hardening of BHP's attitude toward the type of coal used for power generation was revealed in a slide pack published ahead of a strategy briefing by chief financial officer Peter Beaven.
The presentation declares that the decarbonisation of the energy sector will see thermal coal ''phased out, potentially sooner than expected''.
BHP then added that it had "no appetite for growth in energy coal regardless of asset attractiveness".
''Our energy coal exposure is just three per cent of our asset base. But it is made up of two very high quality mines which generate high margins. Our focus will be on maximising value to shareholders, whether we are long term owners or not,'' Mr Beaven told analysts on Wednesday morning.
The comments come after Deutsche analyst James Gurry said this week that he expects BHP to exit its thermal coal assets, which comprise the Mt Arthur mine in New South Wales and a stake in the Cerrejon business in Colombia.
Mr Gurry said in a note that he valued BHP's thermal coal assets at more than $US2.5 billion ($3.6 billion).
Mt Arthur has valuable tax loss assets, but Mr Gurry noted that the mine's recent profitability had reduced the value of those tax shields.
The trends marginalising coal are expected to create strong demand for the minerals that are used in modern batteries and electric vehicles, and BHP is particularly optimistic about demand for copper and nickel.
''We can, with a degree of conviction, say that adding options in copper and nickel sulphides (as opposed to laterites) are likely to be a sound investment. Demand will grow and, at the same time, new supply sources will be hard to discover and permit, and will be more expensive to develop,'' said Mr Beaven.
''We are interested in adding more nickel sulphide resource to our portfolio. So we should continue to add exploration options in these areas.''
But Mr Beaven was surprisingly dismissive about the attractiveness of other battery commodities like lithium and cobalt.
''While demand for batteries will drive lithium and, to a lesser extent, cobalt demand, we also believe that abundant supply of the former, and substitution of the latter, reduces the attractiveness of these commodities for us,'' he said.
BHP is expected to decide within 18 months whether to spend up to $US5.7 billion on the first stage of Canada's Jansen potash project.
Rival potash producers warned last week that potash markets were already oversupplied and BHP would find it hard to make money from potash.
Mr Beaven signalled that BHP was mindful of the existing supply and demand situation, and would only bring Jansen into production once the potash market was tighter.
''Jansen makes sense on a strategic level. It creates a high-margin, long-life asset, with multiple, basin-wide, expansion opportunities. But as existing excess supply capacity will only be utilised by the middle of next decade, so first production from Jansen could only arrive in that time frame,'' he said.
''But this is a large investment and the first stage has to pass the risk-return hurdles in the capital allocation framework, and that has not yet happened.
''We will not invest in markets that do not require additional capacity. But we must be prepared to invest counter-cyclically.
''We may conclude that we like the commodity and the resource characteristics, but the individual project does not pass the capital allocation framework test.''
BHP's Australian shares last traded at $37.94 on Tuesday.News Source: Australian Financial Review