Low-carbon scenario could cut coal asset value by 44%: HSBC.

HSBC (no url): “Public focus on carbon risks to long- term coal demand is growing. We update our scenario analysis of the risks facing UK mining stocks. A low-carbon scenario could cut valuations of coal assets by 44% and the UK miners by 2-13%.”
“The latest climate science has reemphasised that the carbon contained in global fossil fuel reserves is far greater than the available ‘carbon budget’ for the rest of the 21st century. Coal is particularly exposed as it is the most carbon- intensive fuel. In addition, this long-term carbon risk has converged with other factors that are placing downward pressure on coal consumption, notably the growth of shale gas and renewables, as well as tighter air pollution regulations (notably in China and the US).
With negotiators now focusing on finalising a new climate agreement by the end of 2015, we update our analysis of implications of a low-carbon scenario for the coal assets of the large UK-listed mining conglomerates (see ‘Coal and carbon’, 21 June 2012).
The long-run future of coal demand and its impact on prices and stock valuation has become a debatable topic in mining equity analysis since mid-2012. We update our original analysis and conclude that the value of coal in listed UK miners is now USD50bn, down from USD56bn in our previous review – mostly for short-term cyclical reasons, although this may have actually placed proportionately more importance on the long-run future of the commodity. The potential value destruction of 44% of these assets under our scenario analysis represents 6% of the major miners’ value, down from 7%.
A key purpose of scenario analysis is to test situations and reveal blind spots. We believe that mining companies need to be able to demonstrate to investors how their portfolio would prosper in a low-carbon scenario – and how this is being factored into long-term capex.”