Economic assessment of the Hume Coal project

by Rod Campbell and Richard McKeon

Development of an underground coal mine in NSW’s Southern Highlands is not economically viable and presents risks to the environment, existing industries and landowners.

The Hume Coal Project is a proposal to build an underground mine in the Southern Highlands of New South Wales, near Berrima on the Hume Highway, southwest of Sydney. The mine would produce around 3 million tonnes of metallurgical and thermal coal each year for almost 20 years. Hume Coal is owned by South Korean steelmaker POSCO.

The project is controversial. The community, other industries and the local government are worried that the mine will consume groundwater that local residents, businesses and farms depend on. “Water not Coal” signs are common on fences, gates and businesses throughout the district.

This research has been commissioned by Coal Free Southern Highlands. Hume Coal were approached to participate, but provided only limited assistance. Key data sources are Hume Coal’s Preliminary Environmental Assessment and a groundwater study commissioned by Southern Highlands Coal Action Group. Local stakeholders were interviewed in two field trips to the Southern Highlands in April–May 2016.

This report is a cost benefit analysis prepared in line with the NSW Guidelines for the economic assessment of mining and coal seam gas proposals, and uses the draft Cost Benefit Analysis Workbook that accompanies the Guidelines. As this is the first full assessment to use these resources it provides a working example of how they can be further developed.

Our cost benefit analysis estimates that at a global level the project has net present value of negative A$556 million. Key assumptions in this estimate are a coal price of A$112 per tonne, operating costs of A$97 per tonne, a 7% discount rate and groundwater inflow of 9.7 gigalitres per year.

The project as proposed is almost certain to represent a large financial loss to the proponent. Under our central assumptions, producer surplus – a basic estimate of profit – is estimated at negative A$539 million. This means that, if approved, the project is unlikely to proceed as proposed unless there is a major increase in coal price.

If it did proceed despite the financial loss to the proponent, we estimate the project would be liable for royalties worth A$118 million in present value terms. While this represents a substantial benefit to the NSW community, our central estimate of the cost of groundwater impacts is A$131 million. Beyond this likely cost there are many unquantified impacts that make it very unlikely that the project represents an improvement in economic welfare for the NSW community.

Sensitivity analysis shows that to reach a positive net present value, coal prices would need to increase by 43 percent. For the project as proposed to make a reasonable level of profit for the proponents we estimate an increase in coal price of 58 percent is necessary. Importantly, this increase would need to be maintained through the life of the project. Such high prices have only been observed for short periods in the last 30 years.

Alternatively, the project could become viable for the proponent with a 38 percent reduction in operating costs. However, part of the reason for the high operating costs of the mine is the methods adopted to reduce environmental impacts. Any move to reduce operating costs is likely to increase environmental externalities, particularly impacts on groundwater.

The project is unlikely to proceed as proposed under current conditions or prices as forecast by Commonwealth Treasury. If approved, the project is likely to remain on hold indefinitely. This imposes considerable costs on the local economy, which has been affected by the uncertainty over the project. These impacts are further considered in the local effects analysis, presented in a separate document.

Full report