BHP ditches another three coal projects

BHP Billiton (ASX, LON, NYSE:BHP) has added three new names to its growing list of shelved coal mine projects as defers its Red Hill and Saraji East coal projects, reports Mining Australia.

The miner has also stopped research into its underground coking coal mine near Moranbah, where it had planned to mine 14 million tonnes of coal annually.

The project was expected to cost the company more than $3 billion, given average industry project costs.

BHP blamed falling coal prices and weaker Chinese growth expectations for this decision, which follows the cancellation of plans to expand its Olympic Dam copper and gold mine in South Australia, as well as its Port Hedland iron ore harbour expansion in Western Australia.

On Monday, fellow miner Rio Tinto (ASX, LON:RIO) also announced more job cuts across its coal mines in Queensland as the state has raised its royalty rates and the commodity’s price continues to fall.

BHP Billiton shelves Red Hill coking coal project

BHP Billiton Ltd has deferred its Red Hill coking coal project in Queensland, as falling commodity prices and weaker Chinese growth expectations weigh on the mining giant’s operations, according to The Australian.

According to the newspaper, BHP has stopped research into its underground coking coal mine near Moranbah, where it had planned to mine 14 million tonnes of coal a year.

The project was expected to cost the company more than $3 billion, given average industry project costs.

BHP said in May that pre-approval work on the Red Hill site could have started as soon as next year.

A separate The Australian report suggests work on BHP’s Saraji East mine near Dysart, Queensland has also stopped.

The decision follows BHP’s deferral of plans to expand its Olympic Dam copper and gold mine in South Australia and its Port Hedland iron ore harbour expansion in Western Australia.

BHP not in slow-down, says CFMEU

BHP has shafted the planned expansion of its Peak Downs mine while remaining committed to it Caval Ridge and Daunia projects near Moranbah.

Revealing a 34% drop in annual profit to $15.4 billion this week, the mining giant said it lost $1.1 billion on its metallurgical coal division.

BHP closed the Norwich Park mine and is currently reviewing the viability of its other high-cost operations across the Bowen Basin.

The company said coal production was constrained largely as a result of industrial action and weather-related downtime.

An insurance claim of $300m relating to the 2008 flooding event had also been settled.

CFMEU national president Tony Maher said the BHP result was “not a sign of a waning boom … but a sign of a resources boom in full swing”.

“Mining companies would like to have us believe they are under the pump and need to pay less tax, cut jobs and contribute less to local communities,” Mr Maher said.

“Don’t be fooled.”

Geotechnical issues continue to dog the Gregory Crinum operation near Emerald, as the company prepares to do a seismic survey in an effort to uncover potential new coal deposits.

The survey will cover 1.86sq km of land around the mine and take six months.

BHP’s scrapping the Olympic Dam mine expansion won’t affect SA property investors much: Terry Ryder

The single biggest quality underlying the success of mining companies has been their ability to keep their eye on the long-term objective.

They have resisted the tendency of business generally towards short-termism and knee-jerk reactions to temporary setbacks.

This is why miners have enjoyed such massive profits recently. Many of the big projects that are now delivering income were conceived and advanced in the shadow of the GFC.

Grant King, managing director of Origin Energy, said it best with this quote in 2008: “We make investment decisions in assets that have economic lives of 30 years or more. And so, cycles that play out over a year or two are basically irrelevant. We are fundamentally driven by the long-term view.”

Curiously, a notable exception to the resources ethic of long-term thinking is BHP Billiton. It’s the nervous Nellie of the sector. In 2008, for example, it opened a Western Australian nickel mine that cost $2.2 billion, then shut it down within 12 months of opening when it got GFC jitters (putting 1,800 people out of work) and sold it for $370 million.

The recent closure of the Norwich Park coal mine in Queensland’s Bowen Basin has all the hallmarks of a dummy spit, after not getting its way in union negotiations. In similar vein, BHP took its bat and ball and went home when Moranbah landlords asked more rent than it felt it should be paying for houses.

And now we have the Olympic Dam backflip. Half a dozen years of planning and preparation tossed aside because of a few blips on the global radar screen. The people running this enterprise seriously need to develop a spine and some long-term vision.

The question is how this will impact on the South Australian economy and various property markets. The answer is: not nearly as much as commentators are implying.

The SA economy has been chugging along quite nicely in recent years without any contribution from an Olympic Dam expansion, and it will continue to do so.

Media, in its simplistic way, would have us believe that the $30 billion expansion was the only show in town, but this is far from true.

The state’s resources sector has been in a significant growth phase for many years, and this will continue. Iron ore mines are in various stages of development on the Eyre Peninsula and elsewhere, including several multibillion-dollar enterprises. There’s a $1 billion expansion of Prominent Hill mine, among other projects, happening near Coober Pedy, and the $2 billion Hillside mining venture on the Yorke Peninsula.

A far bigger potential for SA than Olympic Dam is the prospect of mining operations in the Woomera Prohibited Area following last year’s joint federal-state announcement. The resources in this area and the potential investment are far greater than BHP Billiton’s piddling little affair at Roxby Downs.

There are multiple export port projects in various stages of planning and development around the state, billions are being invested in wind farm developments, and further billions are circulating thanks to the defence contracts being handled in Adelaide.

The other thing likely to overlooked as media over-dramatises the impact of the BHP Billiton decision is that the company isn’t scrapping the development of its Roxby Downs resource. It says it’s going to seek less expensive ways of doing it.

So something major will happen at Roxby Downs, just not as big or as soon as was originally planned.

Terry Ryder is the founder of and can be followed on Twitter.

BHP Billiton drops Olympic Dam expansion as profit falls

BHP Billiton will abandon its $US30 billion ($28.6bn) expansion plan for the Olympic Dam copper/uranium project after its run of record annual profit came to an abrupt end due to the slump in commodity prices.

BHP said it would look at a cheaper design of its Olympic Dam open-pit expansion and would not approve any expansion before a South Australian government indenture agreement deadline of December 15.

BHP chief Marius Kloppers said: “As we finalised all the details of the project in the context of current market conditions, our strategy and capital management priorities, it became clear that the right decision for the company and its shareholders was to continue studies to develop a less capital intensive option to replace the underground mine at Olympic Dam.”

BHP gave no timing on a revised expansion.

The company said it would recognise a $US346m pre-tax impairment of the Olympic Dam project in 2011-12.

Federal Resources Minister Martin Ferguson said BHP’s decision on Olympic Dam was “completely unrelated” to the mining tax and the carbon tax.

He was disappointed but not surprised by the move. “But as far as I am concerned the project is still there to be grabbed. Our responsibility is to work with BHP Billiton to actually get this project in place in the future.”

South Australian Premier Jay Weatherill said the decision was based on global factors outside the state government’s control, but he said the resources would be developed.

“These resources are world class … they belong to us and they will be developed.”

BHP’s group profit before that hit and other writedowns fell to $US17.11bn from the record $US21.7bn posted in 2011 (before exceptional items). Further earnings pain is on the way due to the sharp fall in iron ore and coal prices since the end of the group’s financial year.

Europe’s economic woes, sluggish growth in the US and a slowdown in the pace of economic growth in China – the world’s biggest consumer of BHP products – are behind the 21 per cent fall in profit.

The earnings crunch – and that previously announced by Rio Tinto for the June half – have raised questions about the accuracy of the Gillard government’s projection of returning the budget to surplus. Since June 30, the fall in the two commodities subject to the new mining tax, iron ore and coal, have fallen particularly hard.

The profit figure is before exceptional items and compares with market consensus for a 22 per cent profit fall to $US16.87bn. That was based on estimates from 25 global analysts.

Australian analysts were generally more bullish on BHP’s profit expectations. Merrill Lynch had been looking for a $US17.38bn although UBS was at the other extreme, forecasting a $US16.1bn result.

Profit after exceptional items (including the BHP hit) was down 34 per cent to $US15.4bn.

BHP shares traded 10c higher at $33.37 in response to the news on the Olympic Dam delay.

Shares had previously traded below yesterday’s close. The stock has nevertheless lost 13 per cent of its value in the last 12 months. Rio, which has a much bigger exposure to iron ore, is down by 22 per cent in the same period.

The latest result is the first profit setback for BHP since 2009, when, in the wake of the global financial crisis, profit slumped from the $US15.36bn booked for 2008 to $US10.72 bn.

BHP’s earnings grew strongly after that GFC hit, rising to $12.46bn in 2010 and last year’s record $US21.7 billion on the post-GFC rebound in commodity prices and the benefits of its aggressive expansion.

BHP today declared a final dividend of US57c a share, taking the annual dividend 11 per cent higher to $US1.12. That compares with the final dividend in 2011 of US55c a share and the 2011 annual payout of $US1.01 a share.

The latest profit hit and the Olympic Dam decision confirms Mr Kloppers is back-pedalling from a statement in February last year that BHP could spend $US80bn on growth projects. The projects included the $US30bn Olympic Dam expansion, the $US20bn Port Hedland outer harbour development and the $US10bn Jansen potash project in Canada.

Today’s news on Olympic Dam was flagged by The Weekend Australian last month, when the paper revealed BHP had informed outsiders that a decision to proceed with the mine expansion had been delayed by two years.

Mr Kloppers has since said that he regrets having talked up BHP’s ability to spend at such a massive rate. He said earlier this month that he now wishes he had added a rider saying that such an investment spree was only possible if, for example, iron ore prices had continued to trade at more than $US180 a tonne. Iron ore prices have since fallen to $US106 a tonne, wiping $US11.5bn from BHP’s annual iron ore revenues.

Today’s profit figure is before the $US3.29bn (before-tax) writedowns announced earlier this month. Low US gas prices saw BHP write down the value of its new US shale gas business by $US2.84bn (before tax) and its struggling Western Australian nickel business by $US450 million (before-tax).

“We have responded appropriately to the changed market conditions,” Mr Kloppers said when announcing the writedowns on August 3. In atonement, Mr Kloppers gave up an estimated $US5m bonus for 2012.

“The buck stops with the CEO. End of story, that’s how it is. It’s part of the job,” Mr Kloppers toldThe Australian at the time.

BHP mothballs Olympic Dam expansion

BHP Billiton has taken the axe to more than $US30 billion in spending on Australian expansion projects, in the clearest sign yet that the nation is past the peak of its resources boom.

BHP’s decision to change its strategy on its Olympic Dam expansion came as the company announced a 35 per cent slide in net profit

“It doesn’t really make a lot of sense in this market for them to be engaging in a major capital spending program and to be bringing more supply onto the market in a time when prices are softening,” said Gavin Wendt, publisher of resources newsletter Mine Life.

“The deposit isn’t going anywhere and this decision gives them the sort of flexibility down the track to expand,” he said. “In this environment it makes sense to maintain the status quo.”


The miner’s shares ended 11 cents, or 0.3 per cent, lower at $33.16, after rising as much as 0.7 per cent in the wake of the announcement.

Beating estimates

BHP’s net profit of $US15.4 billion was well below last year’s figure of $US22.46 billion but beat market consensus of $US14.6 billion.

But the change of direction on Olympic Dam had dominated this afternoon’s results, and marks a dramatic change in BHP’s fortunes over the past nine months.

The world’s biggest miner said it won’t meet a December 15 deadline to approve the copper and uranium mine expanion. Instead, it will investigate less expensive methods to lift production at the South Australian mine.

Olympic Dam was awarded $US1.2 billion in pre-commitment spending in October 2011, BHP was originally expected to approve Olympic Dam by June 2012 but as commodity prices began to slump, the company declared it would not approve any new major project before December.

Under an agreement struck with the South Australian government, BHP had to substantially approve the project by December 15.

Possible price impact

Given the scale of BHP, a move to halt expansion of one of its largest mines may have an impact on global commodity prices, particularly if it prompts big rivals to follow suit and hold back on expansion of their own, said Mine Life‘s Mr Wendt.

“That’s the advantage of the big miners,” he said.

“They do have a big impact in terms of supply and sentiment,” Mr Wendt said. “It sends a message that ‘We’re prepared to leave these sorts of expansion projects on hold’.”

“That in itself should send the message that the supply side is questionable and it might start to stimulate commodity prices.”

The change of strategy is a major blow for South Australia, which had been expected to receive about $350 million in royalties each year from the massive project.

BHP Billiton announced $US1.2 billion in pre-commitment capital for the Olympic Dam Project in October 2011.

The funding was for long-lead items such as trucks and accommodation and infrastructure, however they will be redeployed into other parts of the business if not required, BusinessDay understands.

‘Not related to carbon tax’

Australia’s Resources Minister Martin Ferguson has rejected the suggestions that the Labor Government’s new mining and carbon taxes had influenced the Olympic Dam decision.

“This is purely a commercial decision, it is in no way related to any regulatory decision,” he said.

SA Premier Jay Weatherill expressed disappointment on behalf of his state but said BHP had done everything in its power to make the expansion happen.

BHP has also confirmed that its $US20 billion outer harbour expansion at Port Hedland will not be approved in the next 12 months.

A decision on the expansion was due in December, but BHP said in its results today that capital spending was fully committed for the 2013 financial year at $US22.8 billion.

“No major project approvals are expected over this timeframe,” he said.

The decision is a stunning change of direction in the space of six months, after BHP announced $US917 million in preparatory spending on the outer harbour on February 2.

It highlights iron ore’s fall from grace as the boom commodity in the mining sector: iron ore prices have slumped below $110 per tonne in recent weeks, after spending much of the year above $US135 per tonne.

BHP is now expected to focus its attention on increasing its export capacity in the inner harbour at Port Hedland.

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