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.