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.
MORE: BHP decision not a result of ‘carbon tax’
“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.
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.
With Chris Zappone, BusinessDay
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