Australian Foundation Investment Co. (AFI), a fund owning shares in BHP Billiton Ltd. (BHP) and Rio Tinto Group, said it would encourage companies to cut back on investments in new operations as commodity prices fall.
Mining companies will start to question the economics of projects as prices fall and costs rise, Ross Barker, chief executive officer of the listed Melbourne-based fund with a market value of A$4.5 billion ($4.7 billion), told the Australian Broadcasting Corp.’s Inside Business program. “That is obviously something we would encourage because we don’t want to spend large amounts of money and not get good returns.”
Companies are reassessing spending plans as commodity prices drop, amid concern over growth in Europe and China, the biggest metals consumer. BHP will delay approval of a $33 billion mine expansion in Australia for two years until 2014 because of falling commodity prices, the Australian newspaper reported yesterday, citing a document prepared by an unidentified consultancy.
“There is much more economic growth to feed through China and other emerging economies but on the other hand the period of huge cash flows from very high commodity prices will be coming to an end,” Barker said. “There are still an enormously large number of mining projects in train. The big question for immediate to long-term investors is how many of those will actually get up.”
China’s economy expanded at its slowest pace for six quarters in the three months to the end of June. BHP, the world’s largest mining company, needs to be flexible in the face of change, CEO Marius Kloppers said last month.
BHP’s net income may have declined to $17.4 billion in the 12 months to June 30, according to the mean of 18 analyst estimates compiled by Bloomberg, from a record $23.6 billion a year earlier. Rio de Janeiro-based Vale SA, the second-biggest mining company, last week posted its lowest quarterly profit in more than two years because of falling prices. Net income fell 59 percent in the second quarter to $2.6 billion, Vale said July 26.
The board of Melbourne-based BHP Billiton has been due to decide on proceeding with the Olympic Dam copper-uranium-gold mine expansion by the end of this year. Kloppers warned in May that rising costs and easing commodity prices may change the economics of certain projects.
Aside from Olympic Dam, BHP’s board is also due to decide on two other major projects -- an iron-ore port expansion in Western Australia and a potash project in Canada -- by the end of the year. The three projects may cost a combined $68 billion to build, according to a May 23 estimate from Deutsche Bank AG. The bank estimated Olympic Dam alone will cost $33 billion.
BlackRock Inc. (BLK), the largest holder of BHP’s Australian stock, according to data compiled by Bloomberg, said in March it trimmed holdings due to concerns that spending on Olympic Dam and shale gas assets may curb returns.
Rio Tinto in April withdrew from talks to take part in a A$9 billion ($9.4 billion) port expansion in Queensland where some of its coal mines are located, citing economic volatility and higher costs. Rio this month said it will shed jobs at the Clermont thermal coal mine in Queensland state because of rising costs and falling prices. Thermal coal prices have declined 20 percent since the start of the year.
Rio CEO Tom Albanese said project costs in Australia had as much as doubled.
“Increasing costs are an industry wide problem, particularly in hotspots like here in Queensland,” Albanese said May 10 during the company’s annual meeting in Brisbane. “We probably cannot develop as many projects as we could have done a couple of years ago spending the same level of money. That means we have to be more selective.”
BHP will fall short of a five-year spending target of $80 billion for building mines and expanding assets as it sees commodity prices declining, Chairman Jac Nasser said in May.
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