BHP Delays $68 Billion of Project Approvals as Net Plunges
BHP Billiton Ltd. (BHP), the world’s biggest mining company, put approvals for about $68 billion of projects on hold after second-half profit plunged 58 percent as metal prices declined and costs rose.
Net income dropped to $5.5 billion in the six months ended June 30 from $13.1 billion a year ago, according to Bloomberg calculations that were confirmed by the Melbourne-based company. That beat the $3.5 billion median estimate of four analysts surveyed by Bloomberg.
BHP doesn’t expect to approve any spending on major projects this fiscal year, including the Olympic Dam expansion, which would have created the world’s largest uranium mine, the company said today. It joins Rio Tinto Group (RIO) and Xstrata Plc (XTA) in booking declining profits amid sluggish global growth.
“Given current investor sentiment towards high-capex, long-dated projects, the move not to approve Olympic Dam and Outer Harbour will be taken positively,” Richard Knights, an analyst at Liberum Capital Ltd., told Bloomberg. “The problem for BHP management is at some point they will have to weigh up the market’s desire for short-term returns and their prerogative as a major mining company to commission long-dated projects.”
BHP, the third-biggest iron ore exporter, fell 1.5 percent to 1,949.50 pence at 11:32 a.m. in London. The stock dropped 0.3 percent to close at A$33.16 in Sydney. The company will pay a final dividend of 57 cents a share, up from 55 cents a year ago.
BHP and Xstrata, which this month cut its spending plan for the year by $1 billion to $7.2 billion, are among miners reining in spending as prices fall and investors fret about the potential profitability of new operations. BlackRock Inc. (BLK), the biggest holder of BHP’s Australia-listed shares, had trimmed its holdings because of concerns over spending on shale gas assets and Olympic Dam, it said in March.
“With 20 major projects currently in execution with a combined budget of $22.8 billion, BHP Billiton is largely committed for the 2013 financial year,” BHP said. “No major project approvals are expected over this timeframe.”
BHP said in May it won’t meet its five-year $80 billion spending target on new mines and expansions as it combats higher costs and lower prices. This month it said it was studying spending cutbacks across its operations and reviewing its development pipeline of major projects.
The company’s board had been due to decide this year on approving Olympic Dam, an iron-ore port expansion in Western Australia and a potash project in Canada. 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 would cost $33 billion.
The expansion plans would have made Olympic Dam, located 560 kilometers (348 miles) north of the state capital Adelaide, the world’s largest uranium mine within 11 years, increasing copper output almost fourfold to 750,000 metric tons a year, boosting gold production eightfold and uranium by almost fivefold, according to BHP. It already produces uranium, copper and gold from an existing underground operation.
The company won’t be ready to proceed with an expansion approval before a Dec. 15 deadline, the company said in a statement. The decision to pursue a less-costly expansion is both “prudent and disciplined,” Chief Executive Officer Marius Kloppers, who waived his annual bonus after announcing this month the company would book writedowns on shale gas and nickel assets, said in a statement. BHP reported $3.5 billion in one- time charges.
“It’s pleasing that they’ve stepped back, not necessarily away from Olympic Dam, but just assessing cheaper alternative options,” Tim Schroeders, who helps manage about $1 billion at Pengana Capital Ltd. in Melbourne, said in a phone interview.
The company also delayed the planned 2.5 million ton-a-year expansion of the Peak Downs coal mine in Australia because of the “challenging external environment.”
“We expect volatility in commodity markets to persist as temporary weakness in the manufacturing and construction sectors across all key markets is expected to weigh on market sentiment,” BHP said. “However, in the medium term we expect supportive economic policy and a broad growth bias, particularly in China, to lead to measured improvement in the external environment beginning in the first half of the 2013 financial year.”
Growth in China, the world’s biggest metals consumer, has decelerated to the slowest pace in three years as Europe’s debt crisis crimped exports and the government’s property crackdown cooled domestic demand. Iron ore prices dropped yesterday to the lowest level in 32 months as Chinese demand wanes.
“We expect margins in the industry and for BHP to improve from current levels as commodity prices, especially iron ore and coking coal, should recover from recent weakness in the near- term,” Christopher Lafemina and Seth Rosenfeld, analysts at Jefferies Group Inc. in London, said in a report.
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