With 4 mega-projects sucking up $120 billion, BHP vows to ‘live within its means’

Kloppers does not have to look over his shoulder, his job looks secure for now

Reuters reports BHP has recently informed shareholders it will be “living within its means,” after shareholders raised concerns regarding its four largest projects – Olympic Dam, the Outer Harbour iron ore infrastructure project in Australia, expansion of its US shale gas operations and Jansen potash in Saskatchewan, Canada:

The four “mega projects” will require more than $120 billion of capex over the next 15 years but only increase returns from 2023, according to Deutsche Bank estimates.

“You have got to be certain that the quality of the assets you have are really good and that they are going to earn good long-term returns over 20, 30 years. You have to have the capability and the confidence to keep investing through all cycles, all the way through,” said James Laing, deputy head of UK and European Equities at Aberdeen Asset Managers, a top 10 investor in Rio and BHP.

Some institutions have already reduced their exposure to BHP, the world’s number one miner with a stock market valuation of roughly $175 billion. At the end of March, BlackRock’s World Mining Fund, reduced its position in BHP to around 6.5% from double digits before.

While the price tag for the Outer Harbour expansion to add 100 million tonnes per annum of capacity at the terminal is above $40 billion, of the four projects Olympic Dam is by far the most ambitious.

BHP has already received approval for a mammoth $30 billion expansion of the existing uranium, copper, silver and gold mine in South Australia.

The planned open pit mine adjacent to the current Olympic Dam underground operation would be the world’s biggest.

An idea of the olympian effort required to construct the mine and the size of the undertaking is clear from the fact that trucks will haul overburden 24/7 for five to six years just to reach the ore body.

The combined operations would mine 72 Mt ore per year and would produce 750,000 tonnes refined copper, 19,000 tonnes uranium oxide, 800,000 gold ounces and 2.9 Moz of silver per year.

While Olympic Dam, located in its own backyard, suits BHP’s expertise, analysts have long voiced concerns about the miner’s US energy industry operations after last year’s $12 billion Petrohawk deal – its most ambitious foray into the controversial business of shale gas extraction to date.

They cite the company’s poor track record with acquisitions (the ultimately unsuccessful $40 billion bid for Canada’s PotashCorp and the botched attempt to tie-up with Rio Tinto on iron ore), its relatively limited experience in the fracking business and environmental concerns. BHP is also involved in deepwater conventional oil in the Gulf of Mexico.

The last of the four mega-projects, the greenfield Jansen project, was BHP’s response to the federal government of Canada’s blocking of the Potashcorp deal.

The company has already spent $1.2 billion to bring the project to the feasibility stage and has undertaken some construction.

It will be presented to the board later this year, but given strong fundamentals in potash, should sail through the approval process. Production could start as early as 2015. The life of the mine is predicted to be a staggering 70 years.

Image sourced from Youtube.

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