MELBOURNE/LONDON (Reuters) - BHP Billiton (BHP.AX) has shelved its planned $20 billion (12 billion pounds) Olympic Dam expansion in Australia and put all other approvals on hold as the world’s largest miner battles escalating development costs, slumping prices and an uncertain outlook.
BHP posted a 35 percent slide in second-half profit and its first fall in annual profit in three years, in the face of falling prices as China’s growth cools - wrapping up a sobering earnings season for the world’s top producers.
“It’s pleasing to see that there’s some capital discipline from the company, so they are not ploughing ahead irrespective of current difficult economic conditions,” said Tim Schroeders, a portfolio manager at Pengana Capital in Melbourne.
Big miners have all been battered by weaker prices for iron ore, copper, coal, nickel and aluminium as economic growth in big-buyer China slows this year to what is expected to be its weakest pace in more than a decade.
Expanding Olympic Dam, the world’s fourth-largest known copper deposit and largest uranium source, was one of three major projects that were due to go to the BHP board for final approval by December 2012 in an $80 billion pipeline of projects that BHP had flagged were likely to be slowed.
On Wednesday, the Anglo-Australian giant said no major new projects would be approved before June 2013.
The move from BHP, though not unexpected, is one of the strongest signals of restraint yet in a mining sector that so far has cut projects and trimmed spending mostly on the fringes.
BHP CEO Marius Kloppers told analysts and reporters the company would take a fresh look at Olympic Dam and consider new technology to improve the economics of the project.
“This about capex escalation,” Kloppers said. “This is an escalation driven by a tight labour market, a tight supplier market, a high exchange rate and high diesel prices, which has made a concept that we thought would work, unviable.”
BHP said that as a result of the review, it would not be ready to approve an expansion before December 15, 2012, the deadline agreed with the South Australia state government.
Indeed, Kloppers said the miner had written off the study costs of the project altogether, saying BHP was “insufficiently certain” it could devise an economically viable plan at all.
Investors, who have been pressing the major miners to return capital to shareholders rather than splash out on major projects in an uncertain environment, were relieved BHP would hold back on the plan to quadruple copper output from Olympic Dam.
“Cancelling Olympic Dam was probably a good announcement, as the market was looking for something of that nature, or hoping for something like that. So it’s a sensible move on their part,” said Hayden Bairstow, a Sydney-based analyst at CLSA.
BHP’s London shares were down 1.2 percent at 1,957 pence at 1400 GMT, outperforming its peers and the UK mining sector .FTNMX1770. Its Australian shares slipped 0.3 percent to close at A$33.16 after the announcement.
“LIVING WITHIN ITS MEANS”
BHP did not cut back on short term spending though - $22.8 billion worth of capital spending over the coming year on projects already approved would go ahead, it said.
The miner, which has publicised a desire to live “within its means”, said it would rely on its balance sheet and some asset sales to plug the gap between spending and estimated cash flow.
The expansions underway will boost BHP’s production volumes substantially by the end of 2015, including a 50 percent increase in coking coal output, Kloppers said.
But the decision not to approve other major projects this year left open the question of whether BHP will press ahead with its two other mega developments - the Port Hedland Outer Harbour in Australia and the Jansen potash project in Canada.
Kloppers told reporters the company would focus on squeezing as much as it could out of the existing inner harbour iron ore port at Port Hedland - where efficiencies could mean spare capacity in coming years - before pushing on with a new harbour, and remained committed to getting into potash in the long run.
“I don’t think BHP has been given a mandate from investors and shareholders to go out and write blank cheques. I think they’re very mindful of that and they’re bunkering down and responding to the feedback they’ve been getting,” said Peter Esho, chief markets analyst at broker City Index in Sydney.
BHP expects Chinese steel demand growth to slow to a much more modest pace than over the past 10 years, and Kloppers was bearish about a near-term recovery in iron ore prices, languishing at their lowest since December 2009, and coal.
BHP’s second-half attributable profit before exceptional items fell to $7.16 billion from $10.98 billion a year earlier, as calculated by Reuters from the full-year results, broadly in line with forecasts. Full-year profit to the end of June fell to $17.1 billion from $21.7 billion a year earlier.
BHP has also been hurt by lower natural gas prices and industrial action at its coking coal mines, with its bottom line hit by $2.5 billion in write downs on its shale gas and nickel assets and charges on projects, including Olympic Dam.
In BHP’s biggest business of iron ore, softening demand growth from China has been particularly painful. The world’s biggest iron ore miner, Brazil’s Vale (VALE5.SA), last month reported its worst quarterly earnings in two years.
BHP raised its final dividend by 2 cents to 57 cents, but that was below analysts’ forecasts of around 58 cents, which was seen as another sign of caution on the outlook.
BHP said earlier this month it would book a $2.8 billion write-down on the U.S. shale business it had bought last year and $450 million on its Australian nickel division, which led Kloppers and petroleum head Mike Yeager to forgo their bonuses.
Kloppers said he saw a recovery in gas prices after a “dramatic” reduction in wells, as players respond to prices hit by unexpected technological improvements and warm weather.
Additional reporting by James Regan in SYDNEY; Editing by Neil Fullick and David Cowell