BHP may trim iron ore expansion

BHP Billiton is likely to cut the first stage of its estimated $10 billion iron ore port expansion in half, analysts and investors said, as it looks to slash capital spending due to rising costs and an uncertain market outlook. The Outer Harbour project in Western Australia is one of three mega projects in an $80 billion pipeline that BHP has slowed, under pressure from shareholders who want bigger dividends and buybacks rather than expensive projects with no short-term returns. In February, BHP committed $779 million in early funding to build a 100 million tonnes a year outer harbour facility and said at the time it would be reviewed for full approval in the December quarter this year. Five analysts and two investors said BHP’s incoming iron ore chief, Jimmy Wilson, would have to cut plans for the Outer Harbour. “He’s been told he’s got to re-cut it to a smaller project,” UBS analyst Glyn Lawcock said. They predicted the logical outcome would be to cut the first stage of the expansion to 50 million tonnes a year from 100 million tonnes a year. Analysts and investors said given that BHP has about 50 million tonnes a year extra rail capacity, the company was likely to look for ways to milk its existing mines for extra output to fill that capacity, in which case it would only need 50 million tonnes a year of new port capacity. “They’re looking at it as 50 million tonnes a year,” said another analyst, who declined to be named because they were not authorised to speak to the media. BHP Billiton declined to comment on whether its incoming iron ore chief had been told to cut the scope of the outer harbour project. A spokesman directed Reuters to recent comments by senior BHP managers on the company putting the brakes on spending plans. Wilson’s move into the iron ore job officially from July 1 creates an opportunity for a review of the Outer Harbour plan, looking at ways to stretch the existing operations before splashing out on the massive port, analysts and investors said. “Maybe a new pair of eyes looking at it will come up with alternative ways of doing things,” said Tim Barker, a portfolio manager at BT Investment Management. The Outer Harbour is crucial to BHP’s long-term plan to nearly double its iron ore capacity to 440 million tonnes a year, a project that had been expected to take eight years at a cost analysts estimated at more than $20 billion. When fully built, the development would include a four km-long jetty, a four-berth wharf and a 32-km shipping channel to handle 200 million tonnes a year of iron ore, adding to 240 million tonnes capacity BHP is targeting in an inner harbour expansion already underway. “Anywhere they can take smaller bites, they will,” said CLSA analyst Hayden Bairstow. Under its existing plan, analysts estimate the capital cost of the expansion would be around $200 per tonne of iron ore capacity. That puts it at a sharp disadvantage to world no.2 iron ore miner Rio Tinto, which this week committed to spend $3.7 billion to expand its Australian iron ore operations to 353 million tonnes a year by the first half of 2015, up from 283 million tonnes from an expansion underway. Analysts estimate its capital cost at around $160 per tonne of added capacity. In a dig at its arch rivals BHP and Vale, which last year postponed its $8 billion Serra Sul project by two years, Rio said its Pilbara project stacked up under any likely scenario, underpinned by Chinese demand growth. “This demand growth is coupled with an increasingly challenged supply response, as several high-profile competitor projects have recently been either delayed or postponed,” Rio Tinto’s iron ore chief Sam Walsh said in the expansion announcement. BHP’s shares fell 2.1 per cent on Friday to A$31.52, hovering near a three-year low hit earlier this month. Shareholders who have been clamouring for bigger dividends or share buybacks said they would be comfortable with a smaller spend on the Outer Harbour project, if it helped improve the near term returns. “As an investor you want to see them get the greatest bang for their buck,” said BT Investment Management’s Barker. From gulftoday