TERRY MCCRANN

AUSTRALIA’S biggest and most profitable company BHP is now “clean”.

In North America it’s finally and totally washed US shale right out of its balance sheet.

The $US10.4 billion – $14.6 billion – received last October has been mostly passed quickly through to shareholders.

While in South America, it’s also mostly washed its (shared) Samarco disaster out of all of its profit and loss, balance sheet and – most importantly – future.

It’s got a $US1.25 billion provision available for its share of remediation payments. The mine is now in its books at zero. Yes, it might have annual costs related to the remediation running at perhaps $US200-$300 million for an indeterminate number of years yet, but frankly, that’s trivial in its $US20 billion annualised EBITDA (based on yesterday’s numbers).

In short, whether or not the mine ever restarts is, to BHP and its shareholders, again, now frankly irrelevant. What is very relevant is the second mine disaster of its Samarco partner, Brazil’s own Vale company, in which BHP has absolutely no interest and so no liability.

Again frankly if brutally, Vale’s – and Brazil’s and individual Brazilians – pain (yes, financial, but even more actual) is BHP’s gain.

You take 5 per cent of global iron ore production out of the market – much bigger than Samarco – and you send the iron ore price from the $US55 that prevailed on average for BHP through the December half to around $US90 a tonne. Do your own math: BHP sells over 230 million tonnes of ore a year.

We will have to see where that plays out through the year; there are a veritable portfolio of factors (and uncertainties) that will impact on both the supply and demand sides.

But you would have to conclude that, however all those factors play – like for instance, mostly critically, China’s demand for ore to feed its ravenous mills and how much it sources domestically – the ore price is going to be higher through 2019 than it would have been in the absence of that second disaster.

I should emphasise this is me talking. The formal BHP comment was that the global supply picture was uncertain following the tragedy in Brazil. BHP was not gloating at its “good fortune”.

Indeed, the very first words out of CEO Andrew Mackenzie’s mouth yesterday were to – appropriately and genuinely – offer heartfelt sympathy to those affected in Brazil.

But the brutal truth is that BHP and Rio Tinto and Fortescue, and Australia, and the tax office, will be huge beneficiaries.

Broadly, crudely, the trio (and Gina Hancock and the other producers) will collect an extra $US8 billion or so between them for every $US10 higher the ore price is. And $US2.4 billion of that would flow to Canberra.

That windfall aside, the now “clean” BHP has gone back to its pre-shale future: conventional oil and gas; coal – both sorts; copper; and, of course, Pilbara iron.

But it’s a far more profitable “future” thanks to the massive cost-cutting – or the less-aggressive sounding “productivity improvements” – achieved under Mackenzie’s time in the top job.

With the biggest gains achieved in the iron ore business, which have then built on massively expanded production and sales that, thanks to China, had not crushed the iron ore price, in the same way increased US shale output has continually thumped both global oil and domestic US gas prices.

If ever you needed convincing that BHP got it exactly right in cutting its losses in US shale, it was there to see in yesterday’s price detail.

Over the half, BHP averaged a relatively high oil selling price of just under $US70 a barrel. It was also getting a sharply higher price for its LNG exports. But US domestic gas prices didn’t budge.

That was then. Now, in 2019, more US shale has kicked in and the oil price will be sharply lower this half – subject of course, to any “events”.

But crudely, and again brutally, that will be more than offset by the iron ore price.

This will play out even more – positively – dramatically for Rio and Fortescue (and Gina). They are all much “longer” iron ore (Fortescue fully 100 per cent) and with no oil downside exposures.