Australian fund urges miners to rein in new projects

AUSTRALIAN Foundation Investment, a fund owning shares in BHP Billiton and Rio Tinto Group, has said mining companies should cut spending on new operations because of declining commodity prices.

Companies would start to question the economics of projects as prices fall and costs rise, the fund’s CEO, Ross Barker, told Australia’s Inside Business TV programme at the weekend. “That is obviously something we would encourage because we don’t want to spend large amounts of money and not get good returns,” Mr Barker said.

Miners were reassessing spending plans as commodity prices dropped amid concern over growth in Europe and China, the biggest metals consumer. BHP will delay a $33bn expansion in Australia for two years until 2014 because of falling commodity prices, The Australian newspaper said on Saturday.

“There is much more economic growth to feed through China and other emerging economies, but on the other hand, the period of huge cash flows from very high commodity prices will be coming to an end,” Mr Barker said.

“There are still an enormously large number of mining projects in train. The big question for immediate to long-term investors is how many of those will actually get up.”

China’s economy expanded at its slowest for six quarters in the three months to the end of June, while the International Monetary Fund cut its world economic growth forecast last month for next year to 3,9% from 4,1% estimated in April as Europe’s debt crisis slows expansion.

BHP, the world’s largest mining company, needed to be flexible in the face of change, CEO Marius Kloppers said last month.

BHP’s net income may have declined to $17,4bn in the year to June 30, analysts said. That was from a record $23,6bn a year earlier.

Vale, the second-biggest mining company, posted its lowest quarterly profit in more than two years last week because of falling prices. Net income fell 59% in the second quarter to $2,6bn, it said last week.

BHP’s board has been due to decide on proceeding with the Olympic Dam copper-uranium-gold mine expansion by the end of this year. Mr Kloppers warned in May that rising costs and easing prices might change the economics of certain projects.

Aside from Olympic Dam, BHP’s board is also due to decide on two other major projects — an iron-ore port expansion in Western Australia and a potash project in Canada — by the end of the year. The three projects could cost a combined $68bn, according to a Deutsche Bank estimate in May. It said Olympic Dam alone would cost $33bn.

BlackRock, the largest holder of BHP’s Australian stock, said in March it had trimmed holdings because of concerns that spending on Olympic Dam and shale gas assets could curb returns.

Rio Tinto withdrew from talks in April about a A$9bn ($9,4bn) port expansion in Queensland, citing volatility and costs.

Rio said this month it would shed jobs at the Clermont thermal coal mine in Queensland because of rising costs and falling prices. Thermal coal prices have declined 20% this year.

Rio CEO Tom Albanese said project costs in Australia had doubled.

BHP would fall short of a five-year spending target of $80bn for expanding assets as commodity prices declined, chairman Jac Nasser said in May. Bloomberg