26/11/2008 - 22:00

BHP looks long term, drops Rio bid

26/11/2008 - 22:00


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BHP Billiton is the world's biggest mining company so it was fitting it was BHP that decisively marked the end of the five-year global resources boom this week.

BHP looks long term, drops Rio bid

BHP Billiton is the world's biggest mining company so it was fitting it was BHP that decisively marked the end of the five-year global resources boom this week.

The company stunned investment markets on Tuesday evening when it announced the withdrawal of its takeover offer for mining rival Rio Tinto.

It was part of a package of announcements that was staggering in its significance.

BHP said it was writing down the value of its Ravensthorpe and Yabulu nickel operations by $US2.1 billion ($A3.2 billion), which equates to three quarters of its investment in the project.

This followed cutbacks and mine closures by several mid-tier nickel producers, including Minara Resources, Norilsk Nickel and Consolidated Minerals, which have been hit by plunging nickel prices.

At the same time as its announcement on the Rio Tinto takeover, BHP signalled its long-term faith in the iron ore sector by approving a massive $US4.8 billion ($A7.4 billion) expansion of its Pilbara operations.

The Rapid Growth Project 5, which involves spending on mines, railways and port facilities, will increase the capacity of BHP's iron ore operations by 50 million tonnes to 205mt per year.

That takes BHP close to Rio Tinto's production capacity in the Pilbara of 220mt.

BHP's chief executive of ferrous and coal, Marcus Randolph, said this decision highlighted the company's confidence that the long-term outlook remained positive.

BHP chairman Don Argus also spoke about the positive long-term outlook but it was the more immediate prospects that weighed on the company's directors when they scrapped the Rio takeover offer.

"We have concerns about the continued deterioration of near-term global economic conditions, the lack of any certainty as to the time it will take for conditions to improve and the risks that these issues imply for shareholder value," Mr Argus said in a statement.

When the collective brains trust at the world's largest mining company is unsure about the global outlook, it highlights what strange and volatile times we are in.

BHP has deep tentacles in China, which has been the main engine of global economic growth, and its market intelligence would be second-to-none.

Yet it has effectively admitted that it does not know when China, or the rest of the world, will recover from the current slide.

The withdrawal of BHP's takeover offer is prudent but still amount to a massive climb-down. As the suitor of its smaller rival Rio, BHP tried hard to maintain a positive stance on the economic and market outlook.

Its aggressive iron ore expansion still puts it at odds with most other producers.

Rio Tinto, Brazil's Vale and smaller miners like Fortescue Metals Group and Mt Gibson Iron have all announced cuts in iron ore production or delays in expansion projects.

Was BHP clutching at one piece of positive news to try to offset the negatives on the Rio takeover and the Ravensthorpe write-down?

Only time will tell whether approval of its latest expansion project is a brave move that enables it to take advantage of long-term demand growth from China and other emerging economies, or leaves it with extra debt and excess capacity.

The answer to the latter question will partly depend on whether competing projects proceed.

FMG plans to lift its output to 80mt and potentially more.

In the Mid West, a raft of producers, including Murchison Metals, Midwest Corporation and Gindalbie Metals are hoping to develop projects that collectively will produce some 50mt of iron ore.

Hong Kong group Citic Pacific Mining is spending $5 billion on a new iron ore mining operation that plans to produce 27mt of magnetite concentrate and pellets per year.

Most of these projects have Chinese backing, reflecting the desire of Chinese steel producers to lock in long-term supplies.

The Chinese steel producers also need energy, which underpins the giant liquefied natural gas projects planned for WA's north-west.

Collectively, iron and LNG projects could go a long way towards securing WA's economic growth over the next five to 10 years. But the growth won't be as frenetic as we have experienced during the past five years.


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