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Miners to follow BHP's move in cutting capital expenditure
By Fitch Ratings |
September 5, 2012, Wednesday
|
Print Edition
Print Edition
EXPECTATIONS for a sustained period of lower prices will push more mining companies to follow the example of BHP Billiton in trimming capital expenditure and reassessing major projects.
While sustained lower market prices will harm margins and cash flows, BHP Billiton's decision to defer spending on two major projects shows that miners have the time to respond in an orderly manner, limiting the negative credit impact.
This is in contrast with 2009, when prices fell rapidly and dramatically, limiting the ability of producers to protect their credit profiles.
Even under Fitch's more conservative commodity price assumptions, appropriate early stage action by miners to reduce capex and other cash outgoings should ensure that adequate rating headroom is maintained for a majority of rated companies.
BHP Billiton's decisions to review the timing and scope of the Port Hedland Outer Harbour and Olympic Dam projects is a sensible response to the current environment, as the expected volumes from these projects can be partially met by other less capital intensive projects.
Infrastructure cost
In the case of the Olympic Dam uranium/copper mine, the capex-to-additional-volume ratio of the previously planned expansion was high compared to other copper options available to BHP Billiton.
This difference has reflected the infrastructure and other costs of converting the mine from an underground one to open pit operation.
Doubts about the economics of the project have long existed, which have not been helped by a perfect storm of rising mining industry inflation, falling copper prices and uncertainty over long-term uranium demand caused by the Fukushima nuclear disaster.
At the Port Hedland project, specific considerations also apply. BHP Billiton indicated that it had identified the potential to increase iron ore shipments from the existing inner harbor at significantly lower cost than constructing the outer harbor project.
Significantly, the underlying resources remain in the ground and BHP Billiton has the option to restart both projects if iron ore demand exceeds the capacity of the Port Hedland harbor or if rising prices or a less capital intensive design can improve the economics of the Olympic Dam expansion.
The above article originally appeared as a post on the Fitch Wire credit market commentary page on August 31. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
While sustained lower market prices will harm margins and cash flows, BHP Billiton's decision to defer spending on two major projects shows that miners have the time to respond in an orderly manner, limiting the negative credit impact.
This is in contrast with 2009, when prices fell rapidly and dramatically, limiting the ability of producers to protect their credit profiles.
Even under Fitch's more conservative commodity price assumptions, appropriate early stage action by miners to reduce capex and other cash outgoings should ensure that adequate rating headroom is maintained for a majority of rated companies.
BHP Billiton's decisions to review the timing and scope of the Port Hedland Outer Harbour and Olympic Dam projects is a sensible response to the current environment, as the expected volumes from these projects can be partially met by other less capital intensive projects.
Infrastructure cost
In the case of the Olympic Dam uranium/copper mine, the capex-to-additional-volume ratio of the previously planned expansion was high compared to other copper options available to BHP Billiton.
This difference has reflected the infrastructure and other costs of converting the mine from an underground one to open pit operation.
Doubts about the economics of the project have long existed, which have not been helped by a perfect storm of rising mining industry inflation, falling copper prices and uncertainty over long-term uranium demand caused by the Fukushima nuclear disaster.
At the Port Hedland project, specific considerations also apply. BHP Billiton indicated that it had identified the potential to increase iron ore shipments from the existing inner harbor at significantly lower cost than constructing the outer harbor project.
Significantly, the underlying resources remain in the ground and BHP Billiton has the option to restart both projects if iron ore demand exceeds the capacity of the Port Hedland harbor or if rising prices or a less capital intensive design can improve the economics of the Olympic Dam expansion.
The above article originally appeared as a post on the Fitch Wire credit market commentary page on August 31. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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