BHP Shelves Olympic Dam Project as Profit Falls a Third

In the latest sign that Australia’s resources boom has passed its peak, BHP Billiton’s (BLT:LSE) earnings have fallen by more than a third, forcing the company to postpone some planned projects requiring high levels of capital investment. On Wednesday (August 22), the world’s biggest mining company, announced that it will delay the $20 billion (£12.6 billion) expansion of its Olympic Dam copper-uranium mine in South Australia. BHP also put approval for about $68 billion (£43 billion) worth of investment in other major projects on hold as falling commodity prices weighed on the miner’s full-year performance. The Australian miner’s profit after tax for the year to the end of June was $15.4 billion (£9.8 billion), down 35 per cent on the previous year, marking its first annual profit fall in three years.

Olympic Dam, the world’s fourth-largest known copper deposit and largest uranium source, was one of the mega projects due to go to the BHP board for final approval by December 15, 2012, the deadline which had been agreed with the South Australia state government. As the mining company announced it will not be able to adhere to this deadline, it postponed the approval of all major projects to June 2013.

“As we finalised all the details of the project in the context of current market conditions, our strategy and capital management priorities, it became clear that the right decision for the company and its shareholders was to continue studies to develop a less capital intensive option to replace the underground mine at Olympic Dam,” BHP chief Marius Kloppers said explaining the project delay.

Investors, who have been pressing the major miners to return capital to shareholders rather than splash out on major projects amid global uncertainty, welcomed BHP’s decision to hold back on the project to quadruple copper output from Olympic Dam. For analysts, however, this move has once again signalled the end of the Australian mining boom. Last month, a study by Deloitte Access Economics said that Australia’s much vaunted resources boom had at most two years to run as the strong dollar and rising costs make Australia an increasingly expensive option for overseas investors. Additionally, China, the world’s largest commodities consumer, is experiencing an economic slowdown, shifting the country’s imports towards a greater focus on cheaper producers.

“China is slowing, India is slowing, Brazil is slowing. And you’re seeing those prices come off at the same time as costs have risen in Australia in recent years,” Chris Richardson, director of Deloitte Access Economics, told ABC Radio. “It does not mean that the investment boom goes away tomorrow. You know there’s a lot of petrol left in the tank for another year or two years still to come. But beyond that, the strong bit of Australia’s economy is starting to be called into question,” he explained.

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On the other hand, BHP expressed its belief that the Australian mining industry environment would stabilise before improving in the first half of the 2013 financial year. This recovery will provide support for commodity demand and pricing in the short to medium term:
“In the short term, we expect volatility in commodity markets to persist as temporary weakness in the manufacturing and construction sectors across all key markets is expected to weigh on market sentiment. However, in the medium term we expect supportive economic policy and a broad growth bias, particularly in China, to lead to measured improvement in the external environment beginning in the first half of the 2013 financial year,” the company stated.

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