License article

Don't budget so much on us - miners

In the countdown to the federal budget, miners have made a lot of noise about cost blowouts threatening tens of billions of dollars of projects due for final investment decision approval this year. It is a sledgehammer reminder to the Treasurer, Wayne Swan, that if he goes too far trying to get the budget back into surplus - by taking a few more pounds of flesh from the miners - there will be far-flung consequences.

Falls in commodity prices, a softening in China's economic growth, a high dollar and massive blowouts in the costs of labour, materials and equipment have conspired to make the miners' threats a distinct reality. The changing circumstances in the mining sector also raise questions about the government's original minerals resource rent tax estimates of $10.6 billion.

Indeed, the Fortescue Metals Group chairman, Andrew Forrest, said it wouldn't be anywhere near this and estimated that the tax would cost his company between zero and $50 million over five years. The big miners Rio Tinto and BHP Billiton have yet to put an estimate on the cost but the talk is it will be a fraction of what the government expected.

If the government chooses to stick with its current estimates when it hands down its budget tomorrow night, it will put itself in the invidious position of being accused of using rubbery figures to achieve its promise of a surplus.

Concern over the amount of revenue the government will be able to raise through the minerals resource rent tax goes a long way to explaining recent speculation the budget might try to save billions of dollars a year by removing the diesel fuel excise rebate as well as changing the tax treatment of overburden removal. Interestingly, by week's end, the talk from the miners was that the diesel fuel rebate would be left untouched - for now.


The problem facing the government is a two-speed economy where manufacturing, retail and tourism are being battered while the mining sector and associated industries continue to do well but at a decelerating speed. This means if it goes too far taxing the miners, it might give them the excuse they are looking for to pull the pin on some projects that are on the borderline of being uneconomic.

In BHP Billiton's case, it has a pipeline of massive projects, some of which might not happen, or if they do, they are likely to be rolled out over a longer period due to changing global and domestic market conditions and the spectre of new taxes such as the carbon tax. These projects include the Olympic Dam expansion, which could cost up to $30 billion, the outer harbour expansion at Port Hedland, which could also cost up to $30 billion, and a $10 billion-plus development of its Jansen potash project in Canada.

A committee is believed to be sizing up the cost of these projects as well as market conditions before they are presented to the board for final approval later in the year. If the talk is right and Olympic Dam is $30 billion, then it would not surprise if BHP tried to find a generous Chinese partner to help bankroll the project.

There is already talk that BHP is looking at pushing out the Olympic Dam expansion timetable given the mounting pressure from investors not to spend too much capital on projects that have become increasingly expensive. One contractor currently doing work for BHP said he had heard from people on the ground to expect extensions to his company's contracts. This suggests BHP could slow down the speed of the open-cut expansion.

Britain's Sunday Times newspaper recently wrote that BHP faces a $5 billion write-down after two ill-timed acquisitions in America, raising doubts on the future of Marius Kloppers, the chief executive. One analyst in Australia suggested the write-down could be closer to $10 billion, depending on how much oil it can drill.

It is not the first time Kloppers's future has been speculated about but it has intensified since his expensive and ill-timed $US20 billion buying spree on two shale gas acquisitions; the first, to take control of oil and gas fields in Arkansas from Chesapeake Energy in February last year, followed by the $15 billion acquisition of Petrohawk a few months later.

This, coupled with other factors, has prompted some investors to reduce their weighting in BHP. In March the world's largest money manager, Blackrock, announced it had reduced its weighting in BHP.

In the same month Macquarie released an equity strategy report that indicated it had reduced its portfolio position in BHP from neutral to underweight. ''BHP is suffering from rapidly rising costs, less than successful expensive forays and very expensive capex commitments with very long lead times. In our view EPS growth for BHP will be deeply negative in FY12 (lower than -20 per cent) and investors are not being compensated for holding the stock given the low payout ratio and low dividend yield.''

Since BHP made its expensive shale oil acquisitions the price of gas in the US has more than halved. This has called into question whether the purchases were poorly timed or Kloppers misunderstood the dynamics of the domestic US market.

The talk in the market is how big a write-down the company will have to make on its two acquisitions in the next 12 months, how much longer Kloppers will remain chief executive and what will happen to BHP's pipeline of mega-growth projects.