BHP to spend $9.5bn on Australian iron ore, coal expansion

BHP Billiton has approved USD 9.5 billion of capital investment to expand its Australian iron ore and coal mining operations, showing that planned mining and carbon taxes are not crimping its growth plans.

The world's biggest miner has decided to expand its own operations and infrastructure rather than chase ambitious takeovers after three failed deals as it scrambles to meet rising demand from Asia.

The investments announced for its Pilbara iron ore project, plus its Bowen Basin and Hunter Valley coal projects, mark the first details BHP has given of a planned USD 80 billion in investments over five years.

"This is putting meat on the bones with regards to timing, actual tonnes and the amount of capex," said Constellation Capital Management portfolio manager Peter Chilton.

"Rio has done the same, trying to get more out of their existing assets. It's not like making a big acquisition, these are all things they have control over and manage already," he said.

Other major capital projects include expanding the Olympic Dam copper and uranium mine. BHP has previously announced plans to spend around USD 20 billion on that. Analysts estimate the massive Jansen potash project in Canada, still in the feasibility stage, could cost up to USD 13 billion to build.

Analysts have noted BHP's average annual spend over the next five years was not much bigger than rival Rio Tinto's  plans for 2011 and 2012.

BHP said the investment would develop port capacity and reduce bottlenecks so that port and rail systems could operate at full capacity, as mine production continued to grow.

The announcements came just a day after Australian mining companies won a concession over a plan to tax their profits at 30%, with the government agreeing to repay current royalties the miners pay to state governments.

BHP ferrous and coal chief Marcus Randolph said the concession had been expected, and the profits tax on iron ore and coal mines had long been factored into the miner's plans.

"We reached a framework agreement with the government quite a while back and our assumption was that agreement was going to be respected. So we continue to operate and invest on that premise," Randolph told a media briefing.

Carbon tax

The company had also factored a planned carbon tax into its analysis for several years, and such a tax would not make a big difference to these projects as they were not major users of energy.

The Australian government has announced plans to price pollution with the introduction of a tax on carbon from mid-2012, sparking protests from Rio, Woodside Petroleum and other resource firms.

BHP's shares were up 0.5% at A$44.92 at 0350 GMT, underperforming the broader market's 1.1% rise.

The top global miner said it would invest USD 6.6 billion in a total investment of USD 7.4 billion to continue production growth in its western Australian iron ore operations, to increase annual capacity to above 220 million tonnes.

Investment will include the development of the Jimblebar mine, rail links and additional berths and ship loaders at its Port Hedland site.

The company is the world's third-largest iron ore miner behind Rio Tinto and top producer Brazil's Vale.

Global seaborne supply of the key steelmaking component has been increasing by 20-40 million tonnes in recent years, but expansion plans by global miners could boost annual supply by around 100 million tonnes from late 2012 to early 2013, analysts have said.

"The big risk that hangs over the iron ore market is when you look at 2013, 2014 and all the supply that's expected to come online following a lot of these capital expenditures," said Ben Westmore, commodity economist at National Australia Bank.

BHP said it also approved three key metallurgical coal projects at its Bowen Basin site in Queensland.

BHP will put in USD 2.5 billion of the total USD 5 billion investment with 50/50 partner Mitsubishi Development Pty Ltd, which will see the new Daunia mine developed, its Broadmeadow mine's life extended by 21 years and the Stage-3 expansion of its Hay Point coal terminal.

"In a broader sense, the thing that stands out is the cost of expansion ... it just shows you the costs for a new coking coal mine are just getting higher and higher," said Andrew Harrington, an analyst with Patersons Securities.

"The (coking coal) price has risen so strongly that it's now worthwhile to go for more expensive projects, but it also means you start to embed into the supply side of the economy a higher cost base. Your prices are now going to be bounded by a higher floor," he said.

Strong demand from Asian steelmakers has sent prices of coking coal surging.

Contracts for coking coal in Asia for delivery in the second quarter of 2011 are expected to settle at around USD 330 per tonne, up from USD 225 per tonne in the first quarter.

BHP said it also approved USD 400 million to expand Hunter Valley Energy Coal in New South Wales, to boost production.

BHP has ditched three major deals in as many years, including its USD 39 billion bid for top global fertiliser maker Potash Corp last year, mainly on regulatory concerns.