Reuters: Financial Services and Real Estate: UPDATE 1-BHP chief says spending necessary through commodity down cycles

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UPDATE 1-BHP chief says spending necessary through commodity down cycles Jun 6th 2012, 02:21 Tue Jun 5, 2012 10:21pm EDT * BHP CEO says down cycles no time to stop spending * Capital-intense mine projects need to take longer-term view, he says * Sees global gas "revolution" underway By James Regan June 6 (Reuters) - BHP Billiton , the world's biggest mining company, said on Wednesday it was necessary to maintain investment in new projects even during downturns in commodities prices. BHP last month scrapped a five-year, $80 billion capital spending plan, citing uncertain global economic conditions. That included China, where it supplies millions of tonnes of iron ore, copper, and other industrial raw materials. BHP Chief Executive Marius Kloppers singled out gas - currently at a low ebb - as a commodity that should grow in demand over the medium term due to a worldwide "shale, hydrocarbon revolution". An oversupply in the United States has led to the price of gas plunging from around $13 to around $2 for each 1000 cubic feet since BHP acquired Petrohawk Energy and other shale interests for $17 billion last year. "It is quite often the case that an investment decision in a particular commodity will be made in a part of the business cycle that results in a low price environment for that particular commodity, but the investment is made nevertheless in recognition of the expected future demand and prices," Kloppers said in comments to a business forum in Perth, Australia. Slumping commodity prices in general and escalating costs have squeezed cash flows, pushing BHP to join rival Rio Tinto in reconsidering the pace of their long-term expansion in countries such as Australia and Canada. The miner was planning to finance the expansion with its cash flows, which analysts forecast may fall 20 percent to around $24 billion in the year ending June 30. BHP has long maintained that it is committed to keeping its single-A credit rating, another constraint on spending. As of December, the company had net debt of $21.5 billion. BHP shares have been on a near-uninterrupted decline this year, losing 20 percent in value since early February. Three major BHP projects are seen by analysts as vulnerable to setbacks as markets soften: an outer harbour development at Port Hedland in Western Australia crucial to its iron ore growth, the expansion of its Olympic Dam copper and uranium mine in South Australia, and its Jansen potash project in Canada. In Australia, where the company employs more than 35,000 people, Kloppers said labour allocation and rising costs associated with a strong Australian dollar were dulling the competitive edge of some projects. Australia had turned from a low-cost to a high-cost operating environment, he said. Despite criticism from some shareholders, including its single biggest, BlackRock, over spending, BHP has given little hope to investors expecting that more discipline on major projects could mean a fresh share buyback. "We share those concerns which have been widely voiced, that we would certainly welcome a greater focus on capital management initiatives and a more circumspect approach to some of the items in the capital pipeline," said Ben Lyons, who helps manage A$500 million in funds at ATI Asset Management. BHP's challenge is to balance the long-term demand outlook with short-term economic developments, Kloppers said. "Our ability to deliver robust financial performance is achieved through the consistent application of our strategy - by developing our high-quality diversified portfolio and maintaining our commitment to invest through the cycle," he said. Link this Share this Digg this Email Reprints

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