BHP holds line on iron ore and plugs into battery demand
BHP is not expected to expand its Pilbara iron ore operations in response to supply problems from Brazil.
BHP is not expected to expand its Pilbara iron ore operations in response to supply problems from Brazil, according to chief financial officer Peter Beaven, as the mining giant pivots towards battery minerals and away from thermal coal.
Mr Beaven delivered a presentation on BHP’s long-term strategy to investors and analysts yesterday, flagging a shift in BHP’s thinking to produce commodities demanded by a world reliant on renewable energy in the long term, not fossil fuels.
But where Rio Tinto chief executive Jean-Sebastien Jacques told investors recently his company was weighing its options to increase Pilbara iron ore production beyond its 360 million tonne a year target in response to Vale’s dam-driven problems in Brazil, Mr Beaven told investors yesterday there had been no change in BHP’s thinking on its Pilbara iron ore assets.
“We are unlikely to add significant new capacity in iron ore or metallurgical coal beyond productivity tonnes,” he said.
“We should squeeze the maximum value out of the existing invested capital.”
BHP’s Pilbara output is constrained by its port facilities and is effectively capped at 290 million tonnes a year. This financial year it expects to ship 265 million- 270 million tonnes, downgrading its production guidance on the back of the impact of cyclones and last year’s runaway train incident.
Instead, BHP is looking to electric vehicles and the battery revolution for future growth, confirming it will continue to look for more copper — and potentially to add to its once-unloved nickel division — to keep abreast with advances in battery technology.
“We can, with a degree of conviction, say that adding options in copper and nickel sulfides (as opposed to laterites) are likely to be a sound investment. Demand will grow and, at the same time, new supply sources will be hard to discover and permit, and will be more expensive to develop,” Mr Beaven said.
Despite BHP’s desire for copper, Goldman Sachs analyst Paul Young noted a “disappointing” downgrade of BHP’s Olympic Dam expansion project in South Australia, saying new figures from the company stripped some copper from the mine’s outlook.
“A disappointing de-rate of the Olympic Dam ‘BFX’ copper expansion from 330ktpa to 240-330,000 tonnes per annum due to the orebody not being as contiguous as previously thought,” Mr Young said in a client note. “Despite the lower copper production target, capex for the expansion is unchanged at $US2 billion to $US2.5bn.”
BHP will be looking to its nickel division for future growth, with Mr Beaven flagging a hunt for new resources to feed its Nickel West business in WA. Instead of selling its nickel operations, BHP’s thermal coal mines could now be for sale.
Mr Beaven’s presentation said the use of coal to produce power could be phased out “sooner than expected”, although BHP expected demand to stay strong in the short term. “Thermal coal should remain a large market, but over time we expect it to plateau and then decline as headwinds strengthen. Our energy coal exposure is just 3 per cent of our asset base. But it is made up of two very high quality mines which generate high margins. Our focus will be on maximising value to shareholders, whether we are long term owners or not.”
Nickel expansion will mostly come from WA exploration but Mr Beaven also indicated BHP was willing to buy assets.
“We are interested in adding more nickel sulphide resource to our portfolio. So we should continue to add exploration options in these areas. We do not need to do M&A. But we never discount it as a way to acquire great resource bases, especially early in the life of a project when the optionality is not necessarily fully understood or valued.”