Neither Australia’s major political parties nor the total community fully appreciates the fundamental change that has taken place in BHP – Australia’s largest taxpayer and 10 per cent of the ASX.
I have known every BHP chief executive for the last six decades, and until recently every one of them rated their performance on diversification and their ability to leave their successor more resources than they were handed by their predecessor.
BHP has abandoned both pillars.
Instead of diversification, it now picks winners, and it will concentrate its investment in two global growth areas – electrification and food production. And picking winners goes further.
In food, it’s potash and for electrification it’s copper and nickel.
Australia’s greatest tax revenue producer, BHP’s iron ore, is not on the list and so BHP is not joining the scramble for green steel because it does not see Australian iron ore a growth area. The advent of African iron ore (Rio Tinto and the Chinese), the eventual return of European scrap to the market and the changing pattern of Chinese demand means that in BHP’s view the bonanza of iron ore returns will not continue forever.
The price may fall in due course. If BHP is right, then Australia has a future revenue problem. But it has chosen Australia as the site of two of its potential biggest electrification investment targets via copper and nickel.
In the old days Australia could sit back and count the future growth, but once again the BHP strategy has totally changed and Australia may miss out and be left with declining iron ore tax revenues.
In the past, BHP didn’t always establish clear returns on many of its investments, which sometimes turned out to be catastrophes. Whereas once dividends were a secondary consideration, the new BHP proudly says to its shareholders that it has become the largest dividend paying company in the world.
If BHP doesn’t think there is a return on an investment, then the shareholders get the money via dividends, although shareholders have been guaranteed a payment minimum of 50 per cent of profits.
If Australia is going to maintain anything like the current revenues it gets from iron ore, then new mining projects need to be developed whether they be copper, nickel, rare earths or perhaps lithium.
A month ago, BHP announced a $7.5bn investment in the next stage of Canadian potash. It was telling its shareholders that rather than pay that $7.5bn in dividends, it was investing the shareholders’ money in potash because of the level of returns.
For BHP, that’s a totally new concept.
BHP’s biggest and most exciting potential copper project is the South Australian copper, uranium and gold belt, which the company enhanced with the takeover of Oz Minerals.
Iron ore mining is open cut and basically the raw ore is shipped abroad with huge margins.
The South Australian deposits involve underground mining of material that requires concentrating and smelting.
It’s a much higher-cost operation, and returns need to be very carefully calculated.
In ignorance of what is taking place, Anthony Albanese is allowing his employment minister to set rules that will substantially increase the costs of mining for BHP.
The Albanese government shouts from the rooftops: “What’s the problem? BHP is making a fortune, so they can afford to pay workers on $150,000 incomes substantially more.”
And, of course, the ALP politicians are right – as long as the iron ore price stays high.
But if those sort of wage rates are superimposed on the South Australian copper underground mines then, unless there is a sharp rise in the price of copper, those mines will have marginal economics.
Today’s BHP policy means that unless there is a return, the money goes to shareholders via a dividend, or it seeks other projects.
In BHP’s vision of the future, the mining industry will simply not be able to produce enough copper for the envisaged electrification projects and while the price will boom, only the best projects will be selected for the first round of copper investment.
With the Albanese government threatening the ranking of the South Australian copper belt economics, naturally BHP is searching the world for other copper projects as potential replacements.
Further expansion in Chile is almost a certainty and with Rio Tinto it is making yet another push to convince the Apache Indians to allow development of the Resolution mine in Arizona. This enormous US project starts to rank higher. New projects are being considered.
As in iron ore, the Albanese government tells BHP: “You’re bluffing. South Australia will go ahead despite our industrial relations laws.”
They could be right, but in fact they are gambling with luxury social service projects like NDIS which can’t be sustained without substantial mining tax revenue
If the South Australian copper belt is stopped by the actions of the Albanese government, then, along with the Queensland increase in coal royalties from 15 to 40 per cent, it will signal to the world that there are better places to invest in mining.
With the OZ minerals projects, BHP is or is currently set to produce about 300,000 tonnes of copper. Stage one of the increased output plan would take it to 500,000 tonnes and include a substantial new smelter.
In Canada, BHP sees power prices available for potash treatment that are substantially below what is envisaged by the renewable projects. In Canada, they understand that modern smaller nuclear reactors are both safe and produce power at much lower cost
That means to justify investment in South Australia employment economics are needed to offset the Canberra-imposed higher prices of power and, of course, skyrocketing building costs.
Australia leads the world in mining, and we have an opportunity to continue that lead, but we have elected a government in Canberra that has not understood what is happening in the mining world.
The independents are not likely to help BHP, but there is a good chance they will have pity on the other proposed victims of the industrial legislation – mortgage and rent stressed people, plumbers and gardeners and other contractors, truckies and so on.
In the longer term, if we have the money we can repair the damage the Albanese government is planning to inflict on those who are less well-off, but we can’t repair any substantial long-term damage to our biggest tax paying industry.
That means the blows to the less well-off that Albanese is planning will not easily be reversed.
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