Can't you hear, can't you hear the thunder? Right now, there are plenty of men at work down under who are currently idle, as fires burn at a major natural-gas-processing hub for Western Australia. Normally, such an event would have limited repercussions and attract far less attention, but in a world already weary from soaring commodity prices, this accident bears watching.
Explosions and fires erupted Tuesday at Apache's (NYSE: APA) Varanus Island facility, caused by ruptures in pipelines feeding natural gas from offshore operations. Outflows from the plant have been halted entirely, cutting off about one-third of Western Australia's gas supply. Apache says the duration of the closure won't be known until the fires are out and damage assessments completed.
Western Australia is home to some of the richest mineral reserves in the world, along with some of the largest mining operations. These mines depend on the natural gas that flows through Varanus Island. With the world's leading supply of iron ore, gold production of about 240 tons per year, and significant contributions of nickel and alumina, even relatively short-lived disruptions to mining operations could reverberate throughout the world's commodity markets.
So far, thanks to contingency planning and on-site diesel supplies, the larger miners have managed to keep operations at full capacity. Rio Tinto (NYSE: RTP), BHP Billiton (NYSE: BHP), Alcoa (NYSE: AA), and Newmont Mining (NYSE: NEM) have all hurried to issue comments that their production volume has been largely unaffected. Impacts to production costs, however, will certainly materialize as these companies burn expensive diesel fuel or secure temporary supply contracts from alternative sources.
Operations at Newmont Mining's Jundee mine and its Kalgoorlie joint venture with Barrick Gold (NYSE: ABX) have switched entirely to diesel. Newmont assured investors that operations will continue unabated as long as the disruption "doesn't go on for a long period of time [and] we're able to find an alternative [power] source." Australian miner Newcrest Mining, which operates the world-class Telfer gold and copper mine, warned that low diesel supplies could potentially threaten operations going forward.
For shareholders of Apache or any of the mining names listed above, keep your Foolish fingers crossed that the facility will be repaired in just a few days. If the damage is more severe, the affected miners' stocks could offer attractive entry points, since substantial production disruptions would likely be absorbed by resulting increases in spot prices.
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