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BHP Facing the Perfect Storm?

SYDNEY -- BHP Billiton (ASX: BHP.AX) is facing major headwinds over delayed multibillion dollar expansionsshale gas writedowns, the impact of the Minerals Resource Rent Tax, or MRRT, the carbon tax, and failing investor confidence in CEO Marius Kloppers.

The company has announced that it hasn't made any decisions on its high-cost projects and that it was unlikely to approve any projects until at least December. BHP has three major high-cost projects that require board approval to go ahead: the AU$20 billion expansion of the company's Olympic Dam project, a AU$19 billion expansion of its Port Hedland harbor, and an AU$8 billion Canadian potash project.

The pressure is on the company to approve Olympic Dam before Dec. 15. That's the deadline for an indenture agreement with the South Australian government, which establishes the royalty payment levels for the project for 45 years. However, South Australian Premier Jay Weatherill said on Tuesday that the government would be willing to consider an extension of the deadline -- perhaps no surprise, given the amount of revenue that will flow into the state's coffers should the project go ahead.

The Australian reported today that the big miner has also decided to delay the AU$19 billion expansion of its Port Hedland harbor for two years. The newspaper added that mining contractors in Perth have allegedly begun laying off workers in anticipation of construction delays on the project.

With two megaprojects potentially delayed, one wonders when speculation will turn to the Canadian potash project.

In more worrying news for shareholders, there are reports that investors have lost confidence in Marius Kloppers during his five-year reign at BHP due to failed takeovers and delayed projects. Mr. Kloppers has also refused to confirm that he had the chairman's confidence, dodging the question when speaking to reporters yesterday.

Add in the MRRT, falling commodity prices, and the carbon tax, and the company finds itself in something of a perfect storm.

Australia's other big miners, Rio Tinto  (ASX: RIO.AX) and Fortescue Metals (ASX: FMG.AX), have also announced a slowdown in their expansion, but they could further curtail upcoming projects if commodities prices fall further.

All three companies have seen their share prices drop following the fall in commodity prices. Over the past six months, BHP shares have fallen 15%, Fortescue is down 14.8%, and Rio is down 10.7%, compared with the S&P/ASX 200 (INDEX: ^AXJO  ) index's 0.1% drop.

Foolish takeaway
Shareholders will be hoping some of these issues will be cleared up when the company reports its 2012 financial-year results later this month, and they'll be looking for positive updates on BHP's megaprojects.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool's purpose is to help the world invest, better. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription while it's still available. This article contains general investment advice only (under AFSL 400691). Authorized by Bruce Jackson.

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  • Report this Comment On August 28, 2012, at 6:56 PM, MHedgeFundTrader wrote:

    The decision by BHP Billiton, one of the world’s largest producers of copper, to postpone its planned $20 billion expansion of its Olympic Dam mine is sounding alarms about the near term state of the global economy. It is telling us that China is slowing faster than we thought, that demand for base metals is shriveling, and that we are anything but close to exiting out current market malaise. This is not good for risk assets anywhere.

    The news comes on the heels of a company announcement that earnings would fall from $21.7 billion to $17.1 billion this year. The weakest demand from China in a decade was a major factor. So was the Fukushima nuclear disaster, which dropped prices for uranium, another product of the Olympic Dam mine. Piling on the headaches was a strong Australian dollar, which escalated capital costs. BHP CEO, Marius Kloppers, has said that there will be no new expansion of the company’s capacity approved before mid-2013.

    Olympic Dam is the world’s fourth largest copper source and the largest uranium supply. The upgrade was going to involve digging a massive open pit in South Australia that would generate 750,000 tonnes of copper and 19,000 tonnes of uranium a year. Almost the entire output was slated to be shipped to the Middle Kingdom. When Chinese real estate flipped from a “BUY” to a “SELL” last year, the days for this expansion were numbered.

    I have been following BHP for 40 years, and a number of family members have worked there over the years. So I know it well, and can tell you that their pay and benefits are great. I have used it as a de facto leading indicator and call option on the future of the world economy. When the share price delivers a prolonged multiyear downturn as it has recently done, it is a warning to be cautious and limit your risk.

    Mad Hedge Fund Trader

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