Tight cashflow at the heart of BHP delays: Bartholomeusz

BHP Billiton has been signalling for months that the cluster of mega-projects it had in its pipeline were going to be out on the shelf for at least 12 months, if not longer. Yesterday it confirmed the obvious.

The Olympic Dam expansion and the Outer Harbour project at Port Hedland, both $US20 billion-plus projects, and the Jansen potash project in Canada, a $US10 billion-plus greenfields project, were to be the massive next wave of BHP expansion projects as part of the $US80 billion investment pipeline that Marius Kloppers once touted.

Yesterday BHP said that with $US22.8 billion of major projects currently being executed it is ”largely committed” for the 2012-13 financial year and that ”no major project approvals are expected over this timeframe”.

The reason is obvious. Its cashflows have crashed, from $US30 billion last year to $US24.4 billion, and the group is now borrowing to fund the gap between its operating cashflows, its spending and its dividends.

In the year just ended BHP’s interest-bearing liabilities increased from $US19.3 billion to $US28.2 billion and while its gearing remains reasonably conservative at 26% it simply doesn’t have the surplus cashflows to fund those massive prospective projects.

It isn’t alone. All the major resource groups were caught unprepared by the rapidity and extent of the decline in commodity prices that has occurred as China’s economy has slowed in response to the woes within the eurozone and the sluggish state of the US economy.

BHP, Rio Tinto, Vale, Xstrata, et al, are also shelving previously planned projects and adopting a far more defensive stance as it has become apparent that the ”super” element of the commodity cycle and the windfall price-driven cash bonanzas it generated has ended.

If anything the BHP result, in which earnings before exceptional items fell 21% from $US21.7 billion to $US17.1 billion, understates the extent of the reversal of fortunes as the prices of most of the key commodities have been falling steadily through this year. Most of them are down 30%-plus since the start of the year and even more from their peaks last year – iron ore prices are down about 40%.

As it was BHP attributed $US2.2 billion of the earnings reduction to price impacts, offset to some degree by $US308 million from a net increase in volumes.

In the absence of a near term strengthening of prices, which appears unlikely given that China, despite efforts to reflate its economy, is struggling to hold its slowing growth rate, the full effects of the price falls are likely to be felt in the first half of this financial year.

It is the rate of change in the external circumstances that blindsided the big miners. A year ago their conversations were all about growth and the size of their project pipelines; today they are about discipline and frugality even while they remain convinced that the medium to longer term outlook for China and commodity prices and volumes remains positive.