BHP Billiton's decision to mothball its planned $20-billion (U.S.) expansion of an Australian copper and uranium mine shows that the industry's long-awaited capital spending cull is under way. Cue predictable baying from investors who want miners to shovel unspent cash in their direction. But that's the wrong reaction. More projects may be under pressure as mining margins fall. But there's no shortage of attractive opportunities for big miners to put their capital to work. Companies, and their investors, need to make balanced decisions that secure development through the cycle.
Olympic Dam was always going to be tricky. The mine sits on top of the world's biggest known uranium deposit and the fourth-biggest copper find in the world. But the main ore body is buried under a billion tonnes of worthless rock. Removing it is an increasingly expensive proposition in Australia, where mining costs are still rising despite weaker commodity prices. With little relief in sight, proceeding with the dig would have risked destroying value.
Cutting as-yet-unapproved projects is one thing. But it is another thing to halt investment in active mines. Most companies have only made minor tweaks to spending plans over the next two to three years. BHP, for example, is still committed to spending nearly $23-billion on 20 different projects – mainly expansions of existing sites – that will deliver their first buckets of minerals by 2015. Meanwhile, efficient operators can put iron ore from Western Australia on boats to China for as little as $30 a tonne. That's far below even today's depressed $105 a tonne selling price and makes the decision to add capacity there a no-brainer.
Olympic Dam is unlikely to be the industry's only large project left on the drawing board. And investors who expect the billions of dollars of forgone spending to end up in their pockets will probably be disappointed. BHP's decision to pay a lower-than-expected dividend only serves to highlight the tension. But the current crop of mining bosses, many of whom came of age during the 1990s, won't want to let attractive opportunities slide.
Underinvestment in the 1990s left the industry ill-prepared for the China boom. It is a mistake that would be silly to repeat for the sake of giving beleaguered portfolio managers a few extra points of this-quarter investment performance.