BHP Hedges Against Metals with Opening of Macedon Gas Project

Michael Teague  |

BHP Billiton Ltd. (BHP) , by market-cap the world’s largest industrial metals and minerals miner, took yet another step towards solidifying its spot as a leading energy producer as well when it officially announced the opening of its new Macedon project in Western Australia.

The announcement came last Friday, and was lost amid the hubbub of the sell-off that was occasioned by St. Louis Fed President James Bullard’s comments regarding fiscal stimulus, but is significant for a number of reasons.

Macedon is a milestone for the company, as it is BHP’s largest gas project in the country. The plant will process natural gas from an offshore production lease in the Exmouth Sub-Basin, where the company has already been operating, and is expected to turn out enough product to supply some 20 percent of Western Australia’s consumer and industrial gas needs.

But the successful opening of the $1.5 billion project is also important for reasons that relate to its more traditional business, namely industrial metals production. The company has spent a great deal of effort over the last years adjusting output to meet the astronomical growth-needs of its biggest client, China. This has meant the prioritization of hard metals such as iron-ore and copper, and indeed, BHP’s last production report showed record increases in the production of both.

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The shift to iron-ore, and to a lesser extent copper, has been an industry-wide trend, and one that appears to be running head on into slower Chinese growth, as the Communist Party scrambles to tighten lending restrictions in an attempt to head-off the sort of housing bubble and subsequent financial crisis seen here in the US some five to six years ago. As a result, a number of financial institutions are predicting that iron-ore overstock could lead to a reduction of the spot price of the metal from where it currently sits at around $132 per ton by around half next year, in the worst estimates to below $80.

BHP stands out in this scenario because it has hedged against this somewhat unexpected situation by its forays into shale oil and gas, of which the Macedon project can be seen as the flagship. Furthermore, it bodes well that the project went online in a timely manner, meeting deadlines without any significant delays. This could be an indication that BHP is building dexterity and adding to valuable experience in the increasingly important shale game.

The project is 71.43 percent owned by BHP, with the rest held by Apache Corp. (APA) , an independent explorer and producer. Shares for BHP were up slightly, about one-third of a percent to $67.60. Apache was down slightly, about one-fifth of a percent to $87.75.


[Image: The Exmouth Gulf, Australia. Courtesy of Wikimedia Commons]

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