January 23, 2013 1:49 am

BHP update fuels writedown speculation

BHP Billiton, the world’s biggest resources company by market value, has fuelled speculation of possible asset writedowns by again highlighting the pressures facing its aluminium and nickel businesses.

In its half-year production update, BHP on Wednesday said the strong Australian dollar and “weak pricing environment” continued to weigh on its Australian alumina and nickel operations.

Analysts reckon BHP will take an impairment charge against its aluminium business alongside half-year results next month. The book value of BHP’s aluminium assets is $8.6bn but analysts believe they are worth just over $5.4bn.

“Aluminium volumes were 1 per cent ahead of expectations but management stressed that a strong [Australian] dollar and pricing continue to squeeze operations – could this be warming the market up for a writedown?” asked Adrian Wood, analyst at Macquarie Securities.

Aluminium, the world’s most widely used metal after steel, continues to be plagued by overcapacity and strong Chinese supply growth. At just over $2,000 a tonne, its current price is little changed since 1980, making it the worst performing mined commodity tracked by the International Monetary Fund.

Last week, Rio Tinto said it would write down the value of its aluminium assets by $10bn-$11bn, mostly related to its disastrous purchase of Canada’s Alcan in 2007. The group also said it would take a $3bn impairment against recently purchased coal assets in Mozambique, a decision that forced chief executive Tom Albanese to step down.

In the wake of the writedowns, one of the world’s most influential mining investors, Evy Hambro of BlackRock, has attacked big miners for their reckless and profligate spending and called for greater capital discipline.

BHP took nearly $3.3bn of asset writedowns last year, the bulk of it on the ill-timed purchase of US shale gas assets in 2011. The remainder was a charge against its nickel division in Western Australia, acquired through its purchase of WMC Resources in 2005. Analysts believe BHP will write down the value of the business further.

In Wednesday’s production update, BHP said it was on track to deliver 10 per cent annual volume growth this year and next across its portfolio of commodities.

BHP said production of iron ore from its mines in the Pilbara region of Western Australia reached a record 46.3m tonnes in the three months to the end of December. It expects output of the key steelmaking ingredient to rise a further 5 per cent in the year to June.

Iron ore is BHP’s biggest business, accounting for over half of operating income last year. Restocking by Chinese steel mills saw the price hit a 15-month high of $158.50 a tonne a few weeks ago.

In oil and gas, BHP’s output of 59.9m barrels of oil equivalent in the December quarter topped market forecasts. The company also revealed that its US onshore business had produced 48,000 barrels of natural gas liquids per day, a 13 per cent increase on the same quarter a year ago.

Copper production was broadly in line with analysts’ expectations as was coking coal, where BHP flagged a substantial reduction in costs following the closure of two unprofitable mines.

“Overall this was a solid update from BHP with production largely in line but with sales slightly higher,” said Mr Wood. “What’s more, all key production guidance was reiterated, meaning that BHP remains on track to deliver its targeted 10 per cent annual growth.”

Shares in BHP were up 1.2 per cent at A$37.03 in midday trading in Sydney on Wednesday. They have gained nearly 20 per cent since early September, when the price of iron ore hit a low of $86 a tonne.

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