Melbourne - The world’s two largest mining companies are planning to raise capital expenditure from decade lows as a firming rebound in commodity prices paves the way for at least $12 billion of growth projects.
BHP Billiton, the No. 1 miner, expects to raise spending by 15 percent in fiscal 2018, while Rio Tinto Group forecasts it will boost expenditure from next calendar year. Melbourne-based BHP is looking to approve about $4.7 billion of investments for a oil venture in the Gulf of Mexico and a copper project in Chile.
Any significant rise in the oil price could mean BHP boosts spending further, Chief Executive Officer Andrew Mackenzie said in an interview after reporting full-year earnings on Tuesday. The company had a 95 percent rise in second-half underlying profits.
“It would certainly go up a bit if we saw a big uptick in the oil price and we’d want to get going more aggressively with our oil developments, and particularly in our onshore business,” Mackenzie said. However, he sees capital expenditure remaining lower than at the height of commodities boom. BHP’s annual spend peaked at about $21 billion in fiscal 2013.
Read also: Miner BHP reports worst result since 2001
Raw materials prices are rebounding this year after five straight annual declines amid market gluts and slower growth in China, the top consumer. BHP is bullish on the outlook for oil and copper and on future growth from markets including India and Southeast Asia, Mackenzie told analysts on Tuesday. Free-cash flow is likely to rise to a record of more than $7 billion in the current financial year, he said.
“The improved cash flow outlook should enable BHP to more comfortably develop its organic project portfolio while continuing to repay debt,” Macquarie Group analysts said on Wednesday in a note to clients. There’s a significant capex decision schedule for the next 18 months, they said.
BHP’s board will rule on a potential $2.5 billion investment for its share of developing the BP-operated Mad Dog 2 oil and gas project, in the Gulf of Mexico, in the current financial year, and on about a $2.2 billion expansion at the Spence copper operation in Chile by the end of 2017, Mackenzie said on the analyst call. It follows Rio’s authorisation of investments in about $7.5 billion of bauxite, copper and iron ore projects since November.
Iron ore, the top earner for BHP and Rio, has jumped 42 percent on strong demand and will probably extend its rally as China continues action to bolster growth and as the dollar weakens, according to Austin, Texas-based Prestige Economics’ Jason Schenker, who last October correctly predicted the material’s rebound. The World Bank forecasts commodities will rebound next year after hitting the bottom of the cycle, while Citigroup last month said it’s bullish on commodities for 2017.
Mining executives may be placing too much confidence in China’s ability to support economic expansion, a factor that’s lifted demand and commodities prices this year, according to BlackRock. Chief Macro Strategist Rupert Harrison. China’s growth remains set for a “long-term, slow decline,” Harrison said on Tuesday in a Bloomberg Television interview.
Rio’s capital expenditure will fall to $4 billion this year before rising to $5 billion in 2017 and to $5.5 billion a year later, the London-based producer said this month. BHP’s spending will drop in the 12 months to June 30 to $5.4 billion, before rising to $6.2 billion the following year, it said on Tuesday in a statement.
* With assistance from Jonathan Ferro
BLOOMBERG