MELBOURNE, Sept 13, 2012 (Reuters) – A $246 billion pipeline of planned mining investments in Australia is on increasingly shaky ground, with nearly half already frozen or likely to be delayed, as miners and lenders wrestle with high costs and sliding revenue.
A sharp fall in iron ore and coal prices, driven by a drop-off in demand from China, has caught many by surprise and forced miners — from the world’s largest, BHP Billiton , down to the smallest — to review their investment plans.
“Anyone who was expecting to bank a project at the levels we were at about eight weeks ago had unrealistic expectations,” said Michael Blakiston, a partner at law firm Gilbert+Tobin, which advises miners and is a director of iron ore company Sundance Resources.
The commodities rout has thrust Australia into a debate over whether the mining boom is over and can no longer be relied on to create jobs, power growth and raise tax revenue in a $1.4 trillion economy that has gone 21 years without a recession. Dumping projects will mean millions of tonnes of future coal and iron ore supplies are stripped from the world market, laying the ground for a swifter price revival if Asian demand rebounds.
The $246 billion of planned projects is based on government data on projects under study or awaiting approval and mining expenditure estimated by bankers and lenders. It also includes $40 billion of projects already halted by BHP.
According to project finance lenders, lawyers and analysts, some of the major projects at risk include the $10 billion Roy Hill iron ore mine, Xstrata’s $6 billion Wandoan mine and GVK Power & Infrastructure’s $10 billion Alpha Coal mine. They are in new mining areas, requiring huge investment on railways and ports, which makes them tougher to fund.
The companies had planned to make investment commitments by late 2012 or early 2013, but this looks in doubt as lenders demand more equity and impose tighter terms, such as requirements to hedge commodities prices.
Even top miners concede the days of ever rising prices, which in the past eight years earned them record profits and prompted $70 billion of Australian investment, look to be over.
Iron ore prices have slumped about a third since early July to three-year lows below $90 a tonne and coal prices have tumbled about a fifth this year to near two-year lows.
BHP last month shelved its Olympic Dam copper mine expansion, its Outer Harbour iron ore expansion and its Peak Downs coking coal expansion, together worth over $40 billion.
And debt-laden Fortescue Metals Group, which had planned to triple iron ore output to 155 million tonnes a year by mid-2013, slammed on the brakes last week, delaying nearly half that expansion to save $1.6 billion.
MINING HUB GLOOM
“We are still bullish on lending but overall prepared to lend less due to the softer prices,” said a banker in the mining hub of Perth, declining to be named due to client confidentiality.
The government conceded last week it was worried about the outlook for resources projects that are on the drawing board.
“In the immediate future, I’ve only got a couple in my mind that could go to final investment decision over the next 12 to 18 months,” Resources Minister Martin Ferguson told reporters.
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