Speaking at the Bank of America Merrill Lynch 2012 Global Metals, Mining and Steel Conference, which was held recently at the Loews in Miami Beach, Florida, USA, Marius Kloppers, CEO, BHP Billiton, explained the transitions he sees taking place with future demand fundamentals. He talked at length about how BHP would evaluate future investment decisions against a changing demand backdrop. Editor’s note: This news item is excerpted from an article that will appear in the June print edition of E&MJ.

Throughout the recent bull market in mining (2002-present), BHP has expressed a confident outlook. It was one of the few companies bold enough and with deep enough pockets to continue to invest in mining operations during the global financial crisis. Going forward, however, Kloppers believes the industry now faces an evolving set of challenges. With a value-focused strategy, significant flexibility in the portfolio, and strong momentum, he remains confident with a bit more pragmatism.

The most significant driver during the last decade has been the resource industry’s inability to respond to demand growth, Kloppers explained. “When Chinese demand growth first became evident in 2001 or 2002, mining companies could not respond because they did not have spade-ready projects,” Kloppers said. The companies that had survived the previous decade did so by taking costs, such as exploration and project development, out of the equation. The result was a lag in supply.

The rate of capital expenditure in the mining industry lagged the growth in Chinese demand for most of the last decade. “This failure to respond in supply terms led to the sharp reversal in prices [upward],” Kloppers said. “However, a decade later, sustained higher prices and returns have changed behavior. The prospect of returns attracted capital. In the last five years, the natural resources sector has rebuilt its project pipelines.”

Mining companies now are finding that the fundamentals have changed again, Kloppers explained. “Shifts in terms of trade have made strengthened some producer currencies,” Kloppers said. “The increase in developmental activity has dramatically escalated capital and operating costs. Host governments have continued to pile on royalties and more onerous regulatory burdens.”

As a result, the industry now has a different set of challenges looking forward. The mining sector probably has more projects than cash flows, Kloppers explained. “It has investible options in places where it did have them before, but those options have varying qualities,” Kloppers said. “People will have to make choices and quite a range of outcomes are possible.”

BHP has choices to make too. The company will prioritize its investments where it has political and fiscal stability, a sustainable advantage, and where it has the best returns vs. the risks it has assumed, Kloppers explained. “For us, if our criteria cannot be met in one project or one product or one geographical location, we will redirect our capital elsewhere or we simply will not invest,” Kloppers said. “Of course, giving the long-life nature of the investments, we have to do so being very cognizant of changing demand patterns.”

BHP’s focus for new capital for the five commodities and six major basins in which it operates will continue to sharpen. “All of the development options associated with these basins will be scrutinized throughout the approval process,” Kloppers said. “Each option is different. Since we are net long opportunity, not all options will see investments today.”

BHP is in the enviable position of having more development options than human capital and financial capacity, Kloppers explained.

Following the approval of its organic growth projects at Escondida, BHP is currently executing 22 major projects. “We are largely committed for our capex in FY2012 and FY2013,” Kloppers said. After that, he sees flexibility in FY 2014 and 2015. He explained the company would be careful to approve projects in sequences that maximize value, reduce risk and balance the consideration of the long- and short-term.

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