Xstrata opts for safer brownfields projects

Mining giants across the nation are tending towards the conservative side when it comes to capital expenditure.

In line with this new phase of management a merged Glencore-Xstrata will put off greenfields projects in favour of cheaper brownfields developments of existing mines.

''We are afraid of greenfields,'' chief executive Ivan Glasenberg told investors at an earnings presentation in London.

 

''And it's been proven: we were correct. Greenfields are risky. Greenfields do have capital overruns. Greenfields do have delays which kill the NPV (net present value) on those projects.''

 

This announcement means the company’s only Australian greenfields project, the Wandoan thermal coal mine in Queensland's Surat Basin, is unlikely to go ahead anytime soon.

 

UBS analyst Glyn Lawcock told the SMH that Xstrata had already in effect shelved the Wandoan open-cut, ''not simply because it's a greenfields project but because right now the economics simply don't stack up for coal''.

 

Australian coal is currently battling to compete with an influx of American coal on the global market, as well as a strong Australian dollar, and increasing production costs.

 

This financial year has already seen more than a few thousand jobs cut from the coal sector.

 

Lawcock said BHP Billiton, Rio Tinto and Anglo-American had also shelved new coal projects.

 

The cost to run Australia's coal mines has increased significantly with higher strip ratios as mines deepen, and high labour costs which is according to Lawcock ''actually quite scary when you look at it''.

 

When fully operational Wandoan is expected to produce about 30 million tonnes a year, and has been in the pipeline since 2007 but landowner disputes has slowed the process and the mine is yet to receive final approval.

 

The new leadership teams at mining houses BHP, Rio and Anglo have all announced cost cutting and controlling measures across the board.

 

Glencore and Xstrata have extended the merger date until April.

 

SMH reported that Xstrata's chief executive Mick Davis will leave if the merger with Glencore is approved by Chinese regulators.

 

Last year falling commodity prices hit mining companies’ bottom line, prompting the mining industry to re-evaluate the returns from new projects, Glasenberg said.

 

''They may be good projects afterwards, and they do generate good cash because they're lowest quartile in the area, but returns for the original investors, not so pretty,'' he said.

 

 ''Finally, investors are going back and back-testing. And that's putting the heat on previous CEOs.

 

''So we will try and avoid them as long as possible. I'm not saying forever. It may happen in the future. Hopefully, there is this paradigm shift in the mining industry and people are stopping projects for a while. While they assess what demand is doing they're not going to oversupply. And, hopefully, the markets will start picking up in the future.

 

''Then we may have utilised all our brownfields and pushed them to the maximum. We may have to look at a greenfield and then we will assess it very, very carefully.''

 

Recent reports are showing a general decline when it comes to greenfield exploration activities.

 

Australian Mining reported that  trends towards lower exploration activities has been blamed on decreasing discovery rates, a focus on brownfield exploration rather than greenfield operations, difficulty raising equity, and a shift to offshore projects.

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