Hogsback on the Kloppers conundrum

WHY is Marius Kloppers smiling? If there is one man in the Australian resources industry who ought to be looking less than happy right now, Hogsback reckons it should be the enigmatic boss of BHP Billiton.

Tim Treadgold

That Kloppers is maintaining his tight-lipped grin in every photograph seen of him in the last few weeks is more than interesting.

Either the media is using old photographs, or the grin could be a clue to the way he is playing multiple mind-games with government, unions and investors.

Consider a few reasons why Kloppers should not be happy, including:

  • Protracted industrial action in BHP Billiton’s coal division, which is damaging production levels at its half-owned BMA Alliance, has contributed to the closure of one mine and forced a declaration of force majeure on shipments of coking coal to customers
  • Rising tax rates flowing from the introduction of Australia’s super-tax on iron ore and coal miners
  • Lower gas prices in the US where BHP has invested more than $US20 billion in shale gas assets just in time to be whacked by an energy surplus in that country
  • Pressure from financial markets to slow the pace of project development with expansion of the giant Olympic Dam copper and uranium mine looking less likely by the day.

On their own, each of these issues should be wiping the smile off the face of any chief executive officer.

Collectively, they would have a lesser man considering his future – unless each issue was actually causing fewer problems than outsiders imagined.

Without heaping too much praise on Kloppers, a man who seems to have been told once too often how clever he is, there are reasons to suspect he might be pulling strings in the background to achieve a more positive result than was being widely reported.

The coal dispute first, because it’s closest to the heart of The Hog.

In its March-quarter report filed this week, BHP confirmed stocks of coking coal were running low thanks to the combination of industrial action and heavy rain in Queensland.

“The extent to which industrial action will continue to affect production, sales and unit costs [in coking coal] is difficult to predict,” BHP said.

“However, with inventories now severely depleted, the impact on future quarters may be significant.”

How significant, is the question, because while tonnes will be down, the coking coal price really has only one way to go – up.

Why? Because BHP Billiton’s coking coal operations are the biggest in the world and when they slow sharply, the coal price must rise, even if demand from steel mills is slack.

That means BHP Billiton will undoubtedly be shipping reduced volumes of coking coal over the rest of 2012, but will almost certainly not feel the full pain of any slowdown thanks to the certainty of a higher coal price.

For Kloppers it means if he is going to have a showdown with unions in his coking coal business, which seems inevitable given Australia’s deteriorating industrial relations climate, this is a perfect time.

Tax, the second issue on Kloppers’ theoretical worry list, might also be much less of a problem than is being widely reported.

Unless the Australian government makes further dramatic changes to a deal negotiated with BHP and other big miners it seems the so-called super-tax on coal and iron ore profits might turn out to be a dud.

As one seasoned observer asked of the super-tax: “So what if you throw a big tax and no one turns up?”

The point being that mining companies appear to have pulled the wool over the government’s eyes, achieving so many deductions that very little super-tax will actually be paid.

Gas prices, the third issue, also appear to be under control.

BHP’s US operations have switched focus to maximising production of liquids in the gas reservoirs, leaving the gas in place for later.

As for the Olympic Dam expansion, it is far more than a simple mine expansion project.

It is the trump card in the hand of Kloppers because BHP will only proceed if the Australian and South Australian governments guarantee tax and regulatory certainty.

Without those guarantees Kloppers will invest the estimated $20 billion capital cost elsewhere, or return it to shareholders in the form of higher dividends, or a share buyback, ensuring he keeps his shareholders happy.

All, or some of these suggestions from The Hog might not work out as expected.

However, as you think through the issues on Kloppers’ desk you start to appreciate that he might be managing a number of major issues better than his critics are suggesting.