BHP Moves To Stanch The Bleeding

VANCOUVER–The world’s biggest mining company has joined the lengthy list of majors to close operations and trim payrolls in the face of sagging metal prices. BHP Billiton(BHP-N, BLT-L, BHP-A) is suspending operations at its nascent Ravensthorpe nickel operation, reducing capacity at its Yabulu processing facility, and slashing 6,000 jobs.

BHP finished building Ravensthorpe in 2007, spending more than US$2 billion on the mine, and had only just achieved full capacity in the second half of 2008. Now the still-new operation in Western Australia will sit idle while the major waits for nickel prices to recover.

And the Ravensthorpe shutdown means a slowdown at the Yabulu nickel-cobalt refinery, where capacity was upgraded to 75,000 tonnes of nickel production from 25,000 tonnes last year in order to accommodate nickel-cobalt-hydroxide feed from Ravensthorpe.

Now Yabulu will revert back to processing ore only, which comes from third-party mines in New Caledonia, Indonesia, and the Philippines. Production is expected to return to pre-expansion levels, which would mean 25,000 tonnes of nickel annually. Yabulu is 25 km north of Townsville in Queensland, Australia.

The nickel production cuts don’t stop there. BHP is reducing the rate of mining at the Mount Keith nickel mine in Western Australia. The company says the overall rate of concentrate production at Mount Keith will remain largely unchanged because improved processing technologies will enable the operation to source and process more ore from existing stockpiles.

The decisions also mean job losses. As a result of suspending Ravensthorpe and reducing operations at Yabulu, BHP is letting go of 800 employees and 1,000 contractors at the operations and in the Perth area. The Mount Keith workforce will be reduced by 100 employees and 200 contractors. That brings the Ravensthorpe, Yabulu, and Mount Keith layoffs to 2,100 workers.

And it seems that is not all. According to the Associated Press, BHP’s chief financial officer Alex Vanselow later told reporters the company is also cutting 550 jobs in Pinto Valley, Ariz., 200 at the Olympic Dam project in South Australia, and 2,000 at its base metal operations in Chile. The company estimates that the 6,000 job cuts will result in a one-off cost of about US$500 million.

For the Ravensthorpe and Yabulu moves, BHP will record a pretax impairment charge of US$1.2 billion in its half-year financials, for the period ending Dec. 31, 2008. The following half-year financials will likely also carry an impairment charge of roughly US$400 million. For context, BHP spent US$357 million on mineral exploration in the second half of 2008.

And some analysts think a complete suspension at Yabulu is not far off. BHP says it plans to study future options for the operation over the next six months. The problem is that Yabulu’s high-cost operation is premised on high demand for nickel to produce steel but that leverage ability has deteriorated significantly of late because of the overhang of Chinese nickel pig iron production.

Combined with the global economic crisis and the ensuing drop in demand for stainless steel, the nickel price has fallen 44% since the beginning of September. Stocks of nickel on the London Metal Exchange are currently near their highest levels since 1995.

On the heels of BHP’s nickel news, the company’s share price dropped more than 3% on the Australian Stock Exchange before recovering some ground to close down 1% at A$28.68. The reaction was similar in New York: BHP shares lost more than US$2 before regaining half that loss to close at US$37.37 apiece.