BHP enriches its balance sheet

There is a certain irony in the fact that BHP Billiton's contentious decision to shelve its planned $30 billion Olympic Dam expansion may have helped it, at the margin, in negotiating the sale of its Yeelirrie uranium deposit in Western Australia to Canada's Cameco Corp for $US430 million.

Had Olympic Dam proceeded it would eventually have had a major impact on the supply-demand equation for uranium – it could have added as much as 20 per cent to industry production – and consequently on its price as output at Olympic Dam would have trebled.

Removing that over-hang of production from the market, or at least pushing it out several years beyond the five or six years it would take to remove the over-burden at Olympic Dam, ought to provide some support for the price, which has plummeted in the wake of the Fukushima Daiichi disaster in Japan.

Cameco, one of the world's larger uranium producers, self-evidently retains confidence in that longer term outlook despite saying recently that it may not develop its existing Australian deposit, the Kintyre deposit it bought from Rio Tinto in 2008, because it wasn't economic with prices below $US50 a pound.

BHP's Marius Kloppers cited the fall in demand for uranium post-Fukushima as a contributing factor in the Olympic Dam decision, although he also said it was too early to tell what the long term interplay between the lower demand and the loss of supply from the impact of the disaster on smaller producers might be.

The Fukushima explosions which shut down the Japanese industry initially had a chilling effect on the industry and its perceived prospects, with Japan retiring 12 reactors permanently, Germany announcing that it would shut down its nuclear power generators and other European countries re-evaluating their planned programs.

The International Atomic Energy Agency's annual report that was issued last month, however, said that while Fukushima had slowed the expansion of nuclear power it hadn't reverse it. Its ‘'low'' case for the industry is that there will be at least 90 more reactors commissioned by 2030, with much of the growth occurring in Asia, particularly China.

For BHP, while the outlook for the sector may have been an influence within its Olympic Dam decision, the sale of Yeelirrie is probably driven by more mundane considerations.

Kloppers has made it clear that the vast scale of BHP means that it is only interested in resources that have the capacity to be meaningful within the context of the group.

Indeed last week he said that the only reason BHP was involved in the uranium market was because of Olympic Dam and that it had no aspiration to acquire or build uranium-only mines because generally those mines, and uranium as a sector, were too small to fit within BHP's portfolio.

Similar thinking was behind the decision to put BHP's highly profitable diamonds division up for sale and there's an element of it within the decision earlier this year to "put" BHP's 37 per cent interest in the Richards Bay mineral sands business in South Africa and exit the titanium minerals sector.

There is another reason for BHP to cash out some of its peripheral operations. The heavy falls in commodity prices over the past year have had a big impact on BHP's cash flows, which fell from $US30 billion last year to $US24.4 billion, with essentially the entirety of that fall occurring within its second half.

With committed capital expenditures of $US22.8 billion under way and its own commitment to its progressive dividend policy BHP will be funding some of that spending with borrowings until that capex spending starts falling away over the next two or three years.

The deferral of its mega expansions projects at Olympic Dam and Port Hedland's Outer Harbour, asset sales like Yeelirrie and potentially the diamonds business and the closure of marginal or loss-making businesses – BHP closed its Norwich Park metallurgical coal project and its silicomanganese plant in South Africa – will help BHP close the gap between its near term capital expenditures and its cash flows, which would be a sensible strategy in such uncertain times.