Kloppers' slippery BHP gold mine

Behind the scenes, important things are happening at BHP.

Suddenly Marius Kloppers is starting to move from being the chief executive who overpaid for US shale gas assets to a potential winner.

Woodside is now looking to go into US shale but if Woodside tried to duplicate BHP's stake – if it could be done – Woodside would probably have to pay at least 50 per cent above what Kloppers paid. Of course the Woodside strategy is to put emphasis on applying its LNG technology expertise in the US (Woodside eyeing increased US presence, December 3).

If US shale confirms its current promise then Kloppers will be rare among BHP chief executives.

In the last six decades BHP has made only two brilliant acquisitions – Ian McLennan's purchase of Mt Newman iron ore from CSR and others in the 1960s, and Jim McNeill's purchase of Utah coal and Escondida copper from GE in the 1980s. These two deals became the great drivers of BHP prosperity.

Until now the third best acquisition seemed to be Chip Goodyear's acquisition of WMC in 2005 but in the next few months BHP will have to consider whether it mothballs or slashes the costs of the giant ex WMC Kambalda nickel operation in Western Australia, which is cash negative. It will be a tough decision.

If BHP does mothball Kambalda (no decision has been made) it will be a severe blow to Western Australia and confirm that Australia has made itself uncompetitive in minerals that suffer depressed prices. And WMC's Olympic Dam will require a substantial fall in the Australian dollar and a new approach to construction costs to be economic. There are also technology issues (BHP Billiton's desperate Olympic race, July 30).

We won't class WMC as a mistake because Olympic Dam is still a great ore body.

When Chip Goodyear made the WMC acquisition BHP looked to have secured a bargain and there was a big initial paper profit. By contrast most thought Ian McLennan had overpaid for Mt Newman and Jim McNeill's famous "straw hats in winter” tag to the Utah deal was given the cold shoulder by the institutions. But both Ian McLennan and Jim McNeill knew they were buying magnificent mineral deposits and that in time they would be justified.

In the case of Kloppers' US shale acquisition, unconfirmed reports indicate the BHP chief first looked at buying Woodside but concluded that there might be long-term gas sourcing issues. Kloppers also looked at getting into Queensland shale but was dubious about the economics – doubts that are now being confirmed.

Instead, BHP went to the US and paid $20 billion for shale liquids and gas assets. The shale liquids acquisition has made BHP a key stakeholder on what looks like being one of the world's biggest oil deposits, although it will take further technology breakthrough to extract all the oil.

And the looming US industrial conversion to gas is staggering. When Kloppers bought the US gas assets the American gas price slumped but what few Australians realised was that shale gas can adapt to bad markets better than almost any mineral. Unlike conventional natural gas where the wells remain in production for decades, in the case of shale gas, the wells only last for about two years. So when the gas price slumps people stop drilling and in a short time the supply recedes, pushing up the price.

It looks like a US gas price of between $4 and $5 will deliver big rewards for gas producers and incentivise them to drill, but it will still make economic the massive manufacturing investment required. The Japanese are also pressing for the gas to be exported as LNG.

Of course, Kloppers had no sooner bought the US shale assets for $20 billion than he had to write them down by $2.8 billion because of a fall in the gas price. But BHP could sell the US shale operation tomorrow and receive more than $30 billion.

BHP has had a history of failed acquisitions, which include Magma Copper and Billiton (surely Billiton should be removed from the name rather than remain as a reminder of an error).

When McLennan and McNeill bought their assets the accounting rules of the day did not require the assets be marked to market, which might have forced into them into a writedown similar to Kloppers shale acquisition. BHP will be hoping that US shale duplicates the prosperity Mt Newman and Utah coal and copper delivered.