Xstrata chooses brown over green
"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."
The conservative stance makes it even less likely that the massive Wandoan thermal coal project in Queensland's Surat Basin - Xstrata's only planned big Australian greenfields project in its coal, copper and zinc divisions - will go ahead in the foreseeable future.
UBS analyst Glyn Lawcock said 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".
Mr Lawcock said BHP Billiton, Rio Tinto and Anglo-American had also shelved new coal projects. The rise in costs at Australia's coal mines - including higher strip ratios as mines deepened, higher manning levels and labour costs - was "actually quite scary when you look at it", he said.
Wandoan, which would produce 30 million tonnes a year, has been planned since 2007 but is mired in a dispute with three landowners and does not have final approval.
New leaders at BHP, Rio and Anglo have emphasised a new focus on controlling costs.
Xstrata's long-serving chief executive Mick Davis will leave if the merger with Glencore is approved by Chinese regulators, who are reportedly concerned about the impact of the combination on copper markets. Glencore and Xstrata have again extended the merger date, this time until April.
Mr Glasenberg, delivering a weak set of profit results hit by last year's falling commodity prices, said the mining industry was finally re-evaluating the returns from new projects. "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."
Frequently Asked Questions about this Article…
Glencore and Xstrata said they will defer greenfields projects and prioritise cheaper brownfields developments at existing mines. Management indicated greenfields are riskier and more likely to have cost overruns and delays that hurt project returns.
Executives pointed to common problems with greenfields projects — capital cost overruns and delays — which can reduce net present value and deliver poor returns for the original investors compared with more predictable brownfields work.
The Wandoan thermal coal project, planned to produce about 30 million tonnes a year, is unlikely to go ahead in the foreseeable future. UBS said Xstrata has effectively shelved the open‑cut plan, it lacks final approval and it’s tied up in a dispute with three landowners.
BHP Billiton, Rio Tinto and Anglo‑American have also shelved new coal projects, and new leaders at those companies have emphasised stronger cost control. The industry trend is to re‑evaluate returns and avoid oversupplying markets.
Rising costs cited in the article include higher strip ratios as pits deepen, increased staffing levels and higher labour costs. These rising operating costs are making some new coal projects uneconomic.
The article says long‑serving Xstrata CEO Mick Davis will leave if the merger with Glencore is approved by Chinese regulators, who are reportedly concerned about the merger’s impact on copper markets.
Glencore and Xstrata again extended the merger date until April, as Chinese regulators are reportedly reviewing the deal and its possible effects on copper markets, prompting further delay.
The shift shows miners are prioritising returns and careful project selection, favouring lower‑risk brownfields work and back‑testing past projects. For investors, this signals a focus on cost control and capital discipline rather than rapid expansion into risky greenfields projects.
Call 1300 880 160
Start a chat
Schedule a call
