Xstrata chooses brown over green
In line with the big miners' new capital discipline, a merged Glencore-Xstrata will put off greenfields projects in favour of cheaper brownfields developments of existing mines.
"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."