By Greg Peel

BHP Billiton ((BHP)) is currently reviewing its portfolio of large scale capex projects intended to carry the company into the future. Weak global growth and subsequently lower commodities prices in the face of still rising costs has BHP winding back the timeline on its spending program. To date, the company's strong cashflow earnings net of capex plans have brokers forecasting negative earnings growth in FY13.

One of those plans is to build an outer harbour facility at Port Hedland in WA for the loading of iron ore into today's increasingly large bulk carriers. The project is expected to cost US$20bn and around US$1bn of pre-commitment funding has already been approved. However the JP Morgan analysts believe BHP's new president of Iron Ore is likely to favour smaller scale, but higher returning-growth, suggesting the outer harbour facility may be announced to have been put on hold at BHP's upcoming result release on August 22.

The planned outer harbour facility was to provide 100mtpa of additional capacity and was expected to be approved by the end of this year with ramp up targeted for the first quarter 2016. However in June, BHP CEO Marius Kloppers announced no major projects would be approved before the end of FY13. With Jimmy Wilson having replaced Ian Ashby as iron ore chief, JP Morgan believes the focus will now be on optimising the inner harbour facility before looking to an outer harbour option.

The Port Hedland authority is anticipating an expanded capacity of 495mtpa for the inner harbour of which BHP is allocated 240mtpa. But while the facility is based on a 165kt ship capacity, the average ship currently passing through the port is much bigger, the analysts note. If a 188kt average capacity can be achieved, an additional 40mtpa becomes available to BHP, the analysts calculate, which will tide the company over. Inner harbour optimisation offers a lower capital intensity than an outer harbour project.

JP Morgan is no longer factoring in an outer harbour project in its valuation model, removing $1ps of net present value. The broker's target falls to $41 from $42 and a Neutral rating is retained.

JP Morgan's recommendations are sector relative, rather than market relative, and the broker has a Buy (Overweight) rating on iron ore rival Rio Tinto ((RIO)). Indeed all eight brokers in the FNArena database have Buy ratings on Rio, while only five rate BHP a Buy (plus three Holds).

As it stands, consensus forecast earnings growth for BHP in FY13 is minus 3.6% compared to plus 19.8% for Rio. The consensus 12-month target for Rio is $84.42 or 49.6% above today's traded price. The target for BHP is $39.58 or 21% above, on a range of $37-$41.


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