Updates: BHP Warns On Coal, Vale Sees Iron Ore Lower

Is BHP Billiton about to be 'save' its coking coal competitors here and around the world with a price spike for a second year in a row.

The company yesterday warned in its third quarter production report that stockpiles in the strike-hit coking coal mines in Central Queensland are "severely depleted", which could cause a significant impact on future production if industrial action continues.

And that could cause a sharp fall in sales revenue and earnings for BHP, but it could also force global prices higher, benefiting its competitors.

BHP also revealed weaker than expected first quarter iron ore production.

Despite the warning about coal and the weak production data from most other businesses, the company's shares jumped almost 3% yesterday.

BHP reported that production of steelmaking (coking) coal had fallen 14% to 7.33 million tonnes in the March quarter.

Those factors and weakening prices, were the reasons the company gave two weeks ago for the decision to close the small, high cost Norwich Park mine in Queensland.

(But Norwich Park produced more coal in the latest quarter than it did a year ago)

The weather and the industrial action were also the reasons behind the company's force majeure declaration for the seven mines in central Queensland run by the joint venture it has with Mitsubishi Development (called BMA). With Norwich Park closing BMA now has six mines.

They form the heart of BHP's position as the world's largest supplier of seaborne hard coking coal.

"The extent to which industrial action will continue to affect production ... is difficult to predict," BHP said yesterday.

"However, with inventories now severely depleted, the impact on future quarters may be significant."

Analysts say the industrial action, which shows no signs of ending, could help boost coking coal prices.

But with BHP restricted by the amount of coal it can produce and sell, the benefits would flow to competitors such as Wesfarmers, Peabody, Xstrata and Rio Tinto which all export coking coal from Queensland and NSW.

At worst the force majeure and impact on BHP will halt the gradual fall in coking coal prices that has seen world prices fall from more than $US300 a tonne a year ago to around $US205-10 a tonne.

The quarterly report also revealed that like Rio, BHP's WA iron ore business was affected by the cyclones and bad weather in the March quarter.

The report reveals iron ore production fell 8% in the March quarter from the December quarter of last year, but was up 14% from the March quarter of last year when the cyclone problems were worse.

BHP said in the third quarter production and sales report 37.9 million tonnes of iron ore was produced in the March 2012 quarter.

It also said it did not expect annual iron ore production forecasts from the Pilbara region to change from the 159 million tonne target set in January.

A fall for BHP's iron ore production was anticipated by investors after Rio Tinto surprised the market with a bigger than expected fall in production on Tuesday.

Rio produced 45.6 million tonnes on the three months to March, down almost 11% from December quarter's outcome (which didn't have any storm problems).

BHP's company's recently acquired US oil business contributed to strong growth in petroleum product production, up 43% in the nine months to March, compared to the same period in the previous year.

The report also revealed a 35% increase in "liquids" production from the oil-rich shale gas business acquired in the past year.

"We continue to adjust our onshore US development plans in response to lower US gas prices and expect activity in the liquids rich Eagle Ford shale and Permian Basin to represent the significant majority of Onshore US operating activity by the end of the 2012 calendar year," BHP said.

"Guidance for the 2012 financial year of 225 million barrels of oil equivalent (MMboe) remains unchanged," BHP said yesterday in guidance for the oil division's total production target for the current year.

BHP has spent the best part of $US20 billion buying shale gas assets in the US, only to have American natural gas prices fall to a succession of 10 year lows in recent months (the latest was on Tuesday).

To try and offset this weakness, BHP has boosted production of exploration for liquids from its shale assets.

"Production records for the nine months and quarter ended March 2012 were achieved at two of BHP Billiton's high value, export orientated energy coal operations, New South Wales Energy Coal and Cerrejon Coal.

"Copper production rose 3% from a year ago to 281,400 tonnes in the March quarter, which included 87,700 tonnes of mined copper and 47,400 tonnes of copper cathode from the Escondida mine in Chile, the world's largest copper mine," BHP Billiton said yesterday.

BHP forecasts that production at Escondida "is expected to improve as mining activities progress towards higher grade ore with completion of the Escondida Ore Access project in the main pit".

"Export volumes for New South Wales Energy Coal were adversely affected by vessel delays at the Port of Newcastle in the March 2012 quarter.

"Preparation for the resumption of mining activity at San Juan Coal (USA) has commenced, with a full restart expected in the June 2012 quarter."

For the nine months ended March, BHP said it spent $US785 million on minerals exploration, of which $US668 million was expensed.

Petroleum exploration expenditure for the nine months ended March 2012 was $US925 million, of which $US409 million was expensed.

BHP said its onshore US drilling and development expenditure totalled $US2.2 billion for the nine months ended March 2012.

BHP shares rose nearly 3% to $35.10 yesterday.

They are now up more than $1.50 from the three year low reached last week of $33.59.

And wet weather also had an adverse impact on first quarter production of Brazil's Vale, the world's biggest iron ore miner.

"The summer season in the Southern Hemisphere was extremely rainy, hitting Brazilian mining districts such as the Iron Quadrangle in the southeast and Carajas in the north of the country, where our iron ore operations are concentrated," Vale noted in its first-quarter 2012 production report issued on Tuesday night, our time.

Vale's iron ore production fell 2.2% 70 million tonnes, from 71.54 million tonnes reported during the same quarter of last year.

But it was down 15% from the 4th quarter of 2011 when just over 82 million tonnes was produced.

The fall echoes the 8% drop for BHP and the 10 fall for Rio Tinto in their first quarters, from the last quarter of 2011.

The heavy rainfall forced Vale to declare force majeure on January 11 after the weather led to stoppages on mining and railroad operations affecting the company's Southeastern and Southern Systems.

The declaration was lifted on January 23 Vale's pellet production increased 1.4% from 12.52 million tonnes in the first quarter of last year to 12.7 million tonnes for the first quarter of this year.

Manganese ore output dropped 2.9% in the first quarter from 498,000 tonnes in the first-quarter 2011 to 484,000 tonnes.

The rainy season and geological problems in Australia caused some problems for coal production.

But production jumped 65.4% on a year-on-year basis from 1.42 million tonnes in Q1 2011 to 2.4 million tonnes, thanks to the ramp up of the Moatize coal project in Mozambique.

Vale's nickel production rose 7.5% during the first quarter of this year from 59,000 tonnes in first-quarter 2011 to 63,000 tonnes.

"The performance of this quarter was influenced by weaker production at Voisey's Bay and Sorowako, which more than offset the increases at Sudbury, VNC and Onca Puma," Vale said.

First-quarter copper production was up slightly from 70,000 tonnes in the first-quarter 2011 to 73,000 tonnes..

Production downtime at Vale's Sudbury mining operations impacted Q1 2012 platinum and palladium production as platinum production fell 33% and palladium output dropped 18.6% in the quarter.

Gold production during the same period plunged 37%, but silver output remained steady on a year earlier.

Vale's potash production dropped 12% in the first quarter of the year.