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BHP gets cold feet on mega-projects

BHP Billiton Limited (ASX: BHP) appears unlikely to approve the expansion of its giant Olympic Dam copper-uranium mine in South Australia before the end of the year, as it looks for job cuts across its large mining projects, according to a report in today’s Australian Financial Review.

The two other projects unlikely to receive the go-ahead are the US$20 billion outer harbour at Port Hedland, and a new US$10 billion potash mine in Canada. Rising capital costs and lower commodity prices are being blamed for the delay.

A potential problem for BHP is that if the company doesn’t approve the Olympic Dam project by December 15, it could risk the South Australian government allowing an indenture agreement setting royalty rates for 45 years to lapse. The state government has said that an extension would only be granted if the global economy takes a turn for the worse.

Rio Tinto and Fortescue Metals Group have also announced a slowdown in their expansion, but could further curtail upcoming projects, if commodities prices fall further.

While we have yet to see the effect on profits for companies operating in the mining services sector, contractors could see new work dry up and revenues fall significantly. Investors have already assumed the worst, and many companies in the sector, such as Leighton Holdings Limited (ASX: LEI), Downer EDI Limited (ASX: DOW), NRW Holdings Limited (ASX: NWH), Forge Group Limited (ASX: FGE), Watpac Limited (ASX: WTP) and Structural Systems Limited (ASX: STS) have all seen heavy falls in their share prices in the last three months.

Cut backs on large projects, and short-term issues such as falling commodities prices, sourcing skilled labour and volatile exchange rates are likely to weigh on the big miners’ share prices. Over the long-term, BHP appears well positioned, with global demand for resources unlikely to dry up, as emerging and developing nations continue their move towards urbanisation.

Foolish takeaway

The short-term could have dire consequences for small mining services companies, but over the long-term, the big diversified miners are likely to prosper.

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Motley Fool writer/analyst Mike King owns shares in BHP, Forge Group and Leighton.  The Motley Fool ‘s purpose is to help the world invest, better.  Take Stock  is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  Click here now  to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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