BHP may invest US$300m in Indonesian coal mine

BHP may invest US$300m in Indonesian coal mine

Bloomberg, Melbourne

BHP Billiton, the world's biggest exporter of coking coal used by steelmaker, may spend US$300 million developing a new mine in Indonesia to help meet rising demand for the fuel through 2010, Merrill Lynch & Co. said.

BHP Billiton plans to start mining at the Maruwai site in Kalimantan in 2008, producing 5 million tons of coking coal a year, Merrill analysts led by Vicky Binns said in a June 2 note. The Melbourne-based company also told analysts global coking coal demand will rise as much as 58 percent through 2010, UBS AG analyst Glyn Lawcock said in a June 3 note.

BHP Billiton and rival miners are benefiting from surging steel production, led by China, that fueled a 120 percent increase in coking coal prices from April 1. BHP Billiton is spending $468 million expanding its coal mines and plant in Australia and is aiming to produce 100 million tons of coking coal a year by 2010, up from 58 million tons in fiscal 2004.

"BHP management does believe China has changed the demand landscape," Binns said. "However, future growth is also going to be strong from Brazil and India, who will both likely ramp up steel production due to their own vast iron ore resources."

Of the $300 million to be spent on Maruwai, about half will be spent on mine development, and the remainder on infrastructure. The site is 500 kilometers from the coast and "infrastructure is non-existent," Merrill's Binns said. Binns said the mine may only start in 2009.

BHP Billiton forecasts that global coking coal demand could be between 220 million metric tons and 300 million metric tons a year by 2010, UBS AG said. The company also predicts that steel production could rise to between 1.18 billion tons and 1.475 billion tons by 2010, from 1.05 billion tons last year, UBS's Lawcock said.

China, the world's largest steel producer, is producing more of the material as it increases production of houses, cars and household appliances with economic growth of 9.5 percent in 2004. China's steel production rose 32 percent last year to 266 million metric tons, according to China's National Bureau of Statistics.

India's steelmaker sold 33.4 million tons of metal in the fiscal year that ended March 31, 7 percent more than the previous year.

BHP Billiton also told analysts that production costs at its coal mines in Queensland will rise by between $8 a ton and $10 a ton in 2005, from a year ago. Half of the increase is because of paying more for royalties, UBS's Lawcock said.

"We think that the market is not factoring sufficient cost pressure into its forecasts and we believe we could see earnings lowered by the market," Lawcock said.

Miners are facing increased costs as companies try to increase production and expand mines, leading to shortages of skilled labor and equipment and surging materials costs.

Merrill's Binns said the higher prices BHP Billiton can get for its coal this year will more than offset the higher costs. Costs could rise to between $35 a ton and $40 a ton, while the prices of the coal sold will rise to $125 a ton, she said.