Date 14 December 2000
Number 113/00
BHP WESTERN AUSTRALIA HBI PLANT WILL CONTINUE TO OPERATE
BHP Limited (BHP) today announced it would continue to operate its Western
Australia Hot Briquetted Iron (HBI) plant against strict technical and
financial performance criteria.
The announcement followed a nine-month technical and economic review of the
plant that determined continued operation was economically viable and was
also the most appropriate portfolio value decision.
BHP Managing Director and CEO Paul Anderson said: "The economic assessment
projected that continued operation would result in the plant being cash flow
positive by financial year 2003, and would generate a positive net present
value (NPV) of approximately A$100 million.
"In contrast, immediate closure of the plant had a negative NPV of more than
A$400 million (after tax), taking into account expected mitigation actions,
and would have resulted in a provision of approximately A$650 million (after
tax).
"Today's decision is very straightforward - it is about managing the value of
an existing investment. The difference between immediate closure and continued
operation is more than A$500 million in value."
BHP previously stated a decision to cease operations and shut down the plant
would require the Company to recognise liabilities amounting to approximately
A$1.1 billion before tax and before any mitigation.
The economic case for continued operation is based on a stand-alone valuation
of the HBI facility and excludes the added value to the Company's iron ore
operations through the processing of up to five million tonnes of ore fines
per annum.
The key performance parameters in the commercial valuation are consistent
with the operating achievements recorded at the plant during the past nine
months.
Production targets achieved during the review period included: operating two
production trains simultaneously, producing in excess of 75 tonnes of
briquettes per hour (achieved 81 tonnes per hour) and achieving a plant
maintenance turnaround time of less than 25 days (achieved 22 days).
The remaining benchmark (production train campaign life of 120 days) has not
yet been reached, but forward projection of existing production data indicates
this target is achievable.
The Company invested $66 million during the plant trials to implement
technical modifications within the plant.
"The decision to continue to operate is a tribute to our HBI management team
and employees who have worked extremely hard, together with our BHP research
team, to address operability and reliability difficulties associated with the
plant processes," Mr Anderson said.
"We are confident we have in place the best team to meet both the risks and
the challenge of continued operation."
Continued operation is based on achievement of key operational and financial
criteria relating to campaign length, productivity, maintenance turnaround
and input costs that demonstrate the plant is expected to be earnings neutral
and cashflow positive by FY 2003.
The operation is expected to produce approximately 1 million tonnes this
financial year and to achieve steady-state production of 2.3 million tonnes
per annum in FY 2007.
"Our review shows the plant to be economically viable on a look forward basis,
although clearly this project would not be sanctioned if it were presented as
a new investment to the Board and Policy Committee today," Mr Anderson said.
Continued operation requires an additional $110 million capital investment
over the next 18 months, which is included in the NPV projection. The
investment will be used to implement additional technical modifications
across the plant.
The forecast short-term financial impact of operating the plant is detailed
below:
A$million FY01 (2nd half) FY02 FY03
Capital Expenditure 52 57 27*
Cashflow (after tax) (170) (60) 60
Production (mt) 0.6 1.65 1.98
*Includes sustaining capital
A number of business risks were factored into the economic case for continued
operation including volatility in the metallics market and underlying plant
operating assumptions.
The review took into account a significant deterioration in the world market
for HBI product.
Conservative pricing assumptions were adopted with reversion to an expected
long term pricing trend for HBI, based on scrap equivalent.
BHP will monitor and report on the performance of the operation against the
key operational and financial criteria and a defined ramp up curve.
Further information can be found on our internet site: http://www.bhp.com
MEDIA RELATIONS INVESTOR RELATIONS
Mandy Frostick, Manager Media Relations
Ph: 61 3 9609 4157 Mob: 61 419 546 245
Robert Porter, Vice President Investor Relations
Ph: 61 3 9609 3540 Mob: 61 419 587 456
Francis McAllister, Vice President Investor Relations
Houston
Ph: 1 713 961 8625
