BHP Billiton: Australian Expansion Could Spark Big Gains In 2013

| About: BHP Billiton (BHP)

BHP Billiton (NYSE:BHP) is apparently in big trouble because of its foray into the U.S. shale gas business. Britain's Sunday Times reported that the company could lose as much as $5 billion on its investments in shale gas. Shale gas is an industry code word for fracking, the controversial process by which natural gas is extracted from rock.

Last year, Billiton boss Marius Kloppers spent $15 billion to buy Petrohawk Energy, which owned large amounts of shale gas properties in Texas and Louisiana. He invested another $4.75 billion to buy shale gas acreage near Fayetteville, Ark., from Chesapeake Energy (NYSE:CHK). At the time, analysts noted that Billiton's expertise was mining for coal and minerals, not drilling for gas. It seems as if the analysts were right and Kloppers was wrong.

Kloppers' idea was that natural gas would someday be worth as much as oil and BHP Billiton could make a killing on it. He figured that one day natural gas fracked from the U.S. countryside would be shipped to China and India in the way that coal is shipped. The problem with this scenario is that natural gas is not living up to Kloppers's expectations. Energy analysts told The Sunday Times that the valuations of shale gas have fallen by 25%. That would indicate that BHP Billiton could take a $5 billion loss on the deal. It should be noted here that the analysts' predictions are entirely conjecture and speculation.

The $5 billion figure is apparently based on a statement that an analyst named Richard Knights gave to the Times. There is no evidence that Billiton has actually lost $5 billion or could lose $5 billion, only that some analysts think it might. News reports did not say where Knights was getting his information from. Unfortunately, detailed news reports about this story are scant in the U.S., so there may be more to it.

This could make Billiton a good buy, because it is still the world's biggest mining company with a lot of good mining properties around the globe. It also shows the danger of a company moving outside of its area of expertise and into fashionable new fields. If Billiton can extract itself from the shale gas fiasco, it should be in fairly good shape. The most obvious casualty of this mess will probably be Kloppers, who is likely to be on his way out the door soon. Kloppers' exit is liable to bring Billiton's stock price up.

BHP Billiton Expands Holdings in Australia

Despite the rumored losses, Billiton is still making moves to grow its core business. The Wall Street Journal reported that the company has purchased five exploration tenements or mining licenses (Australian for mining claims) on 10,000 square kilometers of land around its giant Olympic Dam gold, copper, and uranium mine in South Australia for $10.3 million.

This move is designed to keep competitors like Rio Tinto (NYSE:RIO) and Australian iron producer Fortescue Metals (FMG) from prospecting in its backyard. Fortescue is apparently trying to move into the copper business. Billiton operates an underground mine at Olympic Dam. It will make a decision on whether to start a $30 billion dollar open pit operation at the site in the near future.

The Journal report indicates that the move is part of a major effort by BHP Billiton to increase its holdings Down Under. BHP also has exploration rights for other areas of the Outback, including Woomera, Marree Leigh Creek, and Port August.

Power Shortage Could Delay Chile Copper Mining Expansion Plans

Political opposition to new power plants in Chile could thwart ambitious plans to expand copper and gold production in Chile, Bloomberg Business Week reports. If companies like BHP Billiton and Anglo American (NASDAQ:AAL) want to expand their operations in Chile, they're going to need more electricity. Chile will need to add about 8,000 megawatts to its national power grid to run all the machines at those new mines. About one-fifth of Chile's electricity is used in mines.

Several new power plants are on the drawing board, but they may not get built. Objections from environmentalists and community groups have slowed the development of a new power dam at HidroAysen in Patagonia. Approval of the dam last year led to protests in which millions of dollars worth of public infrastructure was damaged. HidroAysen's developers still need approval for a new power line to bring juice from the dam to the mines.

Another project facing delays is MPX Energia SPA, a $5 billion coal burning plant proposed by Brazilian billionaire Eike Batista. Batista is a major player in the mining business in his own right. He owns Ventana Gold, which he took private in 2011. This plant would power generate electricity for mines owned by Freeport-McMoRan (NYSE:FCX) and Teck Resources Limited (TCK).

The political delays are a real problem because Chile is facing a shortage of electricity. Regions of the country, including the capitol Santiago, are already facing blackouts because existing power infrastructure is overburdened. Electric bills in the country are also going up. Business Week reported that the Chilean Energy ministry said the price of a megawatt of electricity in the country rose from $100 to $150 between January 2010 and December 2011. That's a 50% increase in less than two years.

Joaquin Villarino, the president of a mining lobby group, told Business Week that work on new mines and expansion to existing mines in Chile may have to be stopped if the electricity shortage is not addressed. If Villarino is right, the massive expansion of Chile's copper industry planned by Codelco -- the Chilean national copper company and the world's largest producer of the metal -- and foreign miners will grind to a halt. How this would affect the price of copper is not hard to see.

Some copper miners are reportedly planning to take matters into their own hands. BHP Billiton is considering building its own power station in Northern Chile. Teck Resources is also thinking about building a power plant for its Quebrada Blanca Mine. This will obviously raise the cost of operations and could make some operations unprofitable. Xstata (XTA) is trying to build its own hydroelectric plant in Southern Chile with help from an Australian company.

One big problem will be that the miners might have to ship in coal or natural gas to burn in these facilities. They would also have to get them approved by the Chilean government. That could be very difficult because opponents have succeeded in scuttling new plants in the past. Plans to build a 540-megawatt coal-fired power plant in Barracones on Chile's coast were scrapped because of opposition. That opposition could derail any plans for new power plants at the mines.

Not surprisingly, electricity shortages have now become a major political issue in Chile. President Sebastian Pinera has promised to address the issue personally. He also appointed a new energy minister, Jorge Bunster, on April 3 to start the ball rolling. Whether that will achieve any results or not is hard to say; Chile has had five energy ministers in the last two years. Chile's president is also planning to get the government more heavily involved in energy production. In a speech on Feb. 28, Pinera admitted that the electricity shortage could wreck his plans to make Chile a developed nation by 2018.

The real cause of Chile's electricity shortage could be a lack of political will, according to Business Week. Juan Manuel Contreras, the executive secretary of the country's National Energy Commission, told the magazine that Chile has 9,000 megawatts of untapped hydroelectric generating capacity. That would be more than enough to solve its problems and keep the mining industry humming.

It does not seem likely that Chile's political leaders would let this crisis hobble their most profitable industry. Unfortunately, logic is something that we should never expect from politicians in any nation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.