Why would BHP (BLT) CEO Marius Kloppers express support for a carbon tax? The mining industry has its fair share of climate sceptics. Geologists and model-based climatologists have very different views of the world. Does BHP stand to gain or lose from a carbon tax? Marius Kloppers himself has circa two million shares at stake. This excludes future grants as part of his remuneration package.
BHP is a diversified company, a structure designed to smooth volatile commodity earnings streams. This strength was demonstrated in the recent global downturn--weaker aluminium and copper prices were offset by rampaging iron ore and metallurgical coal prices. It is likely that this diversification could again prove at the very least a partial hedge against a carbon tax. It is a feature many competitors don't enjoy.
Carbon-heavy energy coal is not a major component of BHP's earnings stream. Base metals, already tight, might benefit from the necessary electrification associated with growth in renewable energy sources. BHP has substantial gas interests, a potential winner versus other more carbon-intensive hydrocarbons. The company's oil interests sheltered it from the impost of sky-rocketing oil prices on other divisions in 2008. Growth in worth of gas assets might achieve some of the same under a carbon tax.
BHP is also a low-cost producer, a function of a portfolio replete with Tier one assets. It is best placed versus peers to withstand a carbon tax. Pricing power in some areas, including traded iron ore, could even allow a substantial component of costs to be passed on to customers.
What about Klopper's call for Australia, a drop in the ocean of global carbon emitters, to unilaterally lead the world in taxing carbon? Well from BHP's perspective it might not be devastating. Around one third of earnings, 45% of assets, 60% of employees and 40% of taxes are non-Australian. Australian operations would move up the cost curve and pressure prices up. But offshore operations would improve relative to Australia's loss until such time as a level playing field was reinstated. These are operations that aren't subject to the Gillard Government's proposed minerals resources rent tax (MRRT).
And finally BHP has an interesting little asset called Olympic Dam in South Australia where it is considering a major series of upgrades. Expanded Olympic Dam output would exceed one quarter of global mined uranium. This is the one low carbon energy source with the capacity to fuel meaningful baseload global electricity. There are hundreds of new reactors slated for the coming decades and uranium's contribution to running costs is small. Olympic Dam is the world's largest known uranium deposit, alone housing 40% of the planet's resources. That's one hell of a call option on a re-rating in uranium prices. Moreover, the exemption of copper, uranium, gold, and silver from the proposed MRRT potentially enhances Olympic Dam's appeal versus iron ore and coal projects.
