The toll on production, sales, exports and possibly employment, is growing as Western Australia finds out the growing cost of the gas outage on a remote Island off the northern coast.
We explained the background yesterday with some early victims in the shape of Minara Resources, Newcrest Mining, Santos, Tap Oil and Babcock and Brown Power (And I see The Australian newspaper has woken up to the importance of the story today, Thursday).
But yesterday the toll of damage worsened as Alcoa declared force majeure on alumina production from its huge plants in the south of the state and BHP Billiton expressed concern at the possible looming impact.
BHP is within weeks of completing what will be a record year, but the gloss could be knocked off this result and the first few months of 2008-09 by the gas outage.
Billiton produces nearly 3 million tonnes of alumina from its Worsley refinery in Western Australia, as well as nickel, iron ore and other minerals from other sites using gas from Apache.
CEO Marius Kloppers told Sky Business News "We view the gas situation in WA (Western Australia) with some concern. There’s no doubt there’s been an impact.”
About a quarter of BHP’s profits are generated in Western Australia and a project also on the list is the Ravensthorpe lateritic nickel operation in the south of the state that is ramping up to full capacity.
BHP, like Alcoa and a host of other companies are searching for urgent new supplies of diesel or gas to use in back up equipment to get operations going.
Sourcing new supplies of gas from the likes of the North West Shelf is proving tough as they are running at high levels of output for both the domestic and export markets.
Babcock and Brown Power is expected to reveal the impact on its WA domestic businesses in a statement to the ASX this morning. It’s help push the value of the parent company, Babcock and Brown lower on the ASX in the past two days.
The accident has cut the supply of around a third of WA’s gas and led a host of companies to report problems and delays, but Alcoa’s is the most important so far as its alumina business is one of the major mineral export operations in the country. (The Varanus Island gas facility is around 100 kilometres off the NW WA coast and the facility is operated by Apache Energy, a US oil and gas group.)
In a statement listed on Alcoa websites this morning after being released in the US, the company said
"As a result of an explosion at Apache Energy’s Varanus Island facility, and the disruption of gas supply to its Western Australia facilities, Alcoa of Australia today notified its customers that it was declaring force majeure under its alumina supply contracts. The extent of impacts upon its customers is yet to be determined. Alcoa of Australia is part of Alcoa World Alumina and Chemicals (AWAC) which is 60-percent owned by Alcoa Inc. (NYSE:AA), and 40-percent owned by Alumina Limited.
"The incident resulted in complete shutdown of Apache’s gas production operations at Varanus Island and a declaration of force majeure by Apache to all customers. Alcoa of Australia is still receiving gas from its other supplier – North West Shelf Gas. Given the supply disruption, the full extent to which alumina production will be affected is uncertain, but Alcoa is making efforts to minimize the impact on production and its customers."
In a separate statement to the ASX, Alumina Ltd, 40% owned by Alcoa (and whose major investments include the WA alumina plants) said:
"The financial impact to Alumina Limited’s underlying earnings for June 2008 from the shutdown of the Varanus Island gas supplies is estimated to be approximately A$12-17 million (after tax). A further update will be provided at the time of Alcoa Inc reporting its second quarter 2008 results on 8 July 2008."
It’s another hit for Alumina which has had a number of earnings downgrades in recent years. Alumina shares closed 11c down at $5.29 yesterday
Two miners, nickel group, Minara Resources and gold miner, Newcrest have both warned that output from their WA mines would be cut because of the gas outage with early estimates putting the losses for both companies at more than $100 million, depending on world prices. Minara shares rose one cent yesterday to $3.63 but Newcrest shares fell with the slump in the gold price to be down 64c at $28.63.
Babcock and Brown Power shares remained suspended while management prepared today’s update.
There’s likely to be an update on the company’s attempts to raise another $360 million to $700 million in new money from banks, shareholders or through asset sales.
And, local partners in the stricken gas project, Tap Oil and Santos will face earnings hits with brokers already downgrading their forecasts this morning.
But the small rise in the oil price saw those concerns shrugged off: Tap rose 3c to $1.865 and Santos jumped 25c to $21.90. It’s also flavour of the month because of its coal seam methane interests in Queensland and NSW.
But more important to the national interest, it’s the second time this year that exports have been hit by an act of god or accident. The heavy rains and flooding in Central Queensland earlier this year in January and February hit coking and thermal coal exports hard and they are only now returning to normal.
The huge mines
