BHP expected to reduce its asset value further

BHP Billiton's savage writedown of its US shale gas assets has raised the prospect of further billion-dollar impairments in other parts of the business, with the group's struggling aluminium operation in the spotlight before the full-year results in two weeks' time.

Announcing the $US2.84 billion ($2.7bn) gas writedowns on Friday, as well as a separate $US450 million off the Nickel West nickel arm, BHP said the carrying value of all its assets would be finalised in conjunction with the August 22 results.

"I was surprised it came out as early as it did," UBS resources analyst Glyn Lawcock said yesterday. "But they (BHP) argue it was required by continuous disclosure, and it is what it is."

BHP watchers expect the company to emulate the lead of Rio Tinto, which in February slashed $US8.9bn from the value of its aluminium business, which is based on the disastrous $US40bn Alcan acquisition in 2007.

Mr Lawcock said he expected BHP to cut $1bn-$2bn of aluminium carrying values, mainly as a result of the cost blowouts at its 86 per cent owned Worsley alumina refinery. The cost of expanding the WA project has blown out from $US1.9bn to $US3bn.

Similarly, Deutsche Bank petroleum analyst Paul Young expects a $US1.8bn impairment of BHP's alumina assets to be recognised in the 2011-12 results.

The company values BHP's aluminium business, based on two partly owned alumina refineries, two bauxite mines and four aluminium smelters -- at $US4.75bn.

JPMorgan's resource analysts would not be surprised to see aluminium writedowns at BHP and further impairments at Rio. "Both BHP and Rio have aluminium carrying values well above our (valuation)," the firm says.

Argo Investments chief executive Jason Beddow warned that the aluminium market remained "very difficult" but there were assumptions of a recovery built into forward pricing of the metal.

On Friday, BHP chief Marius Kloppers and petroleum chief Mike Yeager said they would forgo short-term bonuses after reducing the carrying value of the Fayetteville shale assets by $US2.84bn. BHP acquired the assets from Chesapeake Energy in February last year for $US4.75bn, only to see US domestic gas prices tumble by almost 40 per cent.

But the assets acquired in the bigger follow-up purchase -- the $US15.1bn Petrohawk acquisition last August -- were retained at acquisition value because of management's subsequent decision to focus on liquids (oil and condensate) drilling. BHP has since reported considerable exploration success in the Permian Basin.

Broker Citi said the writedowns were in line with the $US3bn-$US5bn the firm had expected. But at $US12.3bn the firm's valuation of BHP's onshore US assets remains well below BHP's book value of $US27bn last December.