BHP Maps Olympic Dam Plans

BHP Billiton (BHP-N, BLT-L),the world’s largest mining company, is planning to expand its Olympic Dam copper-uranium-gold mine in Australia, envisioning a sixfold increase in mining and milling capacity by the time the final stage of the multibillion dollar plan is completed. However, the company does not yet have a timeline for any stage except the first, and has not released an estimate of development costs.

BHP outlined its plans for the mine in a presentation to analysts in October. The sheer scope of the expansion becomes clear when looking at mine throughput. The company is projected to hoist 9.7 million tonnes ore and mill 9.9 million tonnes in 2008 at Olympic Dam, located 560 km north of Adelaide, in South Australia. When the expansion is completed, the operation will mine and mill 60 million tonnes ore per year, equivalent to 164,000 tonnes per day.

Measured, indicated and inferred resources at the mine total about 8.3 billion tonnes containing 2.3 million tonnes uranium oxide, a resource more than any other mine in the world. For comparison, Cameco’s (CCO-T, CCJ-N) McArthur River mine in Saskatchewan hosts a resource of 158,000 tonnes uranium oxide, about 7% of the resources at Olympic Dam.

Copper resources, at more than 70 million tonnes, are also considerable, ahead of resources at major mines such as Escondida, in Chile, and Grasberg, in Indonesia. The mine has substantial gold resources, at about 80 million oz.

Before committing to the mine expansion, the company is signing supply contracts with uranium consumers. So far, 10 term sheets have been signed, and BHP reports that “aggregate market interest is well in excess of the first phase expansion tonnage.” That first phase — which is really just an optimization of current operations — will raise annual production to 4,500 tonnes uranium oxide from 4,000 tonnes.

Based on third-party estimates of cash costs at Olympic Dam, the mine seems to be highly profitable. One estimate puts cash costs at about US60¢ per lb. copper, while the market price was US$1.50 at presstime. For uranium, cash costs are estimated at US$12 per lb. uranium oxide, while the present spot price is US$55 per lb., and the long-term contract price is US$70 per lb.

The copper head grade is about 1.8% at present, while the uranium oxide head grade is about 0.055%. Uranium recovery is about 73%.

BHP has now established the configuration of the mine expansion, and even before the expansion itself begins, the company is planning to raise ore volumes to offset declining grades.

An environmental impact statement will be submitted to government this month. It will have to win approval from three ministers: one federal, one South Australian, and the last one from the Northern Territory’s infrastructure minister. The company hopes the project will get the go-ahead by 2010.

The first stage of the expansion will consist of optimizing the existing operation, and is designed to raise throughput by about 20% to 12 million tonnes per year from about 10 million tonnes. The subsequent stages will eventually raise throughput to 60 million tonnes per year. To reduce capital costs, the company plans to ship concentrate to smelters in China, rather than building a smelter in Australia.

Currently, annual production stands at 180,000 tonnes copper, 100,000 oz. gold and 4,000 tonnes uranium oxide. After the first-stage optimization, annual production is projected to rise to 200,000 tonnes copper, 120,000 oz. gold and 4,500 tonnes uranium oxide. Once the last phase, stage 5, is completed, annual production will grow to 730,000 tonnes copper, 800,000 oz. gold and 19,000 tonnes uranium oxide.

The company plans to complete the optimization by 2013. Development of an open pit, which is a part of the subsequent stages, is projected to take five years.

BHP is planning to use autonomous mining systems — automated and semi-automated machines for mining and material-handling — at Olympic Dam to reduce mining costs and lower risk exposure. The company is planning a pilot system to test the concept, and integration aspects.

BHP believes there will be demand for its increased production. The company sees a bright future for copper demand, underpinned by growth in Brazil, Russia, India and China, where urbanization is requiring energy and infrastructure build-out. This has led to demand growth of 3.3% per year over the last decade. In India, copper demand has averaged 9.9% growth per year during that time, with growth forecast at 7.7% per year until 2020.

To give an idea of the scale of growth, BHP says that in 2007 China has added more electricity generating capacity than the entire electrical output capacity of the U. K.

BHP believes that supply interruptions will escalate into constrained copper supply growth in the future. The company projects a situation where there are delays of two to three years — caused by equipment stress, labour disputes, cost pressures, energy constraints, resource nationalism, etc. — in bringing copper mines online.

With uranium, BHP again sees China as a major growth catalyst. The country is planning to have nuclear generating capacity of 70 gigawatts by 2020, about 5% of total electricity supply. Currently, there are 11 reactors with a combined output of 9 gigawatts, and another 16 reactors under construction with a combined output of 16 gigawatts. The company says China is preparing for a major nuclear power generation program, and the growth will not be limited to coastal provinces.

Looking at the worldwide uranium supply/demand picture, BHP believes that, for the short to medium term, the market is balanced, but over the long term, mine supply growth is required.

Currently, about 90% of uranium sales worldwide are handled by fixed-price long-term contracts, and BHP forecasts that this will decline to about 20% by 2015 and about 10% by 2021.

In addition to its expansion plans for Olympic Dam, BHP has also notified the government of Western Australia of plans to reactivate the Yeelirrie deposit, Australia’s second- largest undeveloped uranium target, located 130 km north of the company’s Mount Keith nickel mine.

BHP is planning a drill program to confirm the resource. It is assembling a project team in Perth to evaluate mining and processing options and to prepare an environmental impact statement, and will soon start community consultations.