BHP and Rio double-down on copper

Vancouver — BHP Billiton (BHP-N, BHP-L, BHP-A) and Rio Tinto (RIO-N, RIO-L, RIO-A) are feeling optimistic about copper. Six weeks into the first quarter of 2012, the two mining giants unveiled plans to commit over U$4 billion to expand copper production at operations in Chile and Arizona.

At the Escondida copper mine in Chile’s Region II, 170 km southeast of Antofagasta, BHP — as 57.5% owner and operator — will spend US$2.6 billion on two projects to fuel production increases over the next decade. Rio Tinto will cover US$1.4 billion from cash flows generated through its 30% stake in the operation. The balance will be covered by Japanese consortium JECO, which holds a 12.5% interest, and the World Bank’s International Finance Corp., which owns a further 2.5%.

The improvements include the US$3.8-billion replacement of a concentrator with a 152,000-tonne-per-day plant, allowing access to higher grade ore, and a US$721-million dynamic leaching pad and mineral handling system to maintain oxide leaching capacity. Construction will begin in late February with completion expected in mid-2015.

Production at Escondida fell last year due to labour strikes and lower grades. The mine produced 599,522 tonnes copper during the first nine months of 2011, down 25.4% from 803,319 tonnes copper during the same period in 2010.

BHP and Rio have said output is expected to improve significantly starting in 2013 as work in the main pit allows access to higher grade ore. According to a BHP statement, copper production at the mine should exceed 1.3 million tonnes per year by the close of 2015.

A brownfield exploration program has increased Escondida resources by 17% and reserves by 25%.  According to BHP Base Metals president Peter Beaven, the results suggest that current production levels could be sustained for more than a century.

In Arizona, BHP will spend another US$195 million to revive its 100%-owned Pinto Valley copper-moly mine, east of Phoenix near Miami. Operations were closed in 2009 due to low copper prices during the global financial crisis.

Pinto Valley is scheduled to be in production by the end of 2012, with an expected annual capacity of 60,000 tonnes of copper in concentrate.

The mine will boost the economy of the Globe-Miami area in central Arizona. Wayne Issacs, president of BHP Billiton’s North American properties said, BHP will be “hiring more than 600 new team members and we look forward to working with the local communities to safely restart the mine.”

The Escondida investment follows Rio’s US$299-million acquisition of a majority stake in Ivanhoe Mines (IVN-T, IVN-N) in late January. The acquisition increased Rio’s commitment to the Oyu Tolgoi copper-gold mining project in Mongolia.

The first ore is expected to be mined at Oyu Tolgoi in the second half of 2012, with commercial production of copper concentrate in the first half of next year.

Robust manufacturing performances in the United States and Japan combined with record Chinese copper imports to start the year have contributed to optimism among copper miners that global industrial demand will keep propping up copper prices. 

In the longer term BHP says it remains positive on the outlook for the global economy as the drivers of urbanization and industrialization in China, India and other emerging economies are expected to underpin global growth and robust commodities demand.

Copper prices recently fell from a 5-month high in early February, but remain up 11% through the first six weeks of 2012. Lingering uncertainty about the European Union debt crisis and lagging Chinese imports following the week-long Lunar New Year holiday in late January have contributed to downward pressure.

According to a February base metals update issued to clients by CIBC institutional analysts, “we are currently five months into a sustainable rally in copper prices and expect equities to outperform the commodity in the first half of 2012 should this relationship hold.”

BHP shares have increased 10% to start the new year, jumping from US$69 per share in New York to US$76 on average trade volumes exceeding 3 million shares per day. Rio shares have increased 17% over the first eight weeks, rising from US$49 per share to a mid-February close of US$57.