The company has a 100% interest in the underground mine and smelter-refinery complex, which produces copper and uranium, as well as byproduct gold and silver. Olympic Dam is the world’s sixth-largest copper deposit and the largest uranium deposit.
The latest operating problems began in late May and early June, when WMC had to repair a cooling jacket on the Olympic Dam furnace, resulting in about 7,000 tonnes of lost copper production. A month later, a second jacket leak occurred, causing an additional loss of 10,000 tonnes copper.
A subsequent review of the facility found deterioration in the furnace roof and sidewall refractory, and in the adjacent taphole cooling jackets, causing the company to declare that the smelter would require “substantially increased maintenance and consequent downtime that will impact ongoing production and costs.”
Most importantly, WMC will have to move forward a planned re-line of the smelter from mid-2004 to mid-2003. In all, WMC reckons the repairs and modifications will cost A$120 million.
At presstime, following the news of the unexpected re-line, WMC depository receipts trading in New York fell to below US$17 from US$22, while its Australian-traded common shares fell to below A$8 from above A$9.
“This is a blister-copper smelter, and there are only three of these types of smelters in existence,” says WMC Chief Executive officer Hugh Morgan. “In terms of longevity, it has run well, but like any other smelter, what you start seeing over time is evidence of increasing deterioration.”
The Olympic Dam furnace has large internal dimensions, and re-lining it will consume more than 2,000 tonnes of bricks. The work will take about 40 days and cost close to A$50 million, including the replacement of cooling jackets.
An additional A$40 million will be spent on associated refurbishments and repairs to the smelter, anode furnaces, slag furnace and sulphuric-acid plant — work that is normally scheduled to coincide with each smelter re-line.
An additional A$30 million is earmarked to improve the capability of the gas-handling system and acid plant.
Because of these new problems, WMC now estimates that Olympic Dam may produce 170,000 tonnes copper in 2002 and 185,000 tonnes next year, down from 200,523 tonnes in 2001 and well below the expanded facility’s nameplate capacity of 235,000 tonnes per annum.
“There will be a revenue drop during the time that the smelter actually stops,” says Morgan. “There’s really no other substitute that we can look at at this time.”
On a brighter note, Morgan stresses that Olympic Dam should reach its full capacity of 235,000 tonnes copper in 2004. He added that a re-building of the solvent-extraction plant is progressing, with the uranium circuit now scheduled to be commissioned in November 2002 and the copper circuit in March 2003. Also, WMC’s long-term uranium contracts with power utilities will be met, he says, and no force majeure will be declared at Olympic Dam.
Detailed information will be included in WMC’s half-year financial results, due to be released in mid-August. Meanwhile, the company has revealed that for the half-year ended June 30, 2002, Olympic Dam produced 87,826 tonnes refined copper, 1,192 tonnes uranium oxide, 37,605 oz. gold and 321,283 oz. silver. For all of 2001, WMC produced 200,523 tonnes copper, 4,379 tonnes uranium oxide, 113,412 oz. gold and 912,859 oz. silver.
Costs in 2001 were about US45 per lb. copper, after byproduct credits, making Olympic Dam one of the lowest-cost producers of copper in the world.
Olympic Dam’s uranium-oxide production represents 11% of the world’s total, making WMC the world’s second-largest producer after Canada’s Cameco.
In terms of revenue at Olympic Dam, copper contributes 75%, uranium accounts for 20%, and gold-silver, for 5%. Copper sales have been directed to southeast Asia (30% of total sales), northern Asia (28%), Australia (26%) and Europe (16%); uranium has been sold to the U.S. (54%), Japan (23%), Europe (22%) and Canada (1%).
WMC earned A$402 million (A36.4 per share) in 2001 on operating revenue of A$2.8 billion, with its copper-uranium division accounting for A$48 million in profits and A$913 million in revenue.
For 2002, analysts have slashed profit estimates for WMC by roughly 15-25% to about A$310-330 million, since earnings are likely to be hit by lower copper and nickel production, as well as lower copper and alumina prices.
WMC has also reported that its insurance costs had increased, particularly in the wake of another fire at Olympic Dam.
Discovered in 1975, Olympic Dam began producing in 1988 at the rate of 45,000 tonnes copper per year. In the late 1990s, WMC began a A$2-billion effort to triple the annual capacity to 235,000 tonnes. This expansion program is still under way, with a larger concentrate burner due to be installed in the smelter in the fourth quarter. Beyond that, WMC is looking at ways to expand Olympic Dam to between 350,000 and 600,000 tonnes per year.
In March 1999, operations were hampered by an explosion in the acid plant and smelter, followed by two fires in the solvent-extraction portion of the plant in December 1999 and again in October 2001.
Geologically, the deposit is characterized by a large body of fractured, brecciated, and hydrothermally altered granite, plus various hematite-bearing breccias and minor tuffs and sediments, all of which date from the mid-Proterozoic period. Overlying the breccia complex are 300 metres of barren sediments that range in age from late Proterozoic to Cambrian.
Including reserves, the total resource at Olympic Dam is 2.7 billion tonnes grading 1.2% copper, 0.04% U3O8, 0.5 gram gold per tonne and 2.7 grams silver per tonne.
The reserve consists mostly of disseminated copper-uranium ore with minor gold and silver. Uranium ore occurs in association with copper as uraninite and sometimes coffinite and brannerite. There are also limited amounts of gold ore.
The deposit is zoned, with iron sulphides found at depth and on the outer edges of the deposit, and copper sulphides found toward the core and the surface. Underground drilling has been probing what may be a new zone, west of the mine’s main workings, with initial results highlighted by 40-metre-thick zones of bornite and chalcocite mineralization.
De-merger plans
WMC, Australia’s third-largest mining company, intends to break up into two companies, or “de-merge.”
Under the plan, which was unveiled in November, WMC’s 40% stake in Alcoa World Alumina & Chemical (AWAC), a profitable 40-year-old alumina joint venture with majority owner Alcoa, will be split into another company, to be named Alumina Ltd.
WMC will fold its four remaining assets — its nickel business unit, the Olympic Dam asset, fertilizer operations in Queensland, and a minerals-sands project — into a new company, to be named WMC Resources.
The de-merger initiative arose following an acrimonious rejection last year of a takeover proposal from U.S. aluminum giant
Alcoa’s cash-and-share bid was valued at A$10.20 per WMC share, whereas WMC believed its shares were worth somewhere between A$11.18 and A$12.91 apiece, based on valuations by Grant Samuel and J.P. Morgan.
Oddly, Alcoa never did make a formal proposal to WMC’s shareholders, and nothing resembling a bidding war ever got under way.
WMC notes that one of the main reasons for the de-merger is the structure of the AWAC agreement, which stipulates that both partners can engage in alumina projects only through AWAC. This means that any bidder for WMC would run the risk of having to fold its alumina assets into AWAC or else sell them.
The second reason for the de-merger is to lessen any chances a bidder for WMC would break alumina-industry competition rules — something that
became an issue during the Alcoa-Reynolds merger in 2000.
In effect, WMC believes that with the de-merger completed and both companies trading on the Australian Stock Exchange, a full valuation of its assets will finally be possible. WMC especially hopes to be able to attract additional bidders for its assets, including major aluminum players such as
Once new Australian de-merger tax legislation is approved by parliament in the coming months, WMC will hold a shareholders meeting to gain acceptance of the de-merger proposal.
Earlier in the year, the company announced that Morgan would be retiring in July 2003 and Chairman Ian Burgess would step down at the annual meeting in mid 2003. Morgan is in his early 60s; Burgess, in his early 70s. Chief Financial Officer Donald Morley is also due to retire once the de-merger process is completed.
AWAC has the capacity to produce 13 million tonnes of alumina per year from operations in Australia, the U.S., Spain, Suriname, Jamaica, Brazil and other countries. AWAC also has interests in 18 alumina chemicals plants in North America, Europe, Asia and Australia.
WMC’s stake in AWAC accounted for 40% of its cash flow last year.
WMC’s nickel unit comprises the Mt. Keith, Leinster and Kambalda mines plus a smelter and a refinery, all situated in Western Australia. In 2001, these three mines produced a combined 107,458 tonnes of nickel-in-concentrate, and the company also purchased third-party feed totalling 19,717 tonnes contained nickel.
The recent recommissioning of WMC’s nickel smelter in Kalgoorlie resulted in improved output at all nickel operations in the second quarter. The smelter is now operating at 95% capacity, or at 100,000 tonnes per annum.
Long-Victor
In July, WMC sold the Long-Victor nickel mine complex to Lightning Nickel, a subsidiary of Australia’s Independence Gold.
As for precious metals, WMC has been active in gold mining and exploration since its incorporation in 1933. However, last year the company largely exited the business with the A$505-million sale to
WMC also sold off its talc assets, for A$71 million in profits, and in January 2002, it unloaded its 50.5% interest in Aussie junior Central Norseman Gold to Croesus Mining for A$27 million in profit.
The 56%-owned Meliadine gold project in Nunavut is in limbo pending completion of a project review, which may include its sale. In 2001, WMC spent A$7.5 million working at Meliadine.
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