BHP Billiton's desperate Olympic race

Reasons for any deferral of Olympic Dam are deeper than China's slowdown and indicate BHP may not be the right company to develop Australia’s richest mineral deposit alone.

BHP has been quietly flagging that it will delay development of Olympic Dam for two years because of the slowdown in China and the fall in mineral prices. A decision will be made in December. 

That explanation will satisfy the short term crazed institutions but the reasons for any deferral of Olympic Dam will go much deeper and indicate that BHP may not be the right company to develop Australia’s richest mineral deposit – at least not alone. 

The BHP plan is to dig an enormous open pit and take out the ore (see footnote) and there is no better company to do that than BHP. But Olympic Dam requires much more. First to justify expenditures of around $30 billion, Olympic Dam can’t be just left to the whims of the markets for uranium and copper. Customers need to commit to the product at a price that delivers a return and for that commitment they will want to take some of the equity to be protected on the up side.

Then comes the technical side, where Olympic Dam appears to have major hurdles to overcome.

It is no secret that the mineralogy of the Olympic Dam copper sulphides is complex and this caused the giant Anglo group to walk away from bidding seriously for WMC in 2005. Anglo engineers argued that while a flotation process should be straightforward, uranium would remain in the copper concentrates. And even after an acid leach of those concentrates, the level of uranium in the concentrates would present technical and political problems if the concentrate material had be transported.

Seven years later and it seems that there is still no widely accepted hydro metallurgical route for the recovery of uranium from an acid leach in relatively saline water. Some say a desalination plant would be required but that would  be a huge cost 

Others say that BHP needs to erect another smelter, as the previous Olympic Dam owner, WMC, concluded. WMC showed that the smelter process works and the WMC smelter continues to treat ore mined underground at Olympic Dam. But it is expensive and BHP has made it clear that erecting another smelter is not their favoured option so they must devise a solution. If Olympic Dam is deferred then it is likely BHP has not found a non-smelter economic solution to the uranium extraction problem isolated by Anglo seven years, given the huge fluctuations in market metal prices.  

But there is another problem that is causing some to speculate that BHP needs a technical as well as a customer partner at Olympic Dam. BHP was once a global mining technology giant. That is no longer so and it relies on outsiders for much if its technical expertise. The company has a history of failure in high technology mining ventures including Hartley Platinum, hot iron briquettes, mineral sands and Ravensthorpe.

In the case of Ravensthorpe Nickel, BHP lost $3.6 billion after closing down the mine in 2009 after less than a year of operation. BHP sold the dormant plant to First Quantum Minerals for $340 million and First Quantum had the expertise to run it profitably. Any non-smelter solution to Olympic Dam will again thrust BHP into high technology mining treatment where it has a track record of failure. BHP is not the only global miner to run down its technology in favour of highly profitable digging and shipping. If BHP steps back from Olympic Dam in December it should also reveal any wider long-term treatment problems and canvass new partners.

Footnote: BHP's environmental statement revealed it planned to spend six years removing the overburden to access the ore body. In all, it planned to remove a 350 metre thick layer of overburden and the rock taken out will be transported to a rock storage facility that covers 6,720 hectares and will eventually be 150 metres high. By 2050, when the mine has not even completed half its life, the pit would  be 4.1 kilometres long, 3.5 kilometres wide and one kilometre deep (An Olympic victory for BHP, May 16, 2011).

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles