BHP, Rio splash $3.7b on Chilean water

As mining companies around the world cut their capital spending, BHP and Rio, the owners of the world's largest copper mine, the Escondida project in Chile, have decided it needs a $US3.4 billion ($3.7 billion) water plant.

The loss of access to a water supply in four years has forced them to commit to the heavy new round of spending on the project. When completed, the water plant will allow the partners to significantly upgrade the project's capacity.

BHP's share of the new investment is estimated at $US1.97 billion and Rio's $US1.03 billion, with construction to begin immediately and completion planned for 2017.

The commitment comes as the partners are in the middle of a $US4.5 billion round of spending to be completed next year, primarily on a new ore concentrator and ancillary upgrades.

When completed, this upgrade will enable production to run at more than 1.3 million tonnes of copper a year from 2015.

Early last year, when the partners disclosed the $US4.5 billion upgrade, they indicated this was the first in a series of programs that could substantially expand capacity at the mine. Lifting output further would necessitate access to significantly greater volumes of water, which the planned desalination plant will provide.

"This investment was well flagged on the site visit to Escondida in October 2012," Deutsche Bank analyst Paul Young said on Friday. "However the timing is a little earlier than we had expected.

"The critical path is the expiry of the local aquifer leases in 2017, which currently supply 75 per cent of the mine's water."

The planned desalination plant will increase the supply to the mine by nearly 50 per cent and will give the partners the option of a further big boost to ore throughput and copper production.

"Securing a sustainable water supply in the Atacama Desert is a major priority for all Chilean copper producers," BHP copper division head Peter Beaven said. "The new desalination facility will minimise our reliance on the region's aquifers, which will help us to meet our environmental commitments and enable us to achieve our long-term business strategy."

Rio Tinto's investment will be funded through the company's share of Escondida's cash flows.

BHP has a 57.5 per cent share of the project and is its manager. Rio holds a 30 per cent stake.

Both companies made a show earlier this year of moving to axe several planned investment programs amid caution over the outlook for metals prices, and the plan for the desalination plant is the largest new spending commitment by either company since the cutbacks.

In the year to June 30, copper output rose 28 per cent to 1.1 million tonnes as the average copper grade mined rose to 1.4 per cent and milling rates improved. Output is expected to be sustained at this level in the 2014 financial year before it is lifted to 1.3 million tonnes the next year.