BHP's Olympic dream

In 2011 BHP Billiton will announce major expansions of iron ore, copper and Gulf of Mexico oil. These are important moves, but longer term shareholders should watch developments at Olympic Dam which will transform the company more than any other single asset since BHP's discovery of Bass Strait oil in the 1960s.

Over the Christmas New Year break I read David Upton's fascinating book The Olympic Dam Story.

Since acquiring Western Mining, BHP has more than doubled Olympic Dam ore reserves and according to Upton, BHP has converted Olympic Dam into the most valuable mineral resource in the world. Upton estimates that the current value of Olympic Dam ore is around $863 billion including $470 billion in copper, $270 billion in uranium, $116 billion in gold and $8 billion in silver.

The $863 billion valuation means that Olympic Dam has surpassed the value of Norilsk's nickel-copper-palladium-platinum resource in Siberia which is valued at $745 billion. The Andina Chile copper deposit is third at $631 billion.

Because BHP's drilling has doubled the Olympic Dam ore body it is now economic to create the world's biggest open cut mine. BHP will spend the next five to seven years removing the overburden. The world has never seen mining on this scale before. Under the BHP plan final product treatment will probably take place in China so we are looking at a massive transportation exercise – perhaps via Darwin. China will need the uranium because it is erecting hundreds of nuclear power plants and will later use its technology to erect them around the world.

Upton's book documents the heroes behind the WMC discovery of Olympic Dam which had no surface outcropping and needed deep drilling to find. What WMC achieved reminds me of the more recent high technology pioneering that spawned Microsoft, Google and many others. In almost all cases the initiators were not large public companies but small entrepreneurial ventures.

That's exactly what WMC was. It had a Collins House, large corporation heritage but under the late Lindesay Clark and Arvi Parbo more than half its cash went into exploration where it achieved unparalleled success. The exploration genius was Roy Woodall, but part of his genius was to attract some of the best young exploration minds in Australia and in one or two cases encourage them to go abroad and bring back new ideas. It was those new ideas that lead to the discovery of the world's largest mineral resource.

The deposit probably required a giant company like BHP to develop. And remember that the first exciting discovery was in 1976 yet this project will not reach full capacity until the end of this decade – more than 40 years later. While institutional shareholders think in six to 12 month time frames the chief executives of mining companies must think in decades.

Yet they also have to be nice to the institutions. At one time the institutions called Western Mining Corporation the Wasting Money Corporation. In many ways David Upton's book on Olympic Dam is the story of executives and board that raised equity when it was available but thumbed their noses at institutions who wanted them to think short-term. It's an inspirational Australian story. I commend the book to you.