BHP charts Olympic Dam expansion road map

BHP Billiton (BHP-N, BLT-L), the world’s largest mining company, is planning to expand production at its Olympic Dam copper / uranium / gold mine in Australia. And to diminish risk from the multi-billion dollar project, the company is opting for a stage-wise expansion.

The sheer scope of the expansion becomes clear when looking at mine throughput. The existing mine is projected to hoist 9.7 million tonnes ore and mill 9.9 million tonnes in 2008. When the final stage of the project is completed, mining and milling capacity are envisaged to grow more than sixfold, to no less than 60 million tonnes ore per year, equivalent to 164,000 tonnes per day. BHP has outlined its expansion plans in a presentation to analysts in October.

Measured, indicated and inferred resources at the mine are about 8.3 billion tonnes. This ore contains a resource of about 2.3 million tonnes uranium oxide, a resource larger than that of any other mine in the world. (For comparison, Cameco’s (CCO-T, CCJ-N) McArthur River mine in Saskatchewan has a resource of 158,000 tonnes uranium oxide, about 7% of the resources at Olympic Dam.)

The copper resources, at over 70 million tonnes, are also considerable, ahead of resources at major mines such as Escondida (in Chile) and Grasberg (in Indonesia). The mine also has substantial gold resources, at about 80 million oz.

Looking at the copper market, BHP sees demand underpinned by growth in the BRIC (Brazil, Russia, India and China) countries, where urbanization is requiring energy and infrastructure build-out. This has led to demand growth of 3.3% per year over the last decade. For example, copper demand growth in India has averaged 9.9% per year over the last decade, and is forecast to grow by 7.7% per year until 2020.

To give an idea of the scale of growth, BHP says that in 2007 China has added more electricity generating capacity than the entire electrical output capacity of the U.K.

BHP believes that supply interruptions will escalate into constrained supply growth in the future. The company projects a situation where there are delays of two to three years in bringing copper mines on line. All kinds of obstacles stand in the way of new projects, such as equipment stress, labour disputes, cost pressures, energy constraints, resource nationalism etc. For this reason, supply-side response challenges will continue.

Turning from copper to uranium, BHP again sees Chinese growth as a major growth catalyst. China is planning to have nuclear generating capacity of 70 gigawatt by 2020, about 5% of total generating capacity. Currently there are 11 reactors with a combined output of 9 gigawatt, and another 16 reactors under construction with a combined output of 16 gigawatt. The company says that China is preparing for a major nuclear power generation program, and the nuclear growth will not be limited to coastal provinces.

Looking at the worldwide uranium supply / demand picture, BHP believes that, for the short to medium term, the market is balanced, but over the long term, mine supply growth is required.

Currently about 90% of uranium sales worldwide are handled by fixed-price long-term contracts, and BHP forecasts that this will decline to about 20% by 2015 and about 10% by 2021.

Before committing to the mine expansion, the company is signing supply contracts with uranium consumers. So far, ten term sheets have been signed, and BHP reports that “aggregate market interest is well in excess of the first phase expansion tonnage.” (The first phase expansion will raise annual production to 4,500 tonnes uranium oxide from 4,000 tonnes.)

Based on third party estimates of cash costs at Olympic Dam, the mine seems to be highly profitable. One estimate puts cash costs at about US60¢ per lb. copper, while the market price is US$1.59 at presstime. For uranium, cash costs are estimated at US$12 per lb. uranium oxide, while the present spot price is US$55 per lb., and the long-term contract price is US$70 per lb.

Copper head grade is about 1.8% at present, while uranium oxide head grade is about 0.055%. Uranium recovery is about 73%.

BHP has now established the configuration of the mine expansion, and has decided on a stage-wise expansion path. Even before the mine expansion itself, BHP is planning to raise ore volumes to offset declining grades.

Currently, an environmental impact statement is in preparation, to be submitted to government in December 2008. It will have to get approval from three ministers: one federal, and the other two from two different provinces. The company hopes to receive project approval by 2010.

The first stage of the expansion will consist of optimizing the existing operation, and is designed to raise throughput by about 20% to 12 million tonnes per year. Stages 2 through 5 will raise throughput gradually to 60 million tonnes per year. To reduce capital expenditure, it is likely that concentrate will be shipped to smelters in China.

Currently, annual production stands at 180,000 tonnes copper, 100,000 oz. gold and 4,000 tonnes uranium oxide. After the first stage optimization, annual production is envisaged to rise to 200,000 tonnes copper, 120,000 oz. gold and 4,500 tonnes uranium oxide. Once the last stage, stage 5, is completed, annual production will grow to 730,000 tonnes copper, 800,000 oz. gold and 19,000 tonnes uranium oxide.

The company plans to have the stage 1 optimization completed and running by 2013. Development of an open pit will take five years.

BHP is planning to use Autonomous Mining Systems at Olympic Dam, in order to reduce mining costs and lower risk exposure. These are automated and semi-automated machines for mining and material-handling. Initially, the company is planning to embark on a pilot program.

In addition to Olympic Dam, BHP also owns the Yeelirrie deposit, Australia’s second largest undeveloped uranium target. It is located 130 km north of BHP’s Mount Keith Nickel Mine in Western Australia.