BHP’s Olympic Dam down to 25% output for months

Vancouver – The price of uranium seems to climbing up out of its latest slump, spurred on by confirmation from BHP Billiton (BHP-N, BLT-L) that production at its Olympic Dam mine will be down to just 25% for as long as six months while the main haulage shaft is repaired followed a major accident.

No one was hurt on Oct. 6th when a breakdown in the hoisting system sent a fully loaded ore skip plummeting to the bottom of the 800-metre deep Clarke mine shaft. The weight of the loaded skip sent another, unloaded skip shooting up the shaft into the headframe.

Clarke is the main shaft at Olympic Dam, responsible for hauling at least 80% of the ore out of the massive underground mine. The secondary shaft, known as the Whenan shaft, is still fully operational but is considerably smaller.

In a production update on Oct. 21st, BHP admitted ore hoisting at the mine will be reduced to 25% of its usual level “until full production resumes in the third quarter of the 2010 financial year.” BHP’s financial year ends at the end of June, which means the reduction could last six months.

Olympic Dam, the largest underground mine in Australia, usually produces roughly 200,000 tonnes of copper and 8.9 million lbs. U₃O₈ of uranium each year. The reduction in copper output, while not insignificant, will not be enough to impact world markets. The drop in uranium production, however, is different story because Olympic Dam’s output constitutes roughly 8% of global mine supply.

If the mine operates at only 25% for six months, that will remove some 3.3 million lbs. U₃O₈ from global supply, which represents roughly 10% of annual spot market volume and 3% of primary supply. In addition to reducing supply, the drop in output might force BHP or its customers to buy uranium in the market, at the spot or short-term contract price rather than at their usual long-term negotiated price. Both would push up near-term uranium prices.

The second point might not become an issue, though, because coincident with announcing the six-month production cutback BHP also declared force majeure on some of its copper and uranium contracts. Force majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event occurs.

The company would not comment on whether the smelter could be operated economically at just 25% capacity or on what the impact would be to its metal sales. The company did say its manager for energy coal, Jimmy Wilson, has been chosen to head an investigation into the cause of the haulage system breakdown.

The price of uranium is currently sitting at US$46 per lb. U₃O₈, almost exactly the level it was at a year ago. In the interim it has spiked and troughed twice, climbing as high as US$55 per lb. and sinking as low as US$40 per lb. U₃O₈.