Slower, lower, weaker at Olympic Dam

The beleaguered uranium subsector got a bit of an indirect boost in late August. The world’s biggest miner, BHP Billiton, declared as part of its year-end results that the 800-pound radioactive gorilla in the room — a planned US$30-billion expansion of its already huge Olympic Dam copper-uranium-gold-silver underground and open-pit mining complex and mill in South Australia — would be set aside for years, and dramatically scaled back in size and cost.

Against a backdrop of company-wide annual profits shrinking 21%, BHP specifically cited “current market conditions, including subdued commodity prices and higher capital costs” as having led to the decision, and said it would record a US$346-million before-tax impairment charge on Olympic Dam for the 2012 financial year.

Located 550 km northwest of Adelaide, Olympic Dam is one of the planet’s true geological freaks, boasting billion of tonnes of economic quantities of copper, uranium, gold and silver mineralization in a textbook example of an iron ore copper-gold (IOCG) deposit. Today, Olympic Dam ranks as the world’s fourth-largest copper deposit and the largest single uranium deposit. Western Mining Corp. (WMC) found Olympic Dam in 1975 and started mining it in 1988. BHP bought WMC in 2005.

If BHP’s expansion had gone ahead as planned, Olympic Dam would have become the world’s largest open-pit mine at 1 km deep, 3.5 km wide and 4 km long. The pre-stripping efforts would have been colossal, and there were more plans to build extensive supporting infrastructure, such as a desalination plant, new port facilities and an airport.

BHP is already moving to shrink its 190-person, Adelaide-based Olympic Dam expansion technical team, with some 140 employees now facing transfers or layoffs, reports The Wall Street Journal from Melbourne. U.S.-based engineering consulting firm Jacobs Engineering had been working on the expansion plans for two and half years, but its contract ran out before the expansion cancellation decision was announced.

In his year-end statements, BHP chief executive Marius Kloppers said the company would look at expanding underground operations at Olympic Dam on a much more modest scale. Olympic Dam’s complex metallurgy has always been a headache to deal with, but BHP is also hoping that its pioneering metallurgical research over the past half-dozen years could result in better and more economic metal recoveries from Olympic Dam ore.

Looking ahead, BHP remains bullish on copper at least, commenting that the “long-term dynamics for copper are particularly positive.” It argues that structural operating and capital cost pressure associated with rising strip ratios and declining ore grades “suggests that a relatively steep copper cost curve should be maintained,” and that the need to attract substantial new capacity into the market every year, if supply is to keep pace with demand, “should provide long-term support for the copper price.”

BHP is putting off other major new projects across its business units, but is still committing an astounding US$22.8 billion for 20 ongoing capital projects in financial 2013.

The vast scale of the shelved Olympic Dam expansion project even had economists revising downward Australia’s overall economic outlook in the coming decades. Speaking to an Australian radio interviewer, Australia’s Resources Minister Martin Ferguson was blunt in his assessment of the mining industry’s health Down Under: “You’ve got to understand, the resources boom is over. We’ve done well: A$270 billion in investment, the envy of the world . . . [but] it has gotten tougher in the last six to twelve months.”

BHP made up the Olympic Dam writedown and more, by striking a deal a few days later to sell its wholly owned Yeelirrie uranium deposit 630 km northeast of Perth, Western Australia, to Canada’s Cameco for US$430 million. WMC discovered uranium at Yeelirrie in 1972.

Meanwhile, uranium developers around the world are breathing a sigh of relief that this enormous new supply of uranium won’t be hitting the market.

With spot uranium oxide prices sinking back in recent months to break-even levels for most producers of around US$49 per lb. U3O8, there’s every indication that we’ve at least hit a good, solid floor for uranium prices that will serve as a base for better days ahead.

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