Sydney, July 25, 2008 (ABN Newswire) - A major dilemma is taking shape for BHP Billiton as two vital, major copper expansion projects compete for the board's attention

Both are important to the long term viability of existing businesses, but it would seem that from the publicity BHP has given the new deposit outlined at Escondida in Chile, this could have the inside running over the more costly and technically difficult Olympic Downs expansion in South Australia

For all BHP's huge cash flows and undoubted resources, the risks of expanding both copper mining businesses at the one stage, will be huge and logic says that only one will happen.

Olympic Dam does have the virtues of the extra gold and uranium that will be produced, but it will be a copper expansion at heart.

Both will involve the spending of billions of dollars, but with Escondida suffering a sharper than expected drop in output from next year because of lower mining grades, it's felt the Escondida expansion will end up being preferred.

In fact BHP had a lot to say about the new prospect in this week's yearly production report.

"Total copper production at Escondida is expected to decline by approximately 10 to 15 per cent in the 2009 financial year compared to the 2008 financial year levels due to lower ore grade. 

"Production is then expected to continue at similar levels to the 2009 financial year.

"The Escondida resource base presents numerous options for delivering production growth in future years, which are currently under study.

"Exciting results from exploration of the Escondida mining lease are being obtained in areas close to existing infrastructure and processing facilities, including the new Pampa Escondida prospect.

"The Escondida resource base presents numerous options for delivering production growth in future years that are currently under study. 

"These studies, including the addition of a third concentrator, are at various stages of development, and are focused on increasing copper production in the face of declining ore grades, either through improved copper recovery or increased production rates.

"Extensive exploration of the Escondida mining lease has been underway in recent years; with the knowledge that additional reserves will enhance the investment in further concentrator capacity. 

"Exciting results are being obtained in several areas close to existing infrastructure and processing facilities, including the new Pampa Escondida prospect. Drilling to date suggests that Pampa Escondida contains at least 1 billion metric tonnes of porphyry style mineralisation.

"In order to properly and rapidly evaluate identified exploration targets, decisions were recently made to aggressively expand the exploration and development drilling program. 

"The drilling program will be ramping up from 11 drill rigs that completed 94,351 metres in the 12 months ended 30 June 2008 to 25 drill rigs estimated to complete 320,000 metres in the 12 months ending 30 June 2009, maintaining the capability of completing over 300,000 metres annually.

"Over the next five years, Escondida will invest an estimated US$327 million (US$188 million BHP Billiton share) in drilling, assaying, and metallurgical testwork across the entire mining lease. 

"This work will be directed at the delineation and expansion of three specific projects (including Pampa Escondida), along with the continued exploration of additional targets based on new geological models of mineralisation from the recent work."

In contrast there was nothing in the BHP report, or the quarterly development and exploration reports about the future expansion of Olympic Dam. 

"More is known from various publications in the past three years, but suddenly the Pampa Escondida prospect has emerged out of nowhere and is now a contender for BHP's billions.

A billion tonnes of low grade ore is a huge deposit: Olympic Dam has uranium and gold as well to sweeten the returns, but it will be the largest hardrock mining project ever undertaken in Australia.

There are water, power and carbon emission issues with Olympic Dam, as there will be with expanding Escondida.

But Olympic Dam is profitable now and will grow more profitable as the future for uranium is as much a driver for this mine as copper.

But BHP and its partners at Escondida, which include its takeover target, Rio Tinto, and Mitsubishi, have invested billions at the huge Chile mine and if they have a chance of keeping output at a more profitable level then they will spend money on the expansion.

To give you an idea of just how important the expansion at the new prospect is, look at the following figures. BHP and its partners will spend $US327 million working at proving up the project over the next five years. BHP is spending around $US650 million a year on mineral exploration. 

In the year to June BHP said it spent US$658 million on minerals exploration, of which US$547 million was expensed.

Assuming now further increase over the next five years BHP will spend more than $US3 billion on exploration for minerals, and 10% alone will be spent at Pampa Escondida. Around 25 rigs will be on site, compared to a maximum of 17 at Olympic Dam.

BHP will look to exploit the prospect, if it's economic to do so, via a third concentrator at Escondida, but that would not be built until 2013 at the earliest. Work is supposed to have started on Olympic Dam by then.

In fact we might get a very good idea of BHP's priorities around October when an update on Olympic Dam is due.

At the same time the company is deciding if it can expand Olympic Dam in South Australia, or commit to a dramatic new project next to its huge Escondida mine in Chile. The company will be looking to spend heavily in bringing the new 50% owned the New Saraji Project coking coal mine in Queensland into production.

BHP and its partner, Mitsubishi, have just spent $2.5 billion buying the new Saraji project from New Hope Collieries. 

It's a 10 million tonne a year high quality Bowen Basin coking coal mine with approved export capacity. The irony is BHP and Mitsubishi owned the area but let it go around six years or so ago because of the poor outlook for the global iron and steel industry.

A full 10 million tonne a year mine would be worth around $US3 billion or more at current prices for hard coking coal of approximately $US300 a tonne.

Capital costs are unknown, but would be over $A1.5 billion because of the savings being located next to the existing Saraji mine in the Bowen Basin.

And strangely, Rio Tinto didn't refer to the looming fall in output from Escondida in its half yearly production report last week.

Here's what it said: "Mined copper for the quarter improved by 22 per cent compared with the corresponding period of 2007, attributable to higher volumes of leachate material. Production at Escondida has been impacted by haul truck and shovel maintenance and availability issues".

BHP is the operator, so responsibility falls to them for major announcements, but this is an issue of great importance to both companies, and the value of Rio Tinto in the takeover.

Escondida is the world's largest copper mine, producing more than 1.4 million tonnes of copper last year - nearly 10% of the world's supply. And copper is the highest margin commodity for both companies.

BHP shares fell sharply yesterday, down $1.13 to $37.55. Rio Fell 4% to $115.20. The BHP 3.4 share offer for Rio was valued at $127.67


 

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