BHP Cools Copper Ambitions
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Several times in the past couple of months we have brought your stories about BHP Billiton’s gathering enthusiasm for copper, and its lack of interest in nickel.
A briefing yesterday in Adelaide by BHP Minerals Australia’s CEO, Mike Henry and his management team confirmed both approaches - especially the attraction to copper, with plans to continuous upgrade and expand the huge Olympic Dam mine in South Australia over the next few years at a cost of close to $A3 billion.
But the plan, if adopted, will be less ambitious than the original plan - if approved the company will boost production from Olympic Dam to 330,000 tonnes a year of copper by 2023 (from 150,000 tonnes at the moment) instead of the previous target of 450,000 tonnes a year.
BHP is still trying to sell its Nickel West business in Australia, but is also prepared to further expand the nickel sulphate production at its WA refinery near Perth because of growing demand from the new battering business.
All this was explained in the context of BHP’s plans to cut costs in its Australian mining operations by a further 10% aimed at producing $US1.6 billion ($A2.2 billion) in productivity gains over the next two years.
At the investor briefing in Adelaide, BHP Minerals Australia president Mike Henry said the company had reduced costs at its Australian mining operations (which include the high quality iron ore mines in WA and the Queensland coking coal and NSW energy coal mines, as well as nickel and Olympic Dam) over the past five years and would continue looking for new savings by bringing in expertise from other industries and better leveraging technology (as remote machine operation).
BHP shares dropped 2% yesterday to $27.38 on investor worries about demand for commodities that again seems to be overdone and linked to the very trading in Chinese sharemarkets.
Included in yesterday’s briefing was a bullish outlook for steel and raw materials prices in China (the world’s most important market) which it says could rebound sharply before February as buyers look to replenish stocks.
“While steel production in China will fall in the short term due to the mandated winter cuts and this could impact short term demand for iron ore and met coal ... record margins means competition for premium quality raw materials is high," vice-president of marketing Vicky Binns told the investor briefing
"This gives substantial price support for most of our iron ore and met coal [production]. The push towards high-quality raw material is not only short term. Continued supply-side reform and increased governmental focus on compliance to environmental regulations means that structural reform will drive high quality premium differentials."
On copper Ms Binns said that the short-term outlook was supported by a shortage of copper concentrates, after several disruptions at mines and the potential for work stoppages over wage agreements in Chile and Peru into 2018, as well as changes to China’s scrap import regulations. (http://www.bhp.com/media-and-insights/prospects/2017/11/ten-reasons-why-we-like-copper?utm_source=Subscribers&utm_medium=Organic&utm_campaign=Prospects&utm_content=TopReasonsCopper)
BHP is facing a renewed outbreak of industrial unrest at its huge Escondida mine in Chile that saw a one day strike last week, and a possible repeat this week.
In his speech, Mr Henry said the mining giant’s Australian assets underpin current margins and future investment opportunities.
"The quality, scale, concentration and location of our assets support improvement initiatives, compelling latent capacity options, efficient technology deployment and attractive investment opportunities," Mr Henry said.
"With our global technology initiatives and asset-level programs to unlock resources and lower costs, we expect our Australian mining operations to deliver $US1.6 billion of additional productivity gains over the next two years."
With copper now the big attraction (along with conventional oil) BHP is focusing on Olympic Dam where it is already spending $US600 million over the next year renewing the operation which will in turn boost output.
BHP is now eyeing a further $US2.1 billion ($2.8 billion) expansion of the underground mine, where it says the copper resource is so large it would take 500 years to deplete at the current rate of mining.
The company is working towards increasing copper grades at Olympic Dam by three per cent by 2023. BHP highlighted the potential to increase production at Olympic Dam even further in the coming years through the brownfield expansion option (BFX), which is being considered for investment.
Olympic Dam president Jacqui McGill said the BFX option could provide a capital efficient path to increased capacity through accelerated development into the Southern Mine area.
The BHP board will consider the expansion plan in 2020 (at this stage)
“As we move into the Southern Mine area we expect to see the copper grade increase by three per cent by financial year 2023, which we believe would coincide with a structural deficit in the copper market,” Ms McGill said.
“If approved, the BFX option could lift production capacity by 330,000 tonnes of copper per annum and move Olympic Dam into the first quartile of the cost curve, which is where we strive to be with all our assets at BHP.
“Any investment however, must compete for capital against all other options, including returns to shareholders.”
McGill said other long-term development options, including the use of heap leach technology, also had the potential to increase Olympic Dam copper production.
"Current estimates put the OD (Olympic Dam) resource in excess of 120 million tonnes of copper equivalent. At current production rates, it would take us around 500 years to deplete it. And while scale is important, what makes Olympic Dam so unique is the combination of grade and scale,” she said.
As recently as 2015, the company was talking about the potential to increase production to 450,000 tonnes a year by 2025 by introducing a new heap leaching, or extraction, technology. But now it will opt for a ess ambitious target
Olympic Dam, about 600 kilometres north of Adelaide, is the world’s third-largest “copper equivalent deposit", as well as the world's largest uranium deposit and third-largest deposit of gold.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.