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Sydney - BHP Billiton [JSE:BIL] on Wednesday approved $1.2bn in pre-commitment capital to start expansion work on its Olympic Dam copper and uranium mine, which analysts estimate could nearly cost 30 times that much to develop fully.
The funds will be used to buy trucks, build worker housing and for other items requiring lengthy lead times, it said.
BHP said it will not make a final decision to go ahead until mid-2012, after it weighs up the 150 environmental conditions imposed on the project by the national and South Australia state governments this week.
Once fully developed, Olympic Dam would almost be on par with the massive copper mines of South America, although it would take years before the mine came close to matching the output of BHP’s giant Escondida lode in Chile.
“The Olympic Dam project team is completing studies to create one of the world's largest open pit mines, with the potential to increase copper production from around 180,000 tonnes per annum to 750 000 tonnes per annum and beyond,” BHP CEO Marius Kloppers said in a statement.
BHP has not given a total cost estimate for the project but analysts say it will need $20bn to $30bn to fully develop the lode.
Royalty payment
In a related development, BHP agreed to maintain a 5% royalty payment to the government of South Australia, home to the mine, for uranium and 3.5% for other metals after the expansion. The royalty rate is guaranteed for 45 years.
“BHP have sought with great vigour to get a reduction in royalties,” South Australian minister Kevin Foley said in a statement.
Based on today’s copper price, BHP would pay around $260m a year in royalties on copper alone once the expansion is complete.
The agreement was signed by Kloppers and South Australia leader Mike Rann in Melbourne on Wednesday and requires BHP’s board to give its final approval for the first phase within 12 months.
Asked by reporters if the 12-month deadline was negotiable, Rann said it wasn't, in order to ensure changing market conditions would not dampen BHP’s interest.
Concerns are mounting that industrial growth in China, the world’s biggest consumer of copper was slowing down, cutting demand for the metal at a time when the global supply pool is increasing.
Exchange-traded copper shed nearly 3% on Tuesday as worries about the sustainability of China’s economy compounded the Western world’s growth prospects.
“That’s why we insisted on the 12-month sunset clause whether there is a global downturn or not,” Rann said.
Most of the $1.2bn is conditional on parliamentary approval of a binding agreement with the state government, with the state parliament expected to endorse it by December.
Geologists estimate BHP Billiton will take four or five years to access the additional ore required for the expansion, after which the life of mine would be extended to more than 100 years from its current 20 years.
BHP has agreed to set aside a chunk of land roughly the size of London as an environmental buffer zone and to monitor the mine’s impact on birds and fish inhabiting hundreds of kilometres around the mine site.
It will also construct a desalination project and a 320 kilometre pipeline to bring saltwater to the site.
The mine already uses 35 million litres of water daily, making it the largest industrial user of underground water in the southern hemisphere.
The proposal is also subject to independent reviews by the Australian Radiation Protection and Nuclear Safety Agency, since an expansion would also lift annual uranium production to 19 000 tonnes from around 4 000 tonnes now.
