Sunday, 29 July 2012

Olympic Dam threat as BHP puts brakes on


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BHP Billiton, Olympic Dam South Australia
BHP Billiton's operations at South Australia's Olympic Dam. 

BHP Billiton chief executive Marius Kloppers has warned that a faster-than-expected slowdown in China and increasing European instability will rule out a "near-term" improvement in operating conditions, forcing the world's biggest miner to rethink spending on its portfolio of major projects.

The company's proposed $30 billion expansion of its Olympic Dam mine in the far north of South Australia is shaping up as the first major victim of the volatile economic conditions.Documents obtained by The Weekend Australian show the company has informed outsiders that a decision to proceed with the project - spruiked by federal and state Labor governments as key to South Australia's economic future - will be delayed by two years.

One document prepared by a consulting firm, with the knowledge of BHP insiders, said the miner would delay an investment decision on the mega-project until 2014 rather than this year, as the company had previously stated. The expansion would make Olympic Dam the world's largest uranium mine, as well as increase copper output almost fourfold to 750,000 tonnes a year, boost gold production eightfold and uranium production almost fivefold.

However, $1.2bn in already funded "pre-mine" work will be completed, the documents say, allowing the company to remove a substantial amount of waste from the mine in preparation for approval if conditions improve. A BHP spokeswoman would not say when a board decision for the Olympic Dam expansion was now expected, and would not stand by a statement made in April that the project was on track to be considered by the BHP board by December.

"BHP Billiton has outlined that capital is largely committed for FY12 and FY13 although expenditure associated with major projects in execution decreases substantially from FY14," the spokeswoman said.
"The company is in the enviable position of having more investment options relative to our capacity to invest and the sequencing of our investment pipeline is currently being looked at in the context of our five-year planning process. "We will approve projects in a sequence that maximises value, reduces risk and balances the consideration of short- and long-term returns."

Two other mining mega-projects are also waiting on BHP board approval: the $20bn Port Hedland expansion and the $10bn Canadian Jansen potash mine. The consultant's work followed a separate briefing note sent to BHP's employees by Mr Kloppers at the end of last month, also obtained by The Weekend Australian, that said rising costs and weak commodity demand had combined to force the company to "reduce our cost base, eliminating all non-essential expenditure". "In China, we have continued to see evidence of a faster-than-anticipated economic slowdown," Mr Kloppers said. "Over the past 12 months, the cost base of our business has continued to rise and, against a backdrop of falling commodity prices, is impacting our profitability significantly. "The operating environment is not expected to improve in the near term."

Mr Kloppers said in the briefing note that generating cash from its existing businesses was key to being able to invest in future project development. "We must carefully consider any future capital investment in this lower price environment and in this context we will be sequencing our projects to minimise cash requirements and preserve investment optionality," the memo said.

Commenting today on the possibility of a delay to the project, Minerals Council of Australia chief executive Mitchell Hooke said that of concern was the overall message being sent by BHP and other miners that are also putting off Australian investments. “We’re seeing the cost environment in Australia rise very rapidly, we have significantly falling productivity [and] there’s increasing sovereign risk,” he said. “You put all that together and Australia becomes an increasingly unattractive place to do business.”

If Australia was not amongst the most competitive places in the world for resources companies to invest, the country would miss out, he added. A feasibility study for the proposed expansion of Olympic Dam was completed in May. The company said the "final touches" were now being put on the proposal.

If the company does not approve the mine by December 8, the indenture signed with the South Australian government, and passed by the state parliament in November, would have to be renegotiated. South Australian Mineral Resources Minister Tom Koutsantonis said in May that he had the discretion to grant BHP an extension to its approvals to begin the project, but he was "not inclined to do so" unless there was a drop in commodity prices. South Australian Premier Jay Weatherill, however, in parliament refused to rule out extending the approvals under any circumstances.

The company does have breathing space for its environmental approvals, with the Environmental Impact Statement approved by the South Australian, Northern Territory and federal governments valid until 2016.
The potential delay for the project comes as the South Australian government has recently softened its commentary on the importance of the mine expansion to the state's economy.

Treasurer Jack Snelling last week told The Australian that the mine expansion was never going to be a "cash cow" for government coffers. Yesterday, Mr Weatherill declined to be interviewed but in a statement provided by his office moved to play down any delays. "My office has spoken to BHP today and BHP has made no decision about the Olympic Dam expansion," the Premier said in the statement. "We anticipate, as we have all along, that they'll make a decision before the end of the year."

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