The $30bn Mine Down Under

Published in Company Comment on 12 October 2011

Mega-miner BHP Billiton forges ahead with a massive mine expansion.

As one of the world's largest mining companies, BHP Billiton (LSE: BLT) thinks big. Even so, the scale of its latest investment is pretty astounding.

A $30 billion hole

Today, BHP confirmed that it is to invest an initial $1.2 billion in pre-commitment capital to start work on expanding its Olympic Dam copper and uranium mine. Then again, these start-up costs are but a drop in the ocean.

Over four or five years, BHP would spend $20 billion to $30 billion (up to £19 billion) on expanding this mine in South Australia. To put this vast sum into context, only 24 members of the FTSE 100 are worth more than £19 billion, including BHP Billiton itself!

BHP will spend this initial $1.2 billion on transportation, accommodation and other start-up costs at Olympic Dam. However, it will not make a final decision to go full speed ahead with the project until mid-2012.

Once in full production, Olympic Dam would be one of the largest mines on earth, rivalling such vast, open-cut pits as BHP's vast Escondida copper mine in Chile, South America.

Dr Marius Kloppers, BHP Billiton's chief executive, claims that yearly copper production at Olympic Dam could exceed 750,000 tonnes, more than quadrupling its current output of 180,000 tonnes. Yearly production of uranium oxide could leap to 19,000 tonnes from the current 4,000 tonnes.

Greens fear a 'radioactive mountain range'

Of course, such a vast mining project is certain to attract opposition from environmentalists.

Indeed, green activists have warned that enlarging Olympic Dam would lead to over-use of scarce water supplies, as well as piling up radioactive waste. The mine already uses 42 million litres of water a day, making it the biggest industrial user of water in Australia, but this will soar to 240 million litres daily.

In response to these criticisms, BHP will set aside a huge chunk of land (1.4 billion square metres) to act as an 'environmental buffer' around the site. In addition, it will construct a 200-mile pipeline to bring seawater to the site for desalination, plus a 65-mile railway line, airport and power station, creating up to 25,000 jobs.

What's more, though the mine is in deserts over 340 miles from South Australia's state capital Adelaide, state and national governments have imposed 150 separate environmental conditions on the project.

In return for government approval, BHP will maintain a 5% yearly royalty for uranium to South Australia, plus 3.5% for other metals, guaranteed for 45 years. When Olympic Dam is in full swing, this could produce $300 million a year in royalties to Adelaide.

Copper for China

Of course, very few global corporations could undertake a project on this vast scale. However, BHP is a world leader, with its future success very closely linked to that of Australia itself (so much so that the firm is known as 'the Big Australian'.)

With resource-hungry, fast-growing nations such as China and India sucking in base metals, especially refined copper, BHP Billiton is clearly looking to ramp up its exports to these developing markets.

As I write, BHP's share price is up 26p to 1,938p, valuing the dual-listed company at nearly £118 billion. Almost a fortnight ago, I said that BHP Billiton looks cheap to me, and my view hasn't altered.

BHP's shares currently trade on a forward price-earnings ratio of 6.7 and offer a forecast dividend yield of 3.8%, covered 4.1 times. These ratings are too low for a firm aiming to be the world's number-one miner!

More from Cliff D'Arcy:

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