BHP to pump $3.9bn into Olympic Dam expansion

BHP will pump almost $US3 billion ($3.9bn) into an overhaul and expansion of its Olympic Dam mine in South Australia.

Miner Scott Davey at BHP’s Olympic Dam in South Australia.

BHP will pump almost $US3 billion ($3.9bn) into an overhaul and expansion of its Olympic Dam mine in South Australia as it looks to shrug off the underperformance that has dogged the operation in recent years.

The mining giant used its investor day yesterday to detail new plans for an immediate $US800 million injection to “stabilise” Olympic Dam over the next few years, to be potentially followed in 2020 by a $US2.1bn “brownfields expansion” — or BFX — that would double the mine’s output.

The profitability of the giant operation has been hit in recent times by a combination of issues, including a doubling in power ­prices since 2015 and the well-publicised power outages that rocked SA last year.

The miner also detailed its ongoing efforts to deliver more than $US1.6bn in productivity gains over the next two years, as part of its previously announced $US2bn global productivity target.

And BHP revealed it was now looking to lift its annual iron ore production by another 20 million tonnes over the next two years through tweaking and debottlenecking at its big Western Australia iron ore network.

Olympic Dam’s return on capital employed had fallen to just 1 per cent in the 2017 financial year and the mine had fallen to the wrong end of the global copper cost curve.

The stabilisation program aims to lift that figure to 6 per cent by 2022, which is still substantially less than the 26 per cent ROCE achieved in BHP’s world-class iron ore business in 2017. BHP now expects iron ore to improve even further to a 40 per cent ROCE by 2022.

The new BFX plan at Olympic Dam will expand existing infrastructure such as the smelter and refinery as well as focus on higher-grade ore from the deposit’s southern extension.

But an earlier plan to lift Olympic Dam’s output even further through a massive heap leach component has now been pushed out into the longer term.

While BHP stressed that any future investment in Olympic Dam would need to compete with other BHP projects for capital, Olympic Dam asset president Jacqui McGill said she believed the BFX would be able to justify the cash when a decision was made in 2020.

“We believe it stacks up really well,” Ms McGill said.

“An internal rate of return over 20 per cent makes it a very compelling business case.”

Last year’s power outage cost Olympic Dam $US105 million in EBITDA, and BHP has since invested in 30MW of standby diesel generation capacity to help protect the mine from any future energy ­disruptions.

BHP Minerals Australia president Mike Henry said it was important for the federal government to continue to work towards bringing stability to the energy market.

“There have been measures taken in the short term both by the South Australian government and us to mitigate the near-term risk (at Olympic Dam), but there is a longer-term solution needed here for energy, both to ensure better affordability and better reliability and emissions reduction,” Mr Henry said. “That needs to be addressed at the National Electricity Market level, not at any individual state level. We’ve been very supportive of the recently announced National Energy Guarantee as being the best means on the table to move us in that direction.”

JPMorgan analyst Lyndon Fagan noted that the heap leach expansion at Olympic Expansion looked challenging and was unlikely to go ahead in the next 10 years. “While the production outlook at Olympic Dam is compelling given the BFX project and grade improvement, the capex profile is higher than we expected at over $US3bn once mine stabilisation spend is included,” he said in a note. “If it is all successful, ROCE for the asset will rise from zero to 10-14 per cent but this is still well below the Minerals Australia average of 20 per cent.”