BHP plans $6 billion Olympic Dam investment as global copper demand picks up

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BHP has flagged further capital investment of up to $US4.5 billion ($5.9 billion) on its Olympic Dam mine, as the company forecasts global copper demand to remain high in the medium term.

During an announcement yesterday in Adelaide, the company confirmed expenditure of $US2.1 billion through 2022 to improve operational efficiencies.

The BHP board will then consider a further spend of $US2.35 billion to fund the expansion of the Brownfields copper deposit.

Analysts from UBS said the total spend of around $US4.5 billion should lift Olympic Dam’s return on capital employed (ROCE) to approximately 13% by the 2024 financial year if copper prices rise in line with forecasts.

Source: UBS

So far, Olympic Dam has proved a difficult project for BHP to extract value from. Since large-scale expansion plans were withdrawn in 2012, the mine has averaged a ROCE of just 1% per annum.

According to UBS, the low returns were caused by infrastructure impediments and external factors such as power delays and energy costs.

Of the $US2.1 billion investment, UBS said around $US1.3 billion would be spent on improving stability within the mine. The other $US800 million will go towards fixing the mine’s surface.

The improvements will result in a copper mine able to produce a minimum of 215 kilo-tonnes per annum (ktpa).

“A further US$2.35 billion (inclusive of around US$0.25 billion of study costs) is expected to be spent on the Brownfields Expansion (BFX) project which lifts production to approximately 330 ktpa,” UBS said.

BHP said its Olympic Dam expansion strategy will be supported by a structural deficit in global copper supply by the early 2020’s.

The company says the mining industry as a whole will have to invest around $US100 billion over the next 15 years to meet demand.

Source: BHP, UBS

The UBS analysts added that beyond 2020, input costs for copper mining are expected to rise once the premium ore grades have been mined due to increased water and power costs

“Factors to watch in 2018 that could positively impact the copper market are the suspension of copper scrap imports by China from January 2018, and 40 copper mine Enterprise Bargaining Agreements to be negotiated in 2018,” UBS said.

“Risks remain the emergence of a domestic scrap market in China plus aluminium substitution, although that’s not seen an issue unless the copper price is >3.5x the aluminium price.”