The Olympic Dam ore body in South Australia was discovered in 1975 by Western Mining Corporation. WMC Resources, as it became, was subsequently bought by BHP Billiton for $9 billion in 2005. At that time, Olympic Dam had capacity to produce 235,000 tonnes of copper every year and was a large underground operation.
But the potential of the resource was always much greater. Even in 2006, BHP was conducting a pre-feasibility study for a US$5 billion expansion of the operation to 500,000 tonnes of copper per annum with a 40mtpa (million tonne per annum) open-pit mining operation.
In 2011, the company moved towards approving the expansion of Olympic Dam into a monstrous open-cut mine that would transform the ore body into the world's third biggest copper mine. It would also be the world's largest uranium mine and would have significant production of silver and gold. The plan was shelved in favour of more underground mining.
In 2017, BHP looked at another expansion plan for OD, called the BFX or brownfield expansion plan. BFX was to accelerate development into the Southern Mine Area to access higher grade ore taking production to 330ktpa. This was a smaller US$2.5 billion plan, but it too fell over due to OD’s complex geology. BFX itself had replaced a plan to create a giant heap leaching process but this also stalled.
Unfortunately, as the plans have faltered, OD has continued to plod along leaving its vast potential untapped. Frustratingly for BHP, most of OD’s orebody, perhaps 70% of it, has been left untouched due to its ‘guitar-like’ shape where mining has only focused on the neck and not the larger body.
BHP’s copper portfolio includes Escondida (57.5%), Pampa Norte and Spence in Chile, plus Olympic Dam in SA. Escondida is the largest asset with 18.9bt of resource compared to OD at 11.2bt.
Investment View
Investors will be curious to understand how BHP will incorporate OZL’s adjacent (still hundreds of kms apart) mines into a broader plan to finally unlock the potential of OD. Although it seems logical to think of the region as a single production zone, in the same vein as the Pilbara iron ore region, this may not necessarily be the case.
What does seem logical, in our view, is that OZL and Olympic Dam fit neatly into BHP’s ‘future facing’ metals strategy. OD is so large and complex that it will require four key elements to stack up:
- Tier 1 global resource
- Bottom quartile cost
- Multi-decade demand growth
- Capital return profile sufficiently high enough to be a priority investment for BHP
Our key question is whether the acquisition of OZL becomes a trigger for a new strategy for OD that can realise its full potential. The timing is right given the multi-decade growth in demand for copper and nickel for global decarbonisation efforts. This is arguably a larger and more important theme than the original reason based on Chinese urbanisation.
BHP has understandably invested more time and energy into developing the enormous Escondida copper resource in Chile where it has comprehensively outperformed OD. But the stars may finally be aligning for Olympic Dam.
Risks To Investment View
Demand and prices for commodities could decline, or operational costs could rise more than expected. There is heightened geopolitical risk currently and inflation is a key operational concern.
Recommendation
We have retained our Hold recommendation.
Figure 1: Profit after tax excl net finance costs and exceptional items – Escondida, Olympic Dam
Figure 2: Average capital employed – Escondida, Olympic Dam
Figure 3: bhp copper production
Figure 4: bhp nickel production
Figure 5: OD gold
Figure 6: OD silver
Figure 7: od uranium oxide
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