Picture a hole in the ground four kilometres long and one kilometre deep. Picture a manmade mountain of dirt next to it nearly as high — a mountain of dirt dug from the ground and heaped next to that hole, a new landmark on the South Australian horizon.
Picture a mega-project so large and so thirsty that it would have required a new baseload electricity generator to meet its power needs, and a new desalination plant hundreds of kilometres away on the coast to make the water it required.
Picture a mine so vast, it would have increased the world supply of Uranium by a third.
This was the vast edifice that was to be Olympic Dam — when finished, the largest mine in the world. This astonishing feat of human ingenuity would have seen the excavation of a kilometre of rock in order to mine an ore body with the chimerical value of $1 trillion. Just getting to the ore body was expected to have taken four years of digging. At its peak, the mine was expected to consume more electricity than the city of Adelaide, and 100 Olympic swimming pools worth of fresh water every day.
Now it’s been shelved, after BHP boss Marius Kloppers yesterday announced that the expansion would be put on hold indefinitely. "As we finalised all the details of the project in the context of current market conditions, our strategy and capital management priorities, it became clear that the right decision for the Company and its shareholders was to continue studies to develop a less capital intensive option to replace the underground mine at Olympic Dam," Kloppers said in a statement.
Translation? Olympic Dam was too expensive. Mining is a costly business at the best of times, and in the middle of the great Australian mining boom of the 2000s, the costs of labour, capital and equipment have been ratcheting up across the industry. The Olympic Dam expansion was budgeted for perhaps $30 billion worth of capital expenditure, a vast sum of money by anyone’s measure.
The cost curve is only one side of the equation, of course. In recent years, the mining boom has of course been driven by huge demand for raw materials from China, India and other industrialising nations to our north. But with the Chinese economy slowing, commodity prices are coming off the boil. Copper prices, for instance, have eased markedly from their record highs at the end of 2010, and falling hi-technology production in China has seen warehouses bulging with stockpiled copper.
The analysts were pleased."It’s logical given obvious pressure on cash flows and cost of capital," Karara Capital’s Rohan Walsh told the Wall Street Journal. Pengana Capital fund manager Tim Schroaders told Bloomberg that "it’s pleasing that they’ve stepped back, not necessarily away from Olympic Dam, but just assessing cheaper alternative options." Also speaking to the Wall Street Journal, Antares Equities co-head of Australian equities Nick Pashias said that "in the environment we’re in, it’s an absolutely rational decision. The copper in the ground isn’t going anywhere."
There’s been a lot of speculation in the media that the Olympic Dam announcement means the beginning of the end of the mining boom. That may be true. However, as we’ve argued here before at New Matilda, a slowdown in mining investment would not necessarily be such a bad thing. Falling mining investment might help the Australian dollar to fall on world markets, assisting Aussie exporters. A slowing mining sector would also start to alleviate the very cost pressures that Marius Kloppers mentioned yesterday.
Don’t get too concerned for BHP. A close read of BHP’s full-year results suggests that life is still pretty good for big mining companies. With revenues of $US72 billion, Kloppers and his team brought in earnings before interest tax, depreciation and amortisation of $US33.7 billion. That’s a gross profit ratio of 46 per cent. Net operating cash flow was an astonishing $24 billion.
As yesterday’s announcement tacitly acknowledges, BHP has more money than it knows what to do with. That’s why there’s been serious pressure on the board and management to start returning some of that treasure back to shareholders in the form of dividends and share buy-backs.
Of course, there have been anxious reactions in South Australia, where the breathless media hype had led many to the false belief that the project was integral to the health of the southern state’s economy. The South Australian government had expected the mine to deliver a bonanza of mining royalties for the state coffers — perhaps $350 million a year once the mine was up to full production. The Labor government there under Mike Rann and Jay Weatherill invested huge amounts of political capital in negotiating and delivering the Olympic Dam agreement, with Rann reported telling journalists in 2010 that Olympic Dam was the single biggest drain on his time as Premier. Now the expansion has been shelved, Weatherill is understandably "disappointed".
But South Australia will be fine. Mining accounts for a relatively small share of South Australia’s overall economy, and only 1 per cent of its employment. South Australia’s economy, like the rest of Australia, is mainly based in services in its capital of Adelaide. This sector will be largely unaffected, outside of a few specialist engineering firms.
There’s one unquestionable winner from the Olympic Dam decision: the South Australian environment. The delay in the expansion means that the vast earth moving project will be shelved for the time being. Millions of tonnes of uranium ore will no longer be dug up and shipped across the world to China. Millions of litres of water will no longer be needed. And vast amounts of greenhouse gases won’t be emitted.
As the Australian Conservation Foundation’s Simon O’Connor told New Matilda this morning, the costs and downsides of the Olympic Dam project were significant, but little understood by most South Australian voters.
"BHP was going to be creating a new mountain next to this biggest hole in the ground, and they were going to leave that mountain forever," he said. "There was also a controversy that they were going to ship the unprocessed concentrate to China, and they were only going to separate out the uranium out there in China. That was always a real concern for us — that you’re sending this radioactive copper concentrate halfway across the world."
O’Connor also points out that costs to the federal taxpayer in diesel fuel rebates was going to be significant, and that the mine’s greenhouse gas emissions were enormous.
"Something I found interesting when you look at the Olympic Dam Environmental Impact Statement was that, of the different options of removing the overburden, the biggest way they could have saved greenhouse gas emissions was to use a conveyor belt, but because they get this massive tax handout from the diesel fuel rebate, it was more cost effective to drive trucks around the pit for the next four years."
O’Connor reckons the carbon emissions from Olympic Dam would have dwarfed all the gains in emissions reductions that South Australia has made in renewable energy in recent years. "It’s a nice example of the perversity of fossil fuel subsidies in Australia."
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