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BHP’s big $30 billion hole

Mega-miner BHP Billiton Limited (ASX:BHP) forges ahead with a massive mine expansion, writes The Motley Fool.

As one of the world’s largest mining companies, BHP Billiton thinks big. Even so, the scale of its latest investment is pretty astounding.

A $30 billion hole
BHP recently 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 on expanding this mine in South Australia. To put this vast sum into context, $30 billion would buy you the whole of Woolworths Limited (ASX: WOW), and $37 billion would get you all of Telstra Corporation (ASX: TLS).

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.

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 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.

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.

We have written recently how BHP’s shares looks cheap. Trading on a forward price-earnings ratio of around 7 and a forecast dividend yield of over 3%, these ratings look too low for a firm aiming to be the world’s number-one miner! Unless we are really looking at the end of the mining boom.

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This article, written by Cliff D’Arcy, was originally published on Fool.co.uk. It has been updated. Authorised by Bruce Jackson.

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