Is Olympic Dam strike three for BHP’s CEO?

BHP scales back its expansion plans while Rio and Fortescue push ahead

BHP Billiton Limited (ASX: BHP) has today announced that it would not be ready to proceed with the much-hyped US$20 billion expansion of Olympic Dam in South Australia by the previously agreed deadline of 15 December 2012.

Higher capital costs and subdued commodity prices led to the decision to not proceed as originally planned.

The company instead will investigate an alternative, less capital-intensive design of the open-pit expansion to substantially improve the economics of the project. BHP sets an internal rate of return hurdle of 15% on its projects and it appears the Olympic Dam expansion has failed to make the grade.

Olympic Dam is the world’s largest uranium ore body, substantially bigger than Energy Resources of Australia Limited’s (ASX: ERA) Ranger mine and Paladin Energy Ltd’s (ASX: PDN) Langer Heinrich mine. Not only does it contain uranium, it’s also the world’s fourth largest copper deposit, fourth largest gold deposit and a massive deposit of silver to boot. The expansion project would have created one of the world’s largest open pit mines.

In the current climate the decision not to proceed appears to makes sense, but rather to conserve its capital or invest in other higher value projects, until commodity prices recover, or the company finds another, cheaper way of expanding Olympic Dam.

Iron ore miners, Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) are pushing ahead with their costly expansion plans. With a much higher leverage to the iron ore price than BHP, only time will tell if their moves have been well timed.

The Foolish bottom line

While the cancellation of the Olympic Dam expansion is likely good news for BHP and its cash flow, it may not be good news for the company’s CEO Marius Kloppers, as it could be seen as another failure. He has already come under fire from investors for the missed merger with Rio, the failed US$39 billion takeover of Canada’s Potash Corp and the writedown on the company’s shale gas and nickel assets.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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