There’s Gold In BHP.

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There’s Gold In BHP Annual Report, And Copper Etc Etc
September 27 2007 - Australasian Investment Review – (AIR)

BHP Billiton yesterday shed all of Tuesday’s price rise as investors digested its 2007 annual report and upgrade of its huge Olympic Dam mine in South Australia.

It was yet another example of the way punters, looking for the edge (and helped by hedge funds and the like) buy on the rumour and then sell on the fact to crystalize their profits, short term as they may be.

BHP closed Tuesday at $44.60, yesterday it closed at $43.16, down $1.44.

All the good news was ignored, such as a 75% boost to the total resource at Olympic Dam.
And, all those claims of the world’s biggest gold deposit were just claims. It’s not Lasseter’s Reef, despite the market hype. What it is is a very, very big and rich deposit of copper, gold, uranium and some silver.

But there was no huge new gold discovery outlined, just more gold, more uranium and more copper, partly because of drilling, but also because the higher prices for these commodities over the past year has lowered the cut-off point for the grades of minerals in each tonne of ore.

News of a worsening in new home sales in the US (now at a five year low) didn’t help sentiment, nor an Australian dollar which jumped past 87 UScTuesday night. Lower copper, nickel and oil prices also helped send BHP lower.

But the news from Olympic Dam was pretty spectacular and makes it easier to understand why the company created a separate business (but not a customer group yet) for the project when new CEO, Marius Kloppers revealed his new management structure two months ago.
BHP said Olympic Dam’s total resources are estimated at 7.738 billion dry tonnes of ore from 4.43 billion tonnes.

The ore reserve estimate for the mine in South Australia rose to 399 million tonnes from 374 million tonnes. (An ore resource estimate is a broad calculation of minerals contained underground, while a reserve estimate is a measure of minerals that can be mined profitably.)
BHP has so far indicated that it could spend more than $5 billion expanding Olympic Dam.
That was only up 7% and that did disappoint the market, but a close look at the reserves estimates and comments makes it clear the company has a long, long way to go in its exploration and feasibility work.

A pre-feasibility study is continuing, but is running late as it argues with the South Australian Government about whether a copper smelter should be located in the state. Water is also another big concern and the plans to draw water from the Great Artesian basin. If built, the mine would come on stream around 2013.

BHP had this to say about the prospect in the annual report:

“Due to the size of the Olympic Dam orebody, there is potential to further increase the size of the operation over and above the current capacity.
“A pre-feasibility study is currently being undertaken to examine capacity expansion options. The scope of the pre-feasibility study will address operational capacity, mining methods, processing and smelter options, and the infrastructure, health, safety and environmental practices required to support the expansion options.

“A substantial expansion of Olympic Dam will require completion of feasibility study and subsequent Board approval, as well as various regulatory and governmental approvals covering a range of operational matters.”

But those claims about that huge gold resource: well they were a figment of a concoction of market rumours and a few lose facts.
Although there is a lot of gold, the copper reserves are far, far more valuable. Likewise uranium, which will be produced (as it is now) as a byproduct of the copper. Gold would rank third in importance.

BHP Billiton has outlined 117 million tonnes of non-sulphide gold resources, or around 78 million ounces of gold contained in the ground. But that is short of the world’s biggest gold resource in Uzbekistan which contains around 175 million ounces in resources (not reserves).
And two mines, Telfer and the Superpit would produce more if BHP limited gold output to half a million ounces a year.

The mine produced about 182,500 tonnes of copper, 3,486 tonnes of uranium oxide and 91,700 ounces of gold during 2007. The idea of the expansion is to lift copper output to 500,000 tonnes a year, and to do that, more uranium and gold would be produced.
The resource of copper at the mine rose to 67 million tonnes of metal, from last year’s estimate of 48.7 million tonnes. The uranium resource rose to 2.2 million tonnes of uranium oxide, from 1.7 million tonnes.

A note to the reserves estimates in the report said this about Olympic Dam:
“The ongoing Olympic Dam drilling program and geological interpretation has provided significantly more information to assist in modelling the resource.
“This is the basis for a significant increase (77% tonnage increase and 38% copper metal increase) in the Olympic Dam resource base. The deposit has undergone a major resource modelling change based on the underlying geological controls of Cu-sulphide species, haematite, and structure.

“The significant factors contributing to the change in resource tonnage are: a lower cut-off grade to reflect open-cut mining, modelling changes, additional drilling (542 surface and underground drill holes for 240,000m), and higher metal prices. Non-Sulphide Au only ore type Mineral Resource has been reported separately this year for the first time.”

Elsewhere in the report, BHP Billiton was again confident about the world economy, despite the instability in credit markets.
“The global economy remains robust, driven by solid activity in Asia and Europe,” chairman Don Argus said in his report.

“Growth in China’s demand for raw materials should continue and place ongoing pressure on the global supply of commodities.
“Structurally higher cost sources of supply will be required and this, combined with higher energy prices, is likely to have a flow-on effect to commodity prices.
“Over the medium term we expect commodity prices to move towards long-run marginal costs of supply but, in the interim, prices are likely to stay high relative to historical levels, albeit with increased volatility.
“Our project pipeline is unparalleled in the resources industry.
“It comprises US$14.3 billion of investment in projects that have been approved by the Board and are now under way.

“The 19 projects represented by this investment are due to reach full production capacity within approximately three years. Another 14 projects, representing a further US$6.6 billion of investment, are in the final stage of evaluation before being approved,” he said.
“Our project pipeline provides significant future value, with 33 projects in either execution or feasibility with an expected capital investment of US$20.9 billion. We also have further medium-term options in our portfolio with capital expenditure requirements in excess of US$50 billion.
“During the year, we continued the ramp-up of five projects, approved three additional projects and commissioned Spence (200,000 tonnes per annum copper operation in Chile).”

And the company said this about the coming year:
“Increasing volumes in 2008: In the financial year 2008, we expect to significantly increase production with the delivery of five petroleum projects, three of which are in the deepwater Gulf of Mexico.

“The commissioning of the Ravensthorpe and Yabulu nickel operations and another iron ore expansion, all in Australia, and the completion of the Koala Underground diamond project in northern Canada, add to the increasing 2008 volumes.”
“In FY2007, real prices for all our major commodity prices remained at or near their highest levels since the 1970s as Chinese demand for raw materials continued.
“Of particular note was the increase in base metals prices with nickel being the standout performer.

“Bulk commodity prices also continue to be strong and demand remains firm. Energy prices are very strong with crude oil near record highs.
“Looking forward, supply side pressures are expected to remain high and demand growth from China should remain robust.

“With continuing strong demand, structurally higher cost sources of supply will be required. Higher energy prices are also likely to have a flow-on effect to commodity prices.”

But China remains the big influence on the company:

Again it was optimistic, despite more interest rate rises and a lift in inflation since the annual profit was released in August.

“The rate of growth of the Chinese economy has shown no signs of abating with economic growth expected to be maintained or perhaps accelerate over the second half of 2007.
“This has largely been driven by strong demand, domestic retail sales, healthy investment growth and exports.
“Continued monetary tightening, new export taxes and cuts in value added tax rebates have had a minimal effect on economic behaviour to date.”

But there was also a cautionary note about China in its list of potential risks to future results:
“The influence of China may negatively impact our results in the event of a slowdown in consumption.

“The Chinese market has become a significant source of global demand for commodities.
“China now represents in excess of 45 per cent of global seaborne iron ore demand, 22 per cent of copper, 25 per cent of aluminium and 17 per cent of nickel demand. China’s demand for these commodities has more than doubled in the last five years.
“Whilst this increase represents a significant business opportunity, our exposure to China’s economic fortunes and economic policies has increased.

“Sales into China generated US$9.3 billion, or 19.6 per cent of revenue including our share of jointly controlled entities’ revenue in the year ended 30 June 2007.
“In recent times, we have seen a synchronised global recovery, resulting in upward movement in commodity prices driven partly by China’s demand. This synchronised demand has introduced increased volatility in the Group’s commodity portfolio.

“Whilst this synchronised demand has, in recent periods, resulted in higher prices for the commodities we produce, a slowing in China’s economic growth could result in lower prices for our products and therefore reduce our revenues.

“In response to its increased demand for commodities, China is increasingly seeking self-sufficiency in key commodities, including investments in additional developments in other countries. These investments may impact future demand and supply balances and prices.”
That’s a timely reminder for everyone to keep: If China sneezes, BHP and all of us will catch a big financial cold. Think of that when dreaming about gold in them thar mines!

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