Iron Ore’s Massive Expansion Era Is Finished, Mining Giant Says

By David Stringer  Nov 20, 2014
Bloomberg
Iron ore’s golden spending era is history. That’s the verdict of BHP Billiton Ltd. (BHP), the world’s biggest mining company.

BHP and rivals Rio Tinto Group and Vale SA (VALE) are flooding the global iron ore market after a $120 billion spending spree to boost the capacity of their mines from Australia to Brazil.

Now prices have slumped to the lowest in more than five years as surging supply coincides with a slowdown in China, the world’s biggest consumer.

“Our company has been very clear that the time for massive expansions of iron ore are over,” BHP Chief Executive Officer Andrew Mackenzie told reporters today after a shareholder meeting in Adelaide, South Australia.

While BHP is still increasing production, the company last approved spending on an iron ore expansion in 2011. It’s shifting investment into copper and petroleum, he said

Global seaborne output will exceed demand by 100 million metric tons this year from 16 million tons in 2013, HSBC Holdings Plc said last month. Prices, which are trading around $70 a ton in China, may drop to below $60 a ton next year, according to Citigroup Inc. forecasts.

“At these prices, we still have a very decent business,” Mackenzie said. “We’ve been fairly clear that prices at about these levels were what we were expecting for the longer term.”

Olympic Dam

Investments in copper may help BHP seize on rising demand for energy in emerging economies. Demand from China, the biggest metals consumer, will be supported by electricity grid expansion and greater adoption of renewable energy sources, all of which require more copper wiring, according to Citigroup.

The prospects for an expansion of BHP’s Olympic Dam copper, gold and uranium mine in Australia are looking more promising after testing of new processing technology shows early signs of success, Mackenzie said.

Olympic Dam in South Australia is the world’s largest uranium deposit and fourth-biggest copper deposit. BHP is pilot testing a heap leaching extraction process used in its copper mines in Chile.

If the tests “are successful, and they are showing considerable promise, we will use this technology and phased expansions of the underground mine to further increase Olympic Dam’s output,” Mackeznie told the meeting.

In 2012, BHP halted a proposed expansion of Olympic Dam, estimated by Deutsche Bank AG to cost $33 billion. Mackenzie was addressing the first annual meeting held in the state since the decision.

PM Abbott

Australia’s Prime Minister Tony Abbott has offered to assist BHP in advancing the Olympic Dam expansion, seeking to bolster the region’s economy with manufacturing scheduled to end at General Motors Co.’s Holden unit. The carmaker will cease production in 2017 after 69 years, cutting about 2,900 jobs at sites in the state and in neighboring Victoria.

Trials of a heap leaching processing are planned to begin at the site in late 2016 for three years, the company said in July. Experiments so far are being conducted at a laboratory in Adelaide’s Wingfield district.

“We are looking at the medium term for the deposit, it’s one of the best deposits in the world, it’s absolutely critical to our copper strategy,” Mackenzie told reporters. “What we also need is to have cheaper ways of processing.”

Chile Mine

Heap leaching applies acid to a pile of ore to extract copper rather than using a traditional milling plant, and is used at BHP’s Spence asset in Chile. The producer is already seeking to reduce costs at Olympic Dam to make it the world’s cheapest copper mine, Mackenzie said.

Copper demand may rise to 40 million tons a year from 27 million tons by 2030, BHP’s Marketing President Mike Henry said last month. “Supply, on the other hand, is expected to remain structurally challenged,” he told investors in London.

Shareholders will vote in May on plans to spinoff a collection of smaller assets into a new Perth-based company, Nasser told the meeting. The demerger would be the biggest in the mining industry, separating aluminum, coal and silver assets to create a company valued at about $15 billion after it begins trading next year.

Full details of the demerger plan will be released to shareholders in March ahead of the vote, Nasser said.

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