EXPANSION OF WORLD,S LARGEST URANIUM MINE TO

C O N F I D E N T I A L MELBOURNE 000046


SIPDIS

STATE FOR EEB MONOSSON, DOE FOR SKEER

E.O. 12958: DECL: 04/07/2019
TAGS: EIND ECON ENRG ETRD AS
SUBJECT: EXPANSION OF WORLD,S LARGEST URANIUM MINE TO
PROCEED DESPITE COMMODITIES DOWNTURN

REF: A. A) CANBERRA 330

B. B) CANBERRA 327

C. C) MELBOURNE 8

D. D) MELBOURNE 2

E. E) 08 MELBOURNE 122


Classified By: Michael E. Thurston, Consul General, Consulate
General Melbourne

Summary
--------------


1. (C) Despite turmoil in the global commodities market, BHP
Billiton is proceeding with plans, albeit at a reduced pace,
to expand its Olympic Dam facilities into what will become
the largest uranium mine in the world. Lower copper prices
have forced BHP to shelve several capital investment programs
and to reduce staffing, but plans to release the mine's
environmental impact statement on May 1 are still on track.
Olympic Dam's leadership is already drawing up plans to
provide for the massive amounts of electricity and water that
the expanded mine will require. While its Australian
competitors Rio Tinto, Oz Minerals and Fortescue are
struggling with their balance sheets, BHP appears to be
looking ahead to increased demand for nuclear power and other
resources. End Summary.

Mine Expansion Moves Ahead
--------------


2. (C) Mining giant BHP Billiton is moving ahead with plans
to expand its Olympic Dam facility into what will become the
world's largest uranium mine. During an April 3 visit to the
mine, BHP's Manager for Integrated Planning, Barry Hewlett
told Consul General that the halving of copper prices --
copper constitutes 76 percent of the mine's current business
-- will delay expansion of the facilities by at least one
year, but BHP still intends to release its environmental
impact statement on May 1 for public review. (Note: Uranium
was initially seen as a problematic byproduct of copper
production at Olympic Dam. End note.) The downturn in
commodities prices has forced BHP to shelve several capital
investment projects and to cut 200 positions (120 of whom
were contractors) at the mine. Caterpillar is a major
supplier for Olympic Dam's underground earth moving
operations and stands to benefit greatly from the mine's
expansion.


3. (C) The Olympic Dam mine, which is located 311 miles north
of Adelaide, sits on the world's largest known uranium
deposit. According to the mine's expansion plan, uranium
production would increase from its current level of 4,000
tons (representing 10 percent of current global supply) to
19,000 tons. Expansion of the mine's uranium business will
be carried out gradually in order to avoid "flooding the
market." Hewlett noted that there is a natural ceiling on
uranium demand because customers prefer to diversify their
sources in order to minimize political risk. According to
Hewlett, India represents a potentially massive market for
the mine, but the Rudd Government will not sell uranium to
India until it signs on to the non-proliferation treaty.
(Note: Under the expansion plans, copper production would
rise from 180,000 to 730,000 tons and gold would increase
from 100,000 ounces to 800,000 ounces. End note.)

Chinese Investment
--------------


4. (C) Paul Heithersay, Executive Director for South
Australia's Minerals and Energy Resources department
accompanied Consul General during the visit and said that the
federal government's rejection of PRC-owned Minmetals' bid
for Oz minerals (ref. B) is having a "ripple effect" in the
South Australian mining industry. According to Heithersay,
the decision to block Minmetals' bid on national security
grounds due to its Prominent Hill mine's proximity to the
Woomera testing site has left many South Australian firms
"worried" about securing much needed financing from Chinese
investors. Barry Hewlett noted that BHP had put in a "low
ball" bid for Oz Minerals' Prominent Hill site and that it is
still too early to tell whether that bid will be successful.

Next Steps
--------------


5. (C) BHP plans to release its environmental impact
statement (EIS) to the public on May 1 and expects approvals
from the federal and state governments sometime in 2010.
Paul Heithersay noted that the South Australian government
has already seen the preliminary EIS and is "very supportive"
of the expansion. Responding to Consul General's question on
whether the EIS would generate similar public opposition as
did the controversial Gunns paper mill in Tasmania and the
desalination plant in Victoria (refs. B and D),Hewlett said
the company is not anticipating much reaction. Heithersay
echoed this sentiment and said that Australian worries over
greenhouse gas emissions may actually increase support for
nuclear power.

Impact on the Environment
--------------


6. (C) The Olympic Dam mine presently consumes 10 percent of
South Australia's electricity, but when expansion is
complete, it could absorb as much as 60 percent of existing
capacity in SA. According to Hewlett, expanding the
facilities will lead BHP to put out a bid for a dedicated
power station near the mine from which the company will buy
back power on a contract basis. BHP sources have previously
said that purchasing power from renewable energy projects
like geothermal may also be a possibility.


7. (C) The company is also considering building a
desalination plant on the Spencer Gulf and will offer
increased water supplies as a "fringe benefit" to local
residents who would be impacted by the plant. The mine
presently draws its water from the Great Artesian Basin and
will continue to do so even with a dedicated desalination
plant. Natural gas will continue to be piped in from nearby
facilities. During a previous visit to Adelaide, Canberra
econoff was told that the Olympic Dam expansion would result
in a "carbon neutral" facility, with the company likely to
purchase international CO2 reduction credits to offset the
much larger emission footprint of the open-pit expansion.

Comment
--------------


8. (C) We were struck by Olympic Dam management's calm
appraisal of the global downturn in commodities prices.
While BHP acknowledged that expansion plans will likely be
delayed, we believe it sees increased uranium production as a
stabilizing force for its other more volatile resource
products. BHP has gone so far as to create a special
"Uranium Australia" division based in Adelaide which is
headed by Olympic Dam's mining boss. A lengthy approval
process still lies ahead for mine's expansion which will give
BHP time to assess market conditions. While it is too early
to evaluate the potential market impact of an expanded
Olympic Dam mine, BHP is looking to the future while many of
its Australian competitors are worried about troubled balance
sheets.


THURSTON