BHP, Rio OK $4.5 Billion Escondida Copper Expansion


BHP Billiton and Rio Tinto have raised their bets on global copper demand, approving plans for a $4.5 billion expansion of the massive Escondida mine in Chile, while BHP plans to reopen a U.S. copper mine idled three years ago.

Chiquicamata Coppermine, Atacama Desert, Chile
Charles Bowman | Robert Harding World Imagery | Getty Images

The two miners are already spending billions of dollars expanding output at their Australian iron ore mines to feed Chinese demand, and the push to boost output by 80 percent at the world's biggest copper mine underscores their optimism about long-term demand for metals.

The price of copper, seen as a bellwether for industrial demand, has fallen 17 percent from record highs a year ago above $10,000 a metric ton, but is still more than double the level reached in the depths of the global financial crisis.

"The market wants more copper," said UBS analyst Glyn Lawcock, pointing to tight global supplies of the metal used for everything from power transmission to plumbing.

The $4.5 billion investment at Escondida, where production last year fell 25 percent due to declining ore grades, has been well flagged, but BHP's decision to start mining again in late 2012 at Pinto Valley in Arizona came as a surprise.

"They must be happy be with the outlook for copper and the cost structure of that asset," said Ric Ronge, a portfolio manager at Pengana Capital, which owns BHP shares.

Analysts said cheaper energy prices in the United States had probably helped to justify the planned $195 million investment to restart the mine, at a capacity of 60,000 metric tons a year, in what the major miners see as a tight market in the medium term.

"It's probably fair to assess that you're going to see similar sorts of things from a number of companies who have operations that have been sitting idle waiting for the right environment," said UBS' Lawcock.

Long Life

The $4.5 billion investment at Escondida, where production last year fell 25 percent due to declining ore grades, has been well flagged, and the cost was in line with analysts' expectations.

The Escondida expansion is one of BHP's top priority projects, part of an $80 billion capital spending plan through 2015, including its Olympic Dam copper and uranium mine and iron ore expansions in Australia, shale gas development in the United States and potash development in Canada.

BHP, operator of the mine, also upped the ore reserve estimate by 25 percent and said the giant mine should be able to sustain production for more than a century.

BHP plans to spend $2.6 billion on two projects to boost output at the mine, while Rio's share of the projects is $1.4 billion and Japanese consortium JECO, which holds a 12.5 percent stake, will cover the rest.

The projects are designed to give the partners access to higher ore grades, with a new 152,000 metric tons a day concentrator plant and new mineral handling system that will boost production to more than 1.3 million metric tons a year by June 2015, or about 5 percent of the global copper market.

The mine produced about 760,000 metric tons of copper last year.