Capex Kicker

BHP Billiton’s Minerals Australia division held a briefing and hosted a site visit at its Olympic Dam project in South Australia. FY18 guidance was unchanged and the US$1.6bn productivity target over two years for Minerals Australia was just a subset of the already disclosed US$2bn group-level target.

 

The production outlook at Olympic Dam appears compelling, given the brownfield expansion (BFX) project and grade improvement, but the capital expenditure profile is higher than we expected at US$5bn over the next five years. This includes US$2.1bn for the BFX project, with the remaining US$3bn being essentially catch-up sustaining capital – which will likely see negative free cash flow over the next five years – and development expenditure.

 

The heap leach trials have shown that while almost all of the uranium is leached out, about half of the copper and all of the gold remains. Therefore, the ore then needs to undergo a grinding and flotation process to extract the remaining metal, with the concentrate then smelted on site. No capex numbers were provided, but we estimate a range of US$3–5bn for the Olympic Dam Expansion Project in its current form. This would be unlikely to generate an acceptable return, but BHP has committed to completing the heap leach trial in 2020 at US$20m per annum.

 

Drilling rates at Olympic Dam are well below industry best practice, offering BHP an opportunity to improve productivity. However, we also believe falling short in this area could compromise the targeted timeline to ramp up the BFX.

 

In terms of site culture, after a difficult period there has been significant change in key personnel recently. One manager noted there were now markedly more staff from outside South Australia, which had improved morale and introduced better business practices. BHP will likely install a remote operating centre in Adelaide at a cost of about US$30m, and is looking at using electric vehicles for personnel on site. Site turnover is a low 1.5%, but could come under pressure as BHP’s peers ramp up their project expenditure.

 

Overall, we believe the Olympic Dam asset is set to improve, although achieving an acceptable return on capital employed in the medium term will be hampered by the imminent capex profile. We maintain our Hold recommendation on BHP with a $30.00 target price.

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