Flanking Plan

BHP Billiton will spend an initial US$184 million on the South Flank development in Western Australia to replace the Yandi mine which is expected to be depleted by the mid-2020s. The project is essentially an expansion of Mining Area C (MAC) from 65 million tonnes per annum (Mtpa) to 150Mtpa. The start-up date is earlier than expected, with first ore targeted in CY21 versus our expectation of CY23, meaning capital expenditure at the West Australian iron ore (WAIO) operations will increase in the near term.


Expected capital expenditure for South Flank of around US$2.4–3.2 billion (BHP's share is 85%) is in line with our estimates for the project, which we have already included in our modelling. We note the development doesn’t result in any change to BHP’s targeted capacity of 290Mtpa over the medium term (FY19 target), with the South Flank mine representing a sustaining development rather than a new mine.


Yandi iron ore fines – which grade 57% iron (Fe) with favourable sintering qualities and impurity content – will be replaced by South Flank's higher-grade 62% Fe product, potentially with 40% lump product rather than fines. Overall, the outcome will be a general improvement for achieved ore prices.


The strip ratio – the amount of overburden that needs to be moved to extract a tonne of ore – and costs at South Flank are likely to be higher than at Yandi, although BHP said the South Flank strip ratio was “in line with the WAIO average”. We estimate this number to be 1.3 times, while we understood Yandi to be below 1.0. Also, we estimate that a greater proportion of material at South Flank will be below the water table, and will therefore potentially require wet processing, as per Fortescue Metals (FMG, Accumulate), over the medium term. Transport-distance differentials, another important cost driver, have not yet been disclosed.

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