BHP Billiton Shelving and Selling Major Uranium Projects

Last week, BHP Billiton (NYSE:BHP,ASX:BHP,LSE:BLT) officially announced the shelving of its $30 billion expansion of the Olympic Dam project, the world’s fourth largest copper deposit and the largest uranium source in Southern Australia. The expansion would have made the mine the world’s biggest open-pit copper and uranium mine.

The mining giant, whose annual pre-tax profits have fallen 26 percent, said rising capital costs and declining Chinese demand for copper alongside weak uranium prices made the project uneconomical.

“As we finalised all the details of the project in the context of current market conditions, our strategy and capital management priorities, it became clear that the right decision for the company and its shareholders was to continue studies to develop a less capital intensive option to replace the underground mine at Olympic Dam,” said BHP CEO Marius Kloppers. The news shocked no one in the industry as reports of the halt headlined a month ago.

BHP’s delay announcement, not a surprise to investors, has impacted neither its shares nor those of Cameco (NYSE:CCJ,TSX:CCO), the world’s largest uranium producer.

On Monday, word hit the wires that Cameco will buy BHP’s Yeelirrie deposit, which is located in Western Australia and considered one of Australia’s largest undeveloped uranium deposits. The deal is subject to approval from the Australian Foreign Investment Review Board and the state of Western Australia. JORC-compliant resource estimates give Yeelirrie a combined measured and indicated resource of 139 million pounds of U308 at a grade of approximately 0.13 percent; however, Cameco believes the numbers may be overrepresented by about 10 percent and plans to bring the resource estimate into compliance with NI 43-101 reporting standards.

BHP’s shelving of the Olympic Dam expansion and sale of Yeelirrie are not necessarily indicators that the uranium market is dead in the water post-Fukushima, as uranium accounts for less than 1 percent of the Australian company’s total revenue. However, the indefinite delay to what has been touted as the largest future source of global uranium supply may impact the market in the years ahead as demand for yellowcake resurges. BHP anticipated that the Olympic Dam expansion would increase uranium production by 400 percent to 40 million pounds over a seven-year mine life. That amount — 19,000 tonnes of uranium annually beginning in 2017 — would have flooded the market with supply, more than tripling BHP’s piece of the uranium market pie to 17 percent.

While analysts don’t think the setback will impact the spot price in the short term, it does change the future supply pressure scenario. Unless other large (and economical) projects fill the gap, market watchers can more than likely expect the delay to push prices higher in the coming years as demand for uranium rebounds. But as NEIG, a global nuclear-energy focused investment firm, points out, “the decision to delay is not a permanent cancellation of the project. Should the commodity outlook improve, the mega project may still stage a comeback.”

The uranium spot market has struggled to pull itself out of the $50/lb range for over a year only to recede to $49/lb earlier this month on flat trading. Yet industry analysts expect a turnaround in the coming years as demand for nuclear power resurges. The most recent Red Book, published jointly by the OECD Nuclear Energy Agency and the International Atomic Energy Agency, states that “[d]emand for uranium is expected to continue to rise for the foreseeable future.” The report puts world nuclear demand for uranium metal between 98,000 tonnes and 136,000 tonnes by 2035, compared to 63,875 tonnes in 2010.

Ocean-mined uranium feasible, but not economical

If uranium buyers can’t find enough U308 on land, perhaps they can turn to the sea; or so say scientists from the University of Alabama and the American Chemical Society. “The ocean actually contains more uranium, although very dilute, than you can find in any land source in total,” said chemist Robin Rogers in a recent news conference, “which means we have a wonderful resource; it’s just always been very expensive to get it out.”

On and off over the past half century, scientists have been researching ways to extract uranium from seawater, but the process has always proved so costly and laborious that no one in the industry took it seriously. The US Department of Energy recently funded a project to develop a more cost-efficient process, and as a result researchers were able to decrease the cost estimate for ocean-mined uranium by over 46 percent to $300 per pound. Unfortunately, that’s five times costlier than traditional mining and a far cry from economical.

 

Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.