BHP's play for OZ Minerals could bring back South Australian 'copper kingdom'

BHP Group Ltd.'s pending takeover of OZ Minerals Ltd. is set to trigger a wave of exploration and consolidation to restore South Australia to the copper kingdom it was more than a century ago.

Attracted by the synergies between its own Olympic Dam operation and nearby Oak Dam deposit, and OZ Minerals' Carrapateena and Prominent Hill operations, BHP Group increased its cash offer price for the target company by 13% to A$28.25 per share from A$25 per share, representing a A$9.6 billion enterprise value.

The 2018 discovery of Oak Dam just 65 kilometers from Olympic Dam had already reignited copper exploration in South Australia, with quarterly spending on copper exploration more than tripling after 2018, according to Australian Bureau of Statistics data.

South Australia was known as "the copper kingdom" in the 1860s as it hosted some of the world's largest copper mines, according to Geoscience Australia. The success of some explorers following the Oak Dam discovery in the coveted Gawler Craton geological province suggests the glory days could return, observers said.

Copper will be essential to the energy transition for its role in building renewable power infrastructure and electric vehicles. Global copper demand is expected to surge to 50 million tonnes in 2035, from 25 million tonnes in 2021, S&P Global estimated in its "Future of Copper" report.

Natural owner

For BHP Group, which has observed about 130 companies hunting and mining copper in South Australia, owning OZ Minerals enables the critical mass and investment in downstream infrastructure to provide the economy of scale to tie existing and future major discoveries together in a province-controlling approach to the region.

"With this [OZ Minerals] deal, BHP is now the natural owner of anything of substance in that area, for which they should be able to pay synergy value. People understand that, so there will be a lot of 'nearology' activity in the area," Robert Stein, a research analyst with investment group CLSA, told S&P Global Commodity Insights.

Stein, who spent eight years at BHP Group as a strategy and business development analyst, forecasts that South Australian copper production could significantly increase as a result.

"You could see potentially 400,000 tonnes to 500,000 tonnes of copper coming out of the state in 10 years time, making it globally significant," Stein said.

That estimate is more than double BHP Group's expected fiscal 2023 copper production of between 195,000 tonnes and 215,000 tonnes at Olympic Dam, outlined by the company in early September.

"Multi-hundreds of thousands of tonnes of copper is not an unreasonable proposition for South Australia in the near future," Paul Heithersay, the chief executive of South Australia's Department of Energy and Mining, told Commodity Insights.

Heithersay pointed to OZ Minerals' estimated resources of 150 Mt of ore at Prominent Hill and 950 Mt at Carrapateena, along with Rex Minerals Ltd.'s Hillside project approaching an investment decision in 2023 as one of Australia's largest undeveloped open pit copper projects.

Olympic Dam is the world's fourth-largest copper deposit based on an estimated 80.9 Mt of contained metal, according to S&P Global Market Intelligence data. A 500,000-tonne-per-year run rate for a future BHP Group-consolidated asset base would place within the top four producers globally.

Scale and efficiency

The deal, which is expected to close in the first half of 2023, will likely reduce BHP Groups' cash flow since OZ Minerals has projected negative cash flows in 2023 and 2024, according to a Nov. 18 note by RBC Capital Markets analysts.

OZ Minerals' earnings for the six months through June plunged 59.3% year over year as it grappled with weather, equipment and staffing problems, while attempting to increase copper-equivalent production to more than 340,000 t/y, from 140,000 tonnes.

Still, the transaction adds strategic growth for BHP Group, the RBC Capital Markets analysts said. They estimated up to A$1.7 billion in synergies and described the deal as "a rare mining transaction with meaningful industrial logic."

These synergies also give provide operational flexibility and security for the Olympic Dam mine, which has lost profitability and output through a series of issues over the past several years including breakdowns and a power outage. Olympic Dam's integrated metallurgical complex has a grinding and concentrating circuit, a hydrometallurgical plant incorporating solvent extraction circuits for copper and uranium, a copper smelter and refinery, including an electro-refinery and an electrowinning-refinery, and a recovery circuit for precious metals.

The proximity of OZ Minerals' assets means "if the mine goes down, you've got two or potentially three other mines that you can feed into the infrastructure complex," CLSA's Stein said.

"What BHP is looking at [with] Olympic Dam is similar to what they would have done with its Western Australia Iron Ore business: having a basin network, with shared infrastructure, shared cost bases, and that big, large scale and efficiency," Stein added.

BHP Group already has an exploration joint venture in South Australia with Red Tiger Resources Ltd., while OZ Minerals has combined efforts with Minotaur Exploration Ltd. and Black Tiger Resources Ltd. Stein said Coda Minerals Ltd. and Cohiba Minerals Ltd.'s impressive results suggest there are other discoveries to potentially bring into the fold.

Heithersay said it is "entirely logical" that BHP Group would be "running the ruler" over similar opportunities via offtake agreements, equity, or takeover, as any substantial discoveries can be centralized at Olympic Dam or elsewhere, rather than other companies having to build their own plant to process their ore.

Oak Dam looks to be high grade and potentially of economic size. BHP Group likely has "something of substance" there since it is currently operating seven drill rigs at the site, Heithersay said, who was chief executive of the state government's task force to look into a A$30 billion expansion of Olympic Dam that was shelved by the company in 2012.

However, iron-oxide-copper-gold style deposits such as Oak Dam "tend to be deep, so you need the backing of a BHP to explore and exploit these types of deposits," which is another argument for consolidation of iron-oxide-copper-gold projects in the region, Heithersay said.

BHP Group declined to comment for this story.

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