Australia | Sep 26 2007
By Greg Peel
Prior to this morning’s release of BHP Billiton’s (BHP) annual resource upgrade, the stock had leapt close to 9% in two days. While BHP has been ploughing its way back from a subprime bottom last month, and was bolstered by the news the Fed would save the US economy, the last two days have been somewhat surreal.
It all kicked off when the rumour went around that BHP had suddenly realised the gold deposit at Olympic Dam may actually be the biggest the world has ever seen. Olympic Dam already holds the world’s largest known reserves of uranium, and the fourth largest reserves of copper, and now it seems its gold deposits might be three times bigger than first thought (which they would have to be to become the world’s largest). Gold or no gold, the expectation was that BHP was going to announce something big at Olympic Dam either way.
The company reduced its proved and probable (2P) gold estimation from 9.2moz to 8.7moz. It did, however, increase the indicated gold resource from 17.5moz to 30.6moz.
In afternoon trade BHP’s shares are off over 3% – still a healthy three-day return. There was a major upgrade to the Olympic Dam orebody – by 75% to 7.7 billion tonnes in fact – but the 2P reserves were only increased by a mere 7%.
Whatever may lie under the dust in South Australia, it won’t be reaching the surface tomorrow. The reserve update provides the company with justification to proceed to a feasibility study to expand uranium operations. Uranium production has already been ear-marked for a tripling of production – over decades. Base metal production will also be increased, but gradually, in order to make the most of currently high prices.
Mine expansion takes an inordinately long period of time (if it didn’t, commodity prices would never have reached this high), it is invariably beset with setbacks and delays, and capacity and labour constraints have led to surging costs.
BHP chairman Don Argus told Reuters he expects commodity prices to fall back to long-run marginal cost of supply in the medium term, while remaining historically high a volatile in the interim.
You’d be hard pressed to find someone who didn’t think BHP was a worthwhile investment for the long term player. In the short term however, analysts have watched bemused as shares in the Big Australian have skyrocketed as the world worries about recession. The stock scores an 8/2/0 B/H/S ratio in the FNArena database, but the average 12-month price target stands at $43.32 – 3% below yesterday’s high. Some analysts have already voiced their concern that investors were diving too hard and too fast into resource stocks since the Fed rate cut. Tomorrow’s broker reports should make for interesting reading.
