Damo: The value of BHP Billiton (BHP.US)'s South Australian copper expansion is still underestimated. Site visits may have been catalyzed to reassess and maintain the “gain” rating
The Zhitong Finance App learned that Morgan Stanley published a research report to maintain the BHP Billiton (BHP.US) Australian stock “gain” rating and a target price of 68 Australian dollars. The bank's team of analysts anticipates that the upcoming site visit to the South Australian Copper SA (Copper SA) project could be an important catalyst. The bank said that the market has not fully taken into account the expansion scale of production in the South Australian copper sector, the cost reduction brought about by collapsed mining, and the significant economic support of the project by by-products such as gold, silver, and uranium.
As of now, the South Australian copper sector accounts for about 14% of BHP Billiton Group's net present asset value (NAV), corresponding to a net present value of 10.05 Australian dollars per share, while contributing 14% of the estimated EBITDA attributable to the 2027 fiscal year. However, market consensus expectations have yet to fully absorb the dividends of the project expansion. Visible Alpha markets consistently estimate that the sector's net present value per share is only 7.25 Australian dollars, and Morgan Stanley's benchmark assumption is about 39% higher than market consensus.
Large-scale collapse mining + smelting and refining expansion, construction cost downward logic
According to the research report, the cost advantage of the South Australian copper sector comes from two core drivers: large-scale underground block collapse mining (block caving) and the implementation of the smelter refining expansion project SRE (Smelter Refinery Expansion).
The 12 million ton/year collapse mining development roadway at the Carrapateena mine has been completed, and it is planned to release production capacity by climbing a slope starting in FY2030; Olympic Dam (Olympic Dam) is evaluating a 10 million ton/year block collapse mining program, and the potential final investment decision (FID) time point is 2029 calendar year. Large-scale underground collapse mining can significantly improve mining efficiency and dilute fixed costs. Referring to past global mine transformation experience, after Cadia and Grasberg switched from traditional mining to large-scale collapse mining, unit mining costs all showed a marked decline; Northparkes project data also showed that block collapse mining compared to segmented collapse mining, the cost of mining tons of mining can be reduced by about 20%. Morgan Stanley estimates that after FY2033, before by-products are deducted, the unit operating cost of the South Australian copper mine will be 9% lower than the market's agreed expectations.
The smelting and refining expansion SRE project is another key driver. SRE uses a two-stage flash smelting process to transform existing smelting facilities and is divided into stages 1a, 1b, and 2. After all are completed, the maximum production capacity of regional refined cathode copper will reach 650,000 tons/year. After the expansion is completed, BHP Billiton can locally process copper concentrates produced by Carrapateena and Molten Hill, reduce external processing costs and logistics losses caused by overseas sales of concentrates, and recover sulfuric acid by-products. Referring to the Kansanshi and Kamoa-Kakula integrated smelting project cases, self-built smelting systems can significantly reduce comprehensive operating costs, avoid concentrate sales deduction penalties brought about by uranium elements, and increase actual metal monetization benefits.
Judging from the production plan, under the Morgan Stanley benchmark scenario, the average annual copper production of the South Australian copper mine could reach 500,000 tons in the 2033-2040 fiscal year; however, the market agreed that the peak production in this sector was only 390,000 tons/year, and it would fall back to 335,000 tons by the 2040 fiscal year. The market did not fully account for the increase in the Carrapateena collapse mining, the Olympic Dam expansion, Oak Dam (Ankata), and the second phase of the Olympic Dam Deep (OD Deeps) project. The second phase of the project Oak Dam and OD Deeps plan to achieve FID in the 2032 calendar year and put into operation in the 2038 calendar year, supporting the South Australian copper mine's long-term copper production target of 650,000 tons/year. The South Australian copper mine will contribute 0.9 percentage points to the combined copper equivalent growth rate of BHP Billiton Group in the 2027-2035 fiscal year, and the Group's overall copper equivalent production CAGR is about 3.4%; of the 5.1% compound growth rate of the copper business sector itself, 2.0 percentage points come from the South Australian copper mine. This sector is the second largest copper incremental source within the group after Vicuña, and will bring 283,000 tons of copper equivalent increase.
Gold, silver, and uranium by-products have great value elasticity, significantly reducing the net production cost of copper
The South Australian Olympic Dam is a polymetallic symbiotic deposit. Gold, silver, and uranium oxide by-products can greatly offset copper mining and smelting costs. Morgan Stanley estimates that in the 2027-2036 fiscal year, by-product revenue can cover about 90% of the total unit mining costs of the South Australian copper mine. In comparison, this ratio is only 26% for Escondida and 22% for Spence.
Under the full production plan of 650,000 tons/year of copper, SRE is expected to produce 893,000 ounces of gold, 3.95 million ounces of silver, and 4,900 tons of uranium oxide per year. Price sensitivity estimates show that for every $100 per ounce increase in gold, the NPV per share of the South Australian copper mine will increase by 0.14 Australian dollars, and the net cost per unit of copper will decrease by 0.07 US dollars/lb; for every 10 US dollars/pound increase in uranium prices, the NPV per share will also increase by 0.14 Australian dollars per share, and the cost per unit of copper will decrease by 0.07 US dollars/lb. Using spot commodity prices, the NPV per share of the South Australian copper mine will increase from the benchmark scenario of 10.05 Australian dollars to 15.03 Australian dollars, an increase of nearly 50%; the average net unit cost of copper in the 2033‑2040 fiscal year could even drop to ‑0.26 dollars/pound (by-product returns exceed copper business costs).
The report also suggests that the uranium business has long-term option value. Currently, uranium production is about 4,900 tons/year under the SRE plan, but in the BHP Billiton historical expansion plan, the Olympic Dam uranium output was planned to reach 7,000 tons/year or even 19,000 tons/year; in the future, the scale of mining will expand, and if the hydrometallurgy recovery circuit is expanded, there is still room for further upward uranium production. The SRE expansion will also increase the internal recycling scale of precious metals, reduce metal losses caused by overseas sales of concentrate, and increase the actual amount of gold and silver recycled.
The field visit has six major observation dimensions, and many risks still need to be wary
Field research on the South Australian project to be carried out in November is a key catalyst for verifying the project's prospects. Morgan Stanley will focus on tracking six major directions: one is the landing path for each mine to achieve 500,000 tons/year copper production; the second is the construction scale of SRE smelting expansion, the mine-smelter commissioning schedule and unit cost; the second is the construction scale of SRE smelting expansion, mine-smelter commissioning schedule, and assessment of whether there is a possibility of acceleration; three is the progress of the northern water supply and electricity support construction progress, infrastructure property ownership, and supporting commitments other than financial capital expenditure; four is the internal processing ratio and external sales ratio of the sulfuric acid export logistics project; the fifth is the investment plan for self-produced concentrate; Production commissioning requirements , pre-engineering and remaining regulatory approval progress; the sixth is Oak Dam (Ankata) and Olympic Dam deep OD Deeps, supporting the time point and contribution scale of the second phase of the 650,000 ton production capacity target.
The report also lists the main downside risks of the project. First, capital expenditure exceeded expectations: Morgan Stanley's benchmark assumes nominal capital expenditure of US$141 billion for the first phase of the project in fiscal year 2028-2035, which is already 7% higher than BHP Billiton's inflation-adjusted upper limit of US$13.2 billion. The capital intensity of mines and beneficiation plants is $1.8 to 23 million per ton of copper equivalent. Even if they are competitive compared to mainstream new copper projects in the world, construction complexity, integrated smelter commissioning, and external supporting infrastructure may drive up actual investment.
The second is execution and climbing risk. The project involves multi-link collaboration in mine development, mineral processing plants, and SRE smelting and expansion. If the Carrapateena and Olympic Dam collapse mining, smelter commissioning and commissioning, and the northern water supply project are delayed, it will directly delay production release and free cash flow inflection points. The collapsed mining model itself also has uncertainties about the mining rate, ore grade, and cost release pace that fall short of what the model assumes.
At the approval level, although the newly revised Olympic Dam long-term development agreement has been implemented to resolve state-level institutional barriers, SRE and various mine expansion projects still need to complete environmental and development approvals one by one, and there is a potential risk that the approval cycle will be lengthened.
Group level: the share of the copper business continues to rise, and asset monetization provides financial buffer
Looking at the group as a whole, Morgan Stanley predicts BHP Billiton EV/EBITDA of 7.6 times for the 2027 fiscal year, which is 6 times higher than the historical average for the fiscal year 2019—2026. The core logic behind it is that the copper business will increase its share of the Group's EBITDA from 19% in FY2020 to 56% in FY2027, and the copper growth logic supports valuation premiums.
The company's balance sheet is stable. The net debt/EBITDA forecast for the 2027 fiscal year is only 0.3 times, which can not only support capital expenses to expand production in large-scale copper mines, but also maintain shareholders' dividends. In addition to the expansion of endogenous projects, BHP Billiton still has room for asset monetization: the company has already returned 6.3 billion US dollars through Antamina Silver Stream and Western Australian iron ore power cooperation, and there is still a gap of 3.7 billion US dollars before the asset release target of 10 billion US dollars; the sale of 15-25% shares in Jimblebar iron ore, Hay Point Port, Escondida seawater desalination plant, and Chilean electricity assets all have further capital release opportunities, which can further enhance financial flexibility and reduce the need for foreign mergers and acquisitions.
The report sets three scenarios for BHP Billiton: the target price of 61 Australian dollars in the benchmark scenario; under the optimistic scenario, the project approval was successfully implemented, capital expenditure was manageable, and commodity prices strengthened, and the target price rose to 100.6 Australian dollars; in the pessimistic scenario, China's steel demand weakened, copper projects were postponed, and capital expenditure was greatly overspent. The target price was 42.4 Australian dollars.