BHP and RIO transition to electric vehicles at jointly-owned Escondida copper mine in Chile

BHP to invest A$371 million to electrify Escondida copper mine

Australia is endowed with an abundance of natural resources and so it is no surprise that Australians lead the world in many aspects of large-scale mining activity. BHP and Rio Tinto, being two of the world’s largest mineral producers are testimony to this assertion.

So it is significant that the two Australian-owned mining giants are transitioning their jointly owned Escondida copper mine to an electric trolley system which is a more safe and sustainable way of operating the Escondida mine site.

The new facilities will electrically assist the movement of extraction trucks inside the mine in the areas where they operate loaded with ore and, consequently, consume more fuel. With this new technology, instead of using diesel, they will be propelled by electrical power, reducing greenhouse gas emissions and improving productivity associated with truck performance given the higher travel speed.

BHP will invest around $US250 million (A$371.6 million) in the project at Escondida, which it owns in a joint venture with Rio Tinto.  BHP owns 57.5 percent and Rio Tinto owns 30 percent, with the remaining 12.5 percent owned by Japan-based JECO Corp.

BHP is leveraged to a rising copper price 

BHP has announced that it will not make a firm offer for Anglo American for now. Under UK takeover laws, BHP is precluded from launching a fresh bid unless a rival offer emerges for Anglo. The Anglo American acquisition would have positioned BHP as the world’s largest copper producer and at a potentially lower cost than its internal Escondida copper investment.

BHP will now focus on its Chilean copper projects, and its world-class Pilbara iron ore operations and the large-scale potash project in Canada.

However, BHP is more leveraged to a rising copper price than its compatriot miners in Rio Tinto and South32.

Copper comprises 22 percent of BHP’s current earnings, compared to 19 percent for South32 and 10 percent for Rio. Expansion plans for Escondida indicate that these estimates increase to 34 percent for BHP and 20 percent for Rio Tinto by 2028.

BHP’s increasing leverage to copper at a time of rising global demand and a looming supply deficit leading to higher prices is positive for the company’s earnings prospects, relative to Rio Tinto. Although copper prices have rallied from US$8,500 per tonne in January to around US$9,700 per tonne today, most analysts see further price upside over the medium-term.

BHP strategically positioned to grow long-term earnings  

BHP’s strategic positioning to build its exposure to copper and potash will gradually reduce the miner’s dependence on iron ore, which presently accounts for 69 percent of earnings. Iron ore accounts for 77 percent of Rio Tinto’s current earnings.

The iron ore price is ultimately determined by Chinese steel mills and the demand for steel in an expanding Chinese economy. A slowing growth rate of the Chinese population, leading to lower future housing demand may limit the long-term price upside of iron ore. However, this should be partly offset by increased demand for steel necessary to build the renewable energy infrastructure required as China reduces its carbon emissions.

It is significant that this infrastructure is also highly dependent on copper needed to build the grid for the transmission of green energy to consumers and industry. Copper is also an essential component of electric engines in a changing and dynamic world. This is why BHP’s strategic initiative to increase its exposure to copper, and to become less dependent on iron ore makes it a sensible investment option for future-thinking investors.