The Ravensthorpe Nickel Project was a project to develop a mine, processing plant and associated infrastructure near Ravensthorpe in Western Australia to produce a mixed nickel cobalt hydroxide intermediate product (MHP) over 25 years in combination with an expansion to BHP Billiton's existing Yabulu refinery in Queensland. The MHP transported through the deep water port of Esperance to Yabulu for final refining. According to BHP Billiton (2004c), the estimated productions were up to 50,000 tonnes per year of contained nickel and 1,400 tonnes per year of contained cobalt in MHP. The three ore bodies were proven to a reserve of 125.3Mt at 0.73% nickel and 0.032% cobalt and a probable reserve of 137.9Mt at 0.57% nickel and 0.026% cobalt (Net Resources International n.d.c).
Locations of Ravensthorpe and Yabulu (the land transport route is for reference only)
BHP Billiton started a pre-feasibility and feasibility study on this project in 1997 and spent US$85 million in this study (BHP Billiton 2004c). The project was approved in March 2004 at the cost of US$1.05 billion (BHP Billiton 2004b). The project was believed to be the best profile for a Greenfield laterite project by the sponsor as it was expected to provide the high leach feed grade with low mining costs. The project started immediately after the approval. BHP Billiton achieved its first production in October 2007, which was originally scheduled to start production by the second quarter of 2007 and the first 5,000 tonnes production milestone was achieved in December 2007 (BHP Billiton, 2008). The company did not officially open the operation until 23 May 2008. In January 2009, BHP Billiton announced that it was suspending production at the Ravensthorpe nickel mine indefinitely and wrote off the investment valued at US$3.3 billion on its 2008 books (Lague, D 2009).
The milestones in the project development process were as below:
November 1999
QNI Pty Ltd signed a joint venture agreement with Comet Resources NL and agreed to invest A$10 million in the first stage (a four month evaluation program). Thus, QNI acquired 12 per cent of Comet for an entry price of A$0.925 per share (BHP Billiton 2000).
6 April 2000
QNI Pty Ltd ("QNI"), the wholly owned subsidiary of Billiton Plc, decided to continue the development of the Ravensthorpe Nickel Project in Western Australia and purchased a 40% direct joint venture interest in the project at A$36 from Comet Resources NL (BHP Billiton 2000).
9 March 2001
QNI Western Australia Pty Ltd (QNIWA), a subsidiary of QNI Pty Ltd proceeded to purchase Comet's remaining 50 per cent interest in the Ravensthorpe Nickel Project at a cost of A$28 million and cancelled its interest of 19.9% in Comet (BHP Billiton 2001a).
27 August 2001
As the merger of BHP and Billiton gave new process opportunity to an innovative Atmospheric Pressure Leach process, BHP Billiton had lengthen the completion date for its Ravensthorpe Nickel Project feasibility study to include the process improvement to upgrade the ore to almost two percent nickel content (BHP Billiton 2001b)
8 October 2001
BHP Billiton's Ravensthorpe Nickel Project has got a funding support from the Western Australian government to build multi-user community infrastructure and community service to assist with the project (BHP Billiton 2001c).
23 March 2004
BHP Billiton approved the development of the Ravensthorpe Project and related expansion of the Yabulu Nickel Refinery in Australia. The capital cost of the combined project was expected to be US$1.4 billion with an expectation annual nickel production of approximately US$12.7/lb (BHP Billiton 2004a).
27 October 2005.
The Ravensthorpe Nickel Project revised the capital cost to US$1,340 million or 28% above the initial approved budget (BHP Billiton 2005).
30 November 2006
BHP Billiton announced the revised budget of the Ravensthorpe Nickel Project to US$2.2 billion and the target date of first shipping to Yabulu to the first quarter 2008. The construction of the project was approximately 73 percent complete with engineering and procurement activities finalised and offsite fabrication 97 percent complete (BHP Billiton 2006).
23 May 2008
The company achieved its first production in October 2007 and its first 5,000t production milestone in December 2007; however, it did not officially open the operation until 23 May 2008 (BHP Billiton 2008a, Net Resources International n.d.c).
25 November 2008
BHP Billiton booked a pre-tax impairment charge of approximately US$2.1 billion (US$1.5 billion post-tax) in its 2008 book and disclosed as an Exceptional Item in BHP Billiton's interim as the result of sharp fall of nickel price, decrease in demand, changes in the rate of production ramp up and high capital expenditure (BHP Billiton 2008b).
21 January 2009
BHP Billiton decided to take an indefinite suspension of the project mainly due to continuing deterioration in the outlook for the nickel market, high estimated cost to sustain the targeted production volume, and diminished prospects of the project. Consequently, BHP planned to lay off by approximately 800 employees and 1,000 contractors by June 2009 (BHP Billiton 2009a).
12 August 2009
Due to the suspension of the project, the company booked additional impairment to total cost of US$3,615 million (US$1,076 million tax benefit) (BHP Billiton 2009b).
9 December 2009
BHP Billiton announced its agreement to sell the Ravensthorpe Nickel Operation to First Quantum Minerals Australia Pty Ltd, a wholly owned subsidiary of First Quantum Minerals Ltd ("First Quantum") for US$340 million (Macmillan, 2009). The sale was expected to be finalised during the first quarter of 2010 calendar year.
RISK MANAGEMENT
In order to ensure the success of a project, risks identification, mitigation, and allocation to those best able to manage them should be done fore the project is commenced. The associated risks of this project along with the impact level and probabilities are shown below
Market Risk (price)
The roaring nickel price seemed to justify that the company had every right to project a bright future. Therefore, the company did not have fixed price "turnkey" contracts and completely exposed to market risk. According to Reuters (2008), having reached a high of US$51,650 per tonne in May 2007, the price of nickel fell to about $11,900 per tonne or $5.40 per pound in Oct 2008, 3 months after its official operation. The financial model of the company required a nickel price of between $5 and $8 a pound and full capacity production to give a positive profit to the project (Reuters, 2008). Until the project was sold in 2009, it hadn't yet reached the full production and the nickel price was in the lower quartile of the required price.
The fluctuation of nickel price in the global market 2005-present
Technology Risk
Ravensthorpe Mine produces laterite ore, which contains low grade of nickel and requires intensive process to produce a marketable material. BHP Billiton utilised beneficiation facility to increase the nickel grade of the ore and hydrometallurgical processing plant to process the upgraded ore using the Enhanced Pressure Acid Leach (EPAL), new technology developed by BHP Billiton. BHP Billiton believed that the technology might bring better grade of nickel compared to other leaching technologies and a recovery of an additional of 15,000 ton per annum of nickel (BHP Billiton 2004c). However in market, this technology has not been proven to succeed wholly.
(Source: The Ravensthorpe Nickel Project Overview p. 3)
Foreign exchange risk
As a mega-project like this will last for more than twenty years, foreign exchange risk must be taken into consideration. BHP Billiton never does hedging exposing the company to foreign exchange risk as the sales were in US dollars while a significant part of the cost was priced in Australian dollars. In this project, about 85% of the operating costs were priced in Australian dollars, and this arrangement provided a buffer against falling U.S. dollar nickel prices (Reuters 2008).
Overrun Costs
The capital cost for the project was initially approved at US$1.05 billion in March 2004 (BHP Billiton 2004b). In August 2005, it was revised to US$1.34 billion or 28% higher than the originally approved budget and another revision was approved in November 2006 to US$2.2 billion or 110% higher than the originally approved budget (BHP Billiton 2005, BHP Billiton 2006). The capital cost increased as the result of increasing materials and labour cost due to mining boom in Western Australia and increasing size of workforce needed to operate the mine.
Market Risk (Demand)
When the project was proposed and its feasibility scrutinized, the company was optimistic about the demand for its products in the global market. As a result, the company did not have any long term sales contract and completely exposed to market risk. During the period of high prices and shortage supply of nickel, China, as one of the main sources of the company's nickel demand, enhanced its existing technology to produce nickel pig iron from low grade ores at relatively low cost (Lague, D. 2009). This alternative nickel is a big competitor fro primary nickel. It brought double impact for the company.
Infrastructure risk
Water supply, sewage, roads and other supporting infrastructure are very necessary to provide fundamental services and amenities to the local community where most of the construction and operation work forces in the project are sourced. It is the responsibility of the State Government to provide funding for constructing and operating the infrastructure. However, the State Government later refused to fund a cost blow-out in providing adequate sewage system, which affected the number of residential staff the project could employ and the capacity of the project to reserve its workforce.
Completion risk
A mega-project like this is highly exposed to construction delay risk. It is particularly so since this project is located in a remote place in Western Australia and hence suffered from logistical difficulty and labour availability. The changing construction conditions featuring fluctuating material and labour costs as well as deteriorating labour productivity in the country further called for mitigation measures against project completion delay, such as EPC contract with contractors. However, BHP Billiton bore this risk all by itself.
Environmental risk
The project might impact local flora and fauna and any aboriginal heritage values of the project area. For this reason, an environmental assessment was carefully conducted by independent specialist consultants employed by the Project. The Departments of Environmental Protection, Conservation and Land Management, and Minerals and Energy were extensively consulted throughout the entire assessment period.
The risk management practices and results of BHP Billiton in this Project are summarized in the following table.
LESSONS LEARNT
Price of Nickel
The GFC had caused the commodity prices sunk as demand slowed amid the global economic downturn, with many producers forced to cut output and shed jobs to remain competitive .As price of nickel declined sharply and all other cost maintained or moved higher such as the labour cost of 1,800 employees was significant to further impacted BHP Billiton's position which led to higher production costs. The most important part in the case where the demand slows down and the cost overrun compared to the projected budget then the best option is to secure fixed price contract deals at the initial phase with the customers even before the raw material has been produced in order to avoid the impact of price movement of the raw material resulted from demand and supply impacted from the GFC and other relevant uncertainties.
Overrun Costs
During the construction phase BHPB had exceeded its capital budgeting and operating costs. Following on from the guidance in their annual report BHP Billiton announced in November 2006 an appraisal of the capital costs of the project and increased the total budget to US$2.2 billion. In addition due to lower than expected labour productivity and late delivery of some material and equipment the target date for the first metal produced at Yabulu from Ravensthorpe ore would be pushed back to the first quarter of 2008. With this, on 23 May 2008 BHP Billiton's Ravensthorpe nickel project was only reaching 35% of its capacity and was expected only to achieve full capacity of 50,000 tonnes in 2010 after a series of delays and as resulted it failed to achieve full capacity as well by then.
The bad news in relation to the project continued with the 2008 annual report attributing the costs associated with the start-up operations at the two sites to an adverse impact on earnings of US$313 million. In November 2008, BHP Billiton announced after a review of the project a pre-tax impairment charge of approximately US$2.1 billion (US$1.5 billion post-tax) would be reflected in the group's half year results to 31 December 2008. The impairment was attributed to the 'significant deterioration' in the nickel market, with a 'dramatic fall' in demand together with changes in the rate of production at Ravensthorpe and the project sustaining capital expenditure (Wordpress 2010).
In regard to the overrun cost we would suggest that BHPB should have shared the risk with other sponsors and concentrate on their individual strengths and capabilities in the development stage as BHPB was just started to penetrate this particular market and the new technology that was used.
Technology Adopted
In addition, the project did employ a complex technology involving the leaching of dry ores known as laterites. Earlier attempts at the process in Western Australia had struggled for viability. Laterite ore contains only small amounts of nickel and requires intensive processing to produce a saleable mix of nickel and also cobalt while on the other hand China was using a more efficient technology in regards to production at a lower cost (Regan, J. 2008).
As the new technology hadn't proven working completely well, we would suggest that the assumption in the financial model should also reflect the probability of the technology failure in the initial stage. It might be additional cost reserved for the new technology or lower production in the early stage of production.
Customer Base/ Portfolio
Throughout this research, it was obvious that BHP was just focusing to supply to developing countries in particular China. During the initial stage of developing, BHP Ravensthorpe Nickel was targeting to expand the market share further beyond the existing 41% supply of China's iron ore (Wang, T 2009). BHP intended to take advantage of its strong balance sheet to expand capacity during the downturn, so as to be better positioned than rivals to supply China, India and Brazil when demand rebounds. In addition, one of its main assumptions relied on the increase of China's nickel consumption, which had risen at an average annual compound rate of 23 percent a year since 1998, compared with a 3.7 percent global rate (Wang, T 2009). It would be a fantastic market if BHP was able to capture it.
When the Global Financial Crisis hits, China was cutting its own production which led the demand to decline sharply which directly affected the price of nickel to drop drastically from highs of more than $US51,000 per tonne in May 2007 to $US11,030 a tonne on 21 January 2009 which was close to 80% reduction in price alone.
Therefore, as shown this was among the biggest risk taken by BHP for not having a diversified portfolio of customer from other country and the predictions that were made based solely on one particular customer or country such as China. In addition, long term sales contract might also be utilized to reduce the market risk in term of market demand.
The Focus of BHPB and Relying Predictions/Assumptions
BHPB was really focused on a particular mining industry and with Ravensthorpe it intended to shift their focused in iron ore and coal, followed by copper, aluminium and oil and gas. In 2008, coal and iron ore contributed 30 percent and 20 percent of the group revenue respectively, petroleum and base metals (copper) each contributed around 14 percent of group revenue followed by aluminium at 8 percent. A stainless steel material which is nickel was just 4 percent and now the 'star' Ravensthorpe project in Western Australia was sold (McCrann, T 2010).
Prior to Ravensthorpe Nickel Mine, the company gained significant profit from the non-Ravensthorpe nickel operations bought so cheaply from Western Mining Corporation. In 2007-2008 nickel contributed $US1.2 billion profit on $US5 billion of revenue whilst, in 2006-2007 a staggering $US3.7 billion of profit on $US6.9 billion of revenue. The relatively high profit from its previous nickel mines might lead BHP to look at mainly price in the decision making of this project. For such a huge project, a thorough financial model should be built instead of mainly focused on price solely.
SUCCESSFUL PROJECTS: A COMPARISON
Olympic Dams
Overview
Olympic Dam is Australia's largest underground mine and is the world's fourth-largest copper deposit and the largest uranium deposit and the fifth largest gold deposit. It also contains significant quantities of silver. The massive Olympic Dam ore body was discovered in 1975 and went into production in 1988 (BHP Billiton, n.d)
Challenges
Lower grade of the uranium ore than many mines
Olympic Dam is one of the world's largest uranium producers; however, it's also one of the most low-grade. Olympic Dam has enormous reserves of ore, with 347,000 tonnes of contained uranium oxide and the overall resource contains some 2.45 million tonnes of uranium oxide in a hematite breccia complex (World Nuclear Association 2010). Yet the grade of the uranium ore is lower than many mines or potential mines which have the benefit of open cut operation.
Low efficiency of underground mining
Underground mining can extract only about 25% of the ore containing recoverable quantities of copper, uranium, gold and silver, while open mining would extract up to 98% as large zones of lower-grade mineralization (World Nuclear Association 2010).
Demands and prices for the minerals are expected to be dampened
All mineral commodity markets tend to be cyclical, i.e., prices rise and fall substantially over the years, but with these fluctuations, the long-term trend in real prices still declines as technological progress takes place at mines and mining efficiencies increase. For example, in the uranium market, over the 20 years from 1970 there was a 25% reduction in uranium demand per kWh output in Europe due to mining technology improvements, which continue today (World Nuclear Association 2010).
Lesson Learnt
Multi-product mines
While the grade of the uranium ore is lower than many mines which have the benefit of open cut operation, the fact that copper is a co-product with uranium from that same ore means that such grades are viable, as gold, silver and copper credits help offset the production cost of uranium, making it affordable to produce, even at skinny grade.
Long-term contracts to prevent price fluctuation
The sales of Olympic dam uranium concentrate are made under long-term contracts to electric utilities in Canada, USA, Japan, South Korea, China, Finland, Sweden, Belgium, France and the United Kingdom. Thus, the risk of declining demand and price will be mitigated greatly.
Murrin Murrin Nickel and Cobalt Mine, Leonora, Australia
Overview
The Murrin Murrin nickel-cobalt project, 60km east of Leonora, was commissioned by Anaconda Nickel Ltd. It is based on the mining and processing of lateritic ore for the production of up to 40,000t/y of nickel and 2,500t/y of cobalt briquettes with a design cash cost of $2.00-2.40/lb of nickel, making it one of the world's largest and lowest-cost nickel producers (Net Resources International n.d.b). Stage 1 of the project was commissioned in 1999 at a cost of A$1,030m and total production costs for 2006 were around $8.25/lb of nickel (Net Resources International n.d.b).
Challenges
2009 was a tough year for global consumer demand; the fallout from the financial crisis that afflicted the world economy has seen nickel prices fluctuate wildly. LME prices peaked at just over US$52,000/t in May 2007, on the back of strong demand and low stocks, but had fallen by over 80% by the end of 2008, as demand collapsed (Nickel 2010).
Lesson Learnt
Low mining cost
Opencast mining at Murrin Murrin benefits from favourable stripping ratios, which allow low mining costs. Murrin Murrin is a world-class hydrometallurgical project, using sulphuric acid in high-temperature, high-pressure autoclave vessels to aggressively leach nickel and cobalt from low-grade lateritic (oxidised) ores.
Environmental friendly mining
Hydrometallurgical processing offers significant environmental benefits compared to traditional pyrometallurgical processes, such as smelting, and much of the energy, heat and consumables used in the Murrin Murrin are recycled.
Innovative mining technology
A heap-leach technology has been being tried at the Murrin Murrin, if the technology is successful, it will provide the project with a separate source of output from low-grade ores that are currently un-economic, as well as from low-grade stockpiled material.
