Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

How can a strike at BHP Billiton Ltd.'s largest mine be a good thing for the company?

BHP's shares are up more than 3 percent since Feb. 7, when workers at its Escondida pit in Chile pledged to down tools. Moody's Investors Service upgraded the debt outlook for its holding company Minera Escondida to stable from negative the same day.

To understand why, it's worth considering the sheer scale of Escondida. The project is far and away the world's biggest copper mine, with about twice as much metal in ore as the next biggest contender, Collahuasi, also in Chile.

Dirt in the Ground
Escondida contains almost twice as much copper as the next biggest mine
Source: Company resource and reserve statements, Bloomberg
Note: The largest ultimate shareholder has been shown for pits that are jointly owned. Figures based on company's contained-copper estimates, where available, or proven-and-probable ore reserves and copper-grade figures where they're not. Panguna figures are for measured-and-indicated resources as no reserve figures are available. Figures up to date as of July 2016.

The pit is deep enough that it could swallow the Empire State Building and Chrysler Building stacked on top of each other, with a little bit of spire sticking out. Its water desalination plant lifts the flow of a small river from the Pacific Ocean to a site that's twice as high above sea level as Denver. Every five days, its dump trucks and excavators move rock equivalent in tonnage to the Great Pyramid. The million metric tons or so it produces every year accounts for more than 5 percent of the world's copper supply.

That means that when Escondida sneezes, the global copper market catches a fever. Three-month metal futures are up close to 4 percent since the strike was announced. A 20-day stoppage could pull 64,000 tons from the market, according to Goldman Sachs Group Inc. That would wipe out about one-seventh of the 453,000-ton surplus that Bloomberg Intelligence expects this year -- and we're already 13 days in, with no obvious prospect of a breakthrough.

Metal Polish
Operating costs at Escondida have fallen to their lowest level in at least seven years
Source: Company reports, Gadfly calculations
Note: Calculated as revenue minus underlying Ebitda. Figures before June 2012 have been adjusted to 100% basis from the reported 57.5% numbers reflecting BHP equity ownership.

BHP is offering no salary increase, compared with the 7 percent demanded by unions, and in the inevitable tussle between capital and labor over mining profits, Escondida's workers have a point in asking for more.

More With Less
BHP's copper production costs have been heading down steadily
Source: BHP presentation, December 2015
Note: Shows costs without adjustment for declining ore grade. Figures for June 2017 are based on 2017 first-half earnings.

After all, as BHP has repeatedly pointed out in its communications to investors, it's been doing more with less in recent years -- cutting several thousand jobs to shrink the workforce about 17 percent between June 2014 and October 2015, and increasing overall labor productivity by 48 percent.

Operating costs of about $1.21 billion in first-half results released Tuesday were the lowest in at least seven years and cash costs of 91 cents per pound are enough to give BHP a 66 percent margin at current prices of $6,055 a ton, or $2.74 a pound.

That's likely to be cold comfort to the miners of the Atacama desert, because Escondida's scale gives management reason to take a tough negotiating stance. Right now, those workers camped outside the site are helping to buoy copper prices in a far more effective way than any demand-side factors. BHP shareholders should be delighted.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. BHP has a 57.5 percent stake. Rio Tinto Group has 30 percent and Mitsubishi Corp. associates have most of the remainder.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net