Implications Of The Olympic Dam Expansion Delay For The Uranium Industry

| About: BHP Billiton (BHP)

Earlier this week, BHP Billiton (NYSE:BHP) announced that it will investigate an alternative, less capital-intensive design of the Olympic Dam open-pit expansion, effectively shelving this massive, over $20 billion project. Though not unexpected, the decision is undoubtedly an important development for the world's largest mining company. But it has even larger long-term implications for the small and highly concentrated uranium mining industry.

Uranium is not a significant commodity for BHP Billiton, accounting for less than 1% of total company revenue. At the same time, BHP's existing uranium operation accounts for 5% of global uranium supply and the development of the Olympic Dam expansion would have raised this contribution to over 17% by the beginning of the next decade.

Despite being primarily considered a copper mine, Olympic Dam is the largest known uranium resource globally. Its announced uranium reserve base is around 300 thousand tons or four times global annual uranium demand. The decision to shelve the biggest source of future uranium production undoubtedly removes a significant supply surplus pressure from the industry battling the aftermath of the Fukushima accident. Another important benefit of the decision is that it supports a case for higher incentive prices for future uranium projects, especially those starting in the second half of the decade.

The uranium mining sector rallied on the announcement with Global X Uranium ETF (NYSEARCA:URA) finishing the day more than 2% higher, while the largest publicly traded uranium miner, Cameco (NYSE:CCJ), added about 1%.

Despite this excitement, there are at least three reasons to tame the enthusiasm:

First, the delay does not come as a surprise and was widely expected. In fact, it would have been more surprising if BHP announced that it wants to move ahead with the project. As a result, the implication of the recent announcement have already been largely priced in by investors.

Second, the effects of the project delay are longer term and do little to address near-term challenges facing the uranium industry. The Olympic Dam expansion project would have begun producing only at the end of this decade and would have reached its full capacity closer to the middle of next decade.

Finally, the decision to delay is not a permanent cancellation of the project. Should the commodity outlook improve, the mega project may still stage a comeback.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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