BHP takes on copper project in Australia’s Northern Territory

Encounter Resources says the Northern Territory is Australia’s the next hot spot for copper. (Image courtesy of Toby Hudson | Wikimedia Commons)

BHP (ASX, NYSE:BHP), the world’s largest miner, has reached an option agreement with Encounter Resources Limited (ASX: ENR) over the Australian explorer’s 4,500 sq km (1,737 sq miles) Elliott copper project, in the Northern Territory.

The pact would give BHP the choice to enter an earn-in and joint venture deal to earn up to a 75% stake in the project, following a validation program slated to be completed before the end of the year.

The Melbourne-based mining giant would have to spend up to A$22 million (about $15.5m) over 10 years to become Elliot’s majority owner.

BHP will have to spend up to A$22 million over 10 years to become Elliot copper project’s majority owner

The companies would then form a joint venture and would be expected to fund development based on their percentage interest. That would allow the parties to maintain their respective stakes or dilute according to a standard dilution formula, Encounter Resources said.

The gold and copper junior added that if a party’s interest diluted to below 10%, it would automatically convert to a net smelter royalty.

BHP has the right to be the manager of the project, during the earn-in phase.

Encounter also fully-owns five other copper projects in the Northern Territory: the Jessica, Carrara, Playford and Sandover projects. Together, they cover 10,300 sq km of land surrounded and are by other projects, including the Tennant Creek copper-gold mine and Century zinc mine in Queensland.

BHP has spent the past four years actively looking for new copper projects as analysts anticipate a supply crunch of the metal, used in construction, renewable energy and electric vehicles (EVs).

The mining giant became last year the top shareholder in Australian miner SolGold (LON:SOLG) (TSX:SOLG), which is developing the Cascabel copper-gold project in Ecuador. The asset has the potential to become one of the largest copper-gold assets ever discovered, with an estimated productive mine-life of 55 years.

It also kicked off a $2.5 billion expansion of its Spence copper mine in Chile, BHP’s second largest copper mine after Escondida, which is the world’s biggest.

“Future-facing” metal

BHP’s new chief executive, Mike Henry, said in February the company needed more “future-facing” metals, such as copper. A month later, chairman Ken Mackenzie said the miner was in a strong position to make acquisitions if there were opportunities available because of the pandemic.

“I’m not sure if there will be any opportunities that will come from this, but if there are, we are actually in a position to act,” Mackenzie said.

According to the latest report by International Copper Study Group (ICSG), global mine production fell 1% during the first half of the year. The market deficit hit 235,000 tonnes in the period.

Prices for the industrial metal, also used in the making of electric vehicles (EVs), have spiked thanks to recovering Chinese demand.

BHP bets on copper project in Australia's Northern Territory
Courtesy of Encounter Resources.

Bank of America analysts said earlier this month that baseline mine supply growth had fallen steadily in recent years, with copper concentrates production in 2020 hovering at roughly the same levels as in 2016.

“While output should rebound next year, we remain concerned that unexpected losses may increase as miners especially in Chile have had only essential staff on site in recent months,” they wrote.

“Linked to that, we have factored in the usual disruption allowance of 6% for 2021, which implies a deficit of 188Kt; yet, there is a risk that the shortages may end up being much bigger,” BofA noted.

Copper fell by more than 3% on Monday from fresh two-year highs reached on Friday, but managed to stay above the pivotal $3 a pound level. Prices for metal, however, have surged 56% from a March low and analysts believe they will likely stay around the recent highs for the rest of 2020.