Extract of AFR article from the weekend Jun 19 2015 at 5:36 PM...

• Extract of AFR article from the weekend
  • Jun 19 2015 at 5:36 PM
    
  • Updated Jun 20 2015 at 4:09 AM
  BHP Billiton chief executive Andrew Mackenzie: 'We are looking at things all the time, particularly in oil and copper.' Arsineh Houspian
  by Matthew Stevens
  To Zaldivar or not to Zaldivar, that is the $US1 billion question that is reportedly being mulled over by, among others, BHP Billiton and its partners in Chilean copper.
  
  Zaldivar is a reasonably big Chilean copper mine. It is currently owned by Barrick Gold, a Canadian company that gathered a lot of debt through the back end of the boom and is now seeking to sell half and maybe more of arguably its biggest single cash cow. And Zaldivar sits, quite literally, across the road from the mother of all BHP's copper credentials, Escondida.
  
  Zaldivar's product, proximity and potential make it a natural for BHP to actively ponder.
  
  Copper is an asset class of global choice among the big miners. And BHP has asserted repeatedly over recent times that it would consider opportunistic bolt-on acquisitions, rather than its more traditional transitional deals, in its two growth pillars, copper and petroleum.
  
  
  This announced determination to spend against acquired copper growth has been questioned at some levels of the industry because BHP appeared to meekly bypass the opportunity offered by the sale of the Las Bambas project that was required of Glencore before the Chinese competition regulator would allow the merger with Xstrata.
  
  Las Bambas, you see, appears to tick every BHP copper box. It is a whopping, low-cost, relatively long-life project whose only obvious drawback is geographic: it is in Peru rather than Chile.
  
  So here is our chance to set the Las Bambas record straight. The fact is that BHP did take a look at the project and did express an interest in joining a process that led eventually in early 2014 to a $US5.85 billion sale to China's Melbourne-based global miner, MMG. But the sale process, in the end, was fabricated to deliver an inside running to Chinese interests. MMG duly took advantage of that.
  
  But if, as was possible under the orders issued by the regulator, Glencore could not settle on a price with a Chinese buyer, then BHP was ready to fully engage.
  
  
  
  In our recent extended conversations with BHP boss Andrew Mackenzie, it was made abundantly clear that any and all opportunities that fitted his tier one copper criteria would be studied until it became apparent they did not hit his minium-return-on-investment triggers.
  
  "You know, people can criticise you for failed deals, but this company is always a trier," Mackenzie said. "We are looking at things all the time, particularly in oil and copper. Just because we don't do them doesn't mean we didn't take them seriously."
  
  This, of course, begs the primary question: is a standalone Zaldivar a tier one copper business?
  
  Zaldivar currently produces about 100,000 tonnes of copper annually from ore containing 0.05 per cent copper. Production costs last year were $US1.65 a pound and they are rising as head grades fall. Barrick's annual report puts the project life at 20 years, but claims exploration potential could extend that deadline.
  
  
  To put that into competitive content, BHP's 57.5 per cent-owned Escondida project is expected to produce 1.2 million tonnes of copper this year at a cost of just over $US1 a pound. The head grade is expected to average better than 1.3 per cent, but a new mine plan will see grades edge below the 1 per cent mark after 2016 before they recover temporarily from 2020. BHP rates Escondida a 100-year project.
  
  BHP has two more Andean projects, Pampa Norte in Chile and Antamina in southern Peru, as 55-year and 45-year projects respectively. Each produces significantly more copper than Zaldivar from higher-grade resources.
  
  Therefore, Zaldivar doesn't look to be a tier one offering, so it should fall off BHP's shopping list, right? Well, yes, but maybe no – because Zaldivar's potential might well be subject to a rather less binary review by BHP. Real cost synergies are very rare in mining and they are almost always the product of proximity, and that is exactly what Barrick's baby has going for it.
  
  The medium-term bottleneck at Escondida, for example, is access to water and power. Zaldivar would appear to have an excess of each. And, although Zaldivar's ore is a lower grade, it sits shallower than Escondida's and could therefore add disproportionately greater value if it was introduced to the BHP operation's leaching system.
  
  
  The certainty that emerges for all that uncertainty is the likely shape of an offer should the valuation stack up.
  
  Given that Zaldivar's value might be best expressed through its integration with Escondida, it would seem a fair bet that any progress will be made through the joint venture that owns the world's biggest copper mine, Minera Escondida, rather than by BHP on its own.
  
  This might well explain why so few of the people who might usually know of a BHP deal were expressing certain ignorance about reports from the northern hemisphere claiming it had made it to the second phase of a bid-off, with Canada's Teck the other claimed finalist.
  
  BHP's partners in Escondida are Rio Tinto, which owns 30 per cent, and a pair of Japanese joint ventures, both of which are led by Mitsubishi and which collectively speak for 12.5 per cent.
  
  For those of an historical bent, this could be a second bite at the Zaldivar cherry for BHP & Co. Through the 1980s, Minera Escondida acquired a 49 per cent share of Zaldivar's host tenement from the bloke who founded the thing, a local named Pedro Buttazzoni Alvarez.
  
  But Escondida JV sold the inte...