BHP Billiton Expected to Spend $3.5-Billion in Iron Ore Expansion

Australia-based mining company BHP Billiton (ASX:BHP) (NYSE:BHP) is gearing up to increase iron ore production with the help of a $3.5-billion expansion at its Pilbara mines in Western Australia.

According to Business Review Australia, the move will increase the company’s production to an annual capacity of 290 million tons per year, up from the previous target of 270 million tons.

Although it’s not likely iron ore prices will reach $100 a ton again anytime soon, BHP is prepared to take the chance in a “bigger-than-expected” expansion to bring more iron ore into the market.  

“We would say it is quite unlikely that we would see prices north of $US100 a ton, so our forecasts are obviously based on something below that,” CEO Andrew Mackenzie said.

Iron ore prices fell to $90.10 on Friday as Chinese steel mills continued to run down iron ore inventory amid low steel prices. According to analysts for Macquarie, a continued lack of buying for the precious metal was possible.

“Mills do report that they plan to increase purchasing activity of both iron ore and coking coal, although whether this happens or not will almost certainly depend on how demand conditions evolve in the coming weeks,” the bank said in a note to clients.

However, because of BHP’s low operating costs ($40/ton), iron ore prices would have to drop farther than anyone is predicting for the expansion not to be a success.

“We have looked at quite big capital costs and so on, but by just sitting back with what we’ve got and making what we’ve got much more productive, we’ve seen our way through to achieving that with minimal capital,” said Mackenzie.

The Australian reported if everything goes according to plan, the Pilbara iron ore expansion will give BHP an extra $5.85 billion of annual revenue.

Along with revealing a 23 percent increase in annual profit last week, the company sent shockwaves across the mining industry last week as it announced a demerger of its non-core assets.