Australia's drought puts squeeze on mining

By Elisabeth Behrman
The Wall Street Journal
Monday, May 21, 2007

SYDNEY, Australia -- As demand for minerals surges and commodity prices approach record levels, the worst drought in Australia in 100 years is starting to affect mining and could crimp output in the country, a leading supplier of raw materials.

The shortage of water is squeezing some coal mines and at least one copper and gold operation. And where planned mines face higher costs to get water or where groundwater is insufficient, development may not proceed, threatening to limit increases in output needed to keep pace with demand.

Australia is a leading exporter of uranium and the largest exporter of alumina, coal, iron ore, lead and zinc. Mining accounts for nearly one-third of the country's exports by value, feeding the rapid development of economies such as China and India.

The states of South Australia, New South Wales and southern parts of Queensland have been severely affected by the drought, which has lasted more than five years in some areas. Prime Minister John Howard said last month he will cut water supplies along the Murray-Darling Basin, a key agricultural and mining region, unless the area receives substantial rain soon. The region provides 5% of Australia's mineral output.

"The viability of planned operations in the Murray-Darling Basin are seriously brought into question," said Melanie Stutsel, director of environmental and social policy at the Minerals Council Australia. "This is an issue that will escalate in time."

The drought comes as miners in other parts of Australia are wrestling with excessive rainfall and cyclones, which have dented the iron-ore output of BHP Billiton in north Western Australia.

In April, copper and gold miner Newcrest Mining Ltd. warned that it would cut production at its Cadia Hill mine in New South Wales if there wasn't rain soon. Last week, Newcrest said it had reached a deal with the local government to buy additional water to keep the mine running. A feasibility study for a 1.5-billion-Australian-dollar (US$1.24 billion) expansion of the mine is under way.

Water is crucial to mining, though mining accounts for just 3% of Australia's national water demand. Coal miners need it to control dust and to wash out rocks, dirt and other small particles. In copper processing, water is used to liquefy concentrate for transport through a pipeline. And in metal refining, miners need water for cooling.

Eighty percent of the water the industry uses comes from underground sources, which don't face the same seasonal pressures as rivers but are affected by prolonged drought because aquifers aren't recharged at the usual rate.

One victim of the drought last week was the Tarong coal mine Rio Tinto owns in Queensland. It said it will let go 160 people, or two-thirds of its work force, after the power station it supplies reduced output by 70% because of the lack of water. Other coal mines in southeast Queensland are also at risk from insufficient water.

Last year, the drought didn't hurt mining, but it did curb farm output -- agriculture accounts for the bulk of water demand -- and so shaved three-quarters of a percentage point off economic growth, which came in at 2.8%. For fiscal 2007-08, which ends June 30, the Australian government predicts growth of 3.75%, provided rainfall returns to seasonal conditions.

A South Australian Chamber of Mines and Energy study of 23 companies most likely to undertake development found that water accounted for a "fair chunk" of the A$20 billion they expected to devote to infrastructure, according to Jason Kuchel, the Chamber's chief executive.

"In some mines, significantly more than 50% of development costs will be on infrastructure," Mr. Kuchel said. "A project could go on the back burner if it's at risk of an infrastructure-cost blowout, such as water."

Water demand will increase sevenfold over the next 10 years in South Australia's central Gawler Craton region, which houses BHP's giant copper-gold-uranium Olympic Dam mine, as a result of Olympic Dam's expansion and other mine starts, Mr. Kuchel said.

"The government will likely provide water through desalination plants or [will] work with BHP on an expansion for its [proposed] desalination plant," Mr. Kuchel said.

BHP has said it is considering a desalination plant, with the state government to supply water to local communities and to the Olympic Dam operation. A BHP spokeswoman said Friday it is too early to address issues such as cost or expansion plans for the plant. A desalination plant planned for Western Australia has a price tag of A$955 million.

* * *

Join GATA
at the
World Gold, PGM, and Diamond Investment Conference
in Vancouver, British Columbia, Canada
Sunday and Monday, June 17 and 18, 2007

http://www.cambridgeconferences.com/ch_june2007.html

* * *

Help Keep GATA Going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at www.GATA.org. GATA is grateful for financial contributions, which are federally tax-deductible in the United States.