The McArthur River Mine

The McArthur River Mine

THERE was an unmistakeable whiff of victory when the chief of Xstrata Zinc, Santiago Zaldumbide, took the lectern at Xstrata's half-year earnings presentation in London this week to announce a $US360 million third-phase expansion of the McArthur River zinc mine in the Northern Territory.

Inherited with Xstrata's 2003 bargain-basement acquisition of Mount Isa Mines, this was one of the most contentious mining projects in recent times.

Along the way, after years of argument, a 5.5 kilometre stretch of the McArthur River was diverted to convert the mine from an underground to an open-cut operation.

In 2009, after a successful court challenge by traditional owners to environmental approvals given under the Howard government, Xstrata boss Mick Davis had threatened to close the mine and sack its 300 workers on Australia Day if the Rudd government did not intervene to validate the project. Then environment minister Peter Garrett swiftly complied.

But for Xstrata on Tuesday the McArthur River story wasn't about overcoming stiff community opposition, it was about the technical challenge of separating the lead from the zinc in the very fine-grained ore. McArthur River had only ever been able to produce ''bulk'' concentrates that could be used only by some smelters. Not only that, as an underground operation the mine could only produce from two of eight available orebodies, with a capacity of 1 million tonnes. By 2002 it had just five years' life and was uneconomic.

Zaldumbide said McArthur River had always been recognised as one of the world's largest zinc deposits, but the technical challenges prevented mining for decades. As soon as it bought the mine, Xstrata set out to exploit the vast potential of the orebody, notwithstanding the closures of the smelters that were customers for its bulk concentrates.

In 2005, Xstrata bought out its Japanese partner's 25 per cent stake for $4 million and in October 2006 federal approvals for the open cut were granted.

Work started and diversion of the river using a semi-circular bund wall around the mine pit was almost complete when the court overturned the original approval. Work stopped and, for a time, the mine went into care and maintenance with workers stood down until the approval was retrospectively validated.

Zaldumbide said that although Xstrata had inherited a fine-grinding technology from MIM, it had high capital expenditure and power requirements and was not a compelling solution even with improvements. ''In parallel we tested an advanced alternative leaching technology, which ultimately won the race,'' he said, ''allowing us to produce a widely marketable concentrate with 50 per cent zinc grade and low lead content, suitable for use by standard electrolytic smelters, including our own.''

It was the final piece of the puzzle and with the announcement of the phase-three expansion, Xstrata will double production at McArthur River to 5.5 million tonnes from 2014. It is waiting on final approvals and will commission the expansion next year.

The expansion will lift reserves at McArthur River from 55 million to 115 million tonnes, making it the largest zinc resource in the world. Costs will fall 20 per cent and the mine life will be extended from 2027 to 2038. A falling zinc price was a significant contributor to Xstrata's weakened profit result this half, which forced the company to swing into austerity mode, targeting cost savings of $US972 million and deferring capital spending of $US1 billion in 2012.

Zinc dropped 15 per cent to $US1978 a tonne, but Xstrata reckons the expansion will earn back its cost of capital at a zinc price of $US1340 a tonne and will be well timed to meet a shortfall when zinc mines reach the end of their lives over the next few years.

Macquarie Bank's analysts were slightly less confident, noting that the expansion ''continues the steady stream of developments, despite the present pricing environment, that suggests the zinc market is likely to remain well supplied in the coming years''.

But nothing was going to get in the way of a bit of back-slapping on Tuesday. Zaldumbide said McArthur River's full potential could ''finally be realised through a capital and energy-efficient, low-cost operation … sitting on top of a 50-year orebody''.

And Davis paid his own tribute: ''Santiago and team have doggedly sought to remove one obstacle after another … in an effort to realise the potential of this vast resource base.''