CHAPTER 10
Minera Escondida is located in the Atacama Desert, an almost rainless plateau on the western side of the Andes. ‘I dreamed up the Atacama Project after working in Chile for several years as a geological consultant for Codelco [Corporacion Nacional del Cobre de Chile – Chile’s state copper company and the dominant force in world copper],’ says J. David Lowell, the legendary American mining engineer-cum-geologist credited with finding more copper than any other explorer. ‘I became familiar with all the large copper deposits in Chile and noticed on a one-to-a-million map that they line up absolutely in a straight line.’ 1
The alignment convinced him that there must be another big deposit up there in the baking Mars-like terrain among the high sierras. He designed an exploration program based on a belt 32 kilometres wide that ran for 500 kilometres between two known deposits at Chuquicamata in the north and El Salvador in the south. Utah International and Getty Oil Company were brought in as 50/50 joint venturers, while Lowell negotiated a contract that allowed him to plan and manage the project and receive a finder’s fee or a percentage interest in any mineable discovery.
In January 1979, a convoy of four-wheel-drive vehicles set off from Antofagasta, a port in northern Chile, and headed for the first likely point along the 500-kilometre belt. Altitudes ranged from 2500 to 4000 metres, which in the Chilean view was not considered very high. It was so hot and dry that the prospectors hung their tents with pictures of forests and rivers to remind them what they looked like. Speaking from his mining office at Rio Rico near the Mexican border in Arizona, Lowell says, ‘The air is terribly clear up there and the stars shine like little light bulbs – it’s a place where many astronomical observatories are located. At night, you could walk out away from the tents and it was totally quiet. The only sound was the blood in your ears.’ 2
Over the next two years, Lowell did so much walking over rough ground to check out significant outcrops that might indicate the presence of copper that his boots wore out and he spent days at a time without any footwear. ‘We were not looking for an underground mine,’ he says. ‘We were looking for an open-pit mine.’ Whenever he found a likely prospect, the crew drilled a row of boreholes at 500-metre intervals – unusually wide spacing for exploration, but the type of ore body they were looking for would have been hard to miss. ‘It would have dimensions of thousands of metres.’
One promising site 170 kilometres south-east of Antofagasta had been staked five times by Codelco and two or three other major companies. ‘They had filed claims on the property, looked at it carefully, decided it wasn’t worth drilling and dropped it,’ Lowell says.
There were relatively small outcrops indicating a porphyry copper system and the rest of the area was covered with chucha, a powdery surface of bleached rock. One outcrop on top of a ridge had some leached capping. There was a difference of opinion about the significance of the leaching, not least because it was in the middle of the Atacama Desert, one of the driest places on earth – so where had the water come from?
‘There’s a water table under all parts of the desert, sometimes 300 metres deep,’ Lowell explains. ‘In an ordinary part of the world, the water would come from rainfall and would penetrate downwards. This water was rising from the water table to the surface and in the process picking up salts containing copper minerals. I think I was probably the first one to understand this process and that contributed to the discovery, although I would have to admit I didn’t have a great deal of faith in my conclusions. But I felt it was well worth drilling at that spot.’
Dave Lowell, son of an Arizona rancher, had spent so much of his 53 years in the outdoors that his features seemed to have been chiselled out of sandstone. He and his team burned the midnight oil trying to pick a name for the claim that, to mislead the opposition, would give the impression it had been staked by a small miner. Lowell suggested calling it ‘San Francisco’, a commonplace name for such claims, but Donaldo Rojas, a Chilean who was staking claims for the project, disagreed. ‘No, no, a small miner would be more romantic than that,’ he said. ‘We should call it La Escondida – the Hidden One.’ The name reflected the explorers’ intention of keeping the site secret from rival companies and, if they hit paydirt, it would also describe the hidden jewel they had found among the dross.
Lowell returned to his office at Antofagasta, leaving the drilling to his Chilean assistant, Francisco ‘Pancho’ Ortiz. ‘After five holes, Pancho telexed me for permission to stop the drilling on the basis of negative results,’ he says. ‘I told him to keep drilling and the next hole was Pozo 6 [drill-hole 6].’
On 14 March 1981, Pozo 6 struck 1.51 per cent copper at a depth of 240 metres. The rotary drill bit had intersected the main Escondida ore body of high-grade copper. The deposit was three kilometres long and one kilometre wide, with ore grades averaging 2.5 per cent, rising to five per cent in isolated pockets.
The find created a sensation at Utah headquarters in San Francisco. ‘We had drilled and drilled in that area and were about to give up when we sunk a drill-hole right into the middle of the Escondida deposit,’ Jim Curry says. ‘It was very exciting, although at that time Chile was a questionable place to do business.’ 3
Only a decade earlier, Chile’s foreign-owned mines had been nationalised by the Marxist regime of President Salvador Allende. But in 1973, Allende was violently overthrown – and killed – in a right-wing military coup led by General Augusto Pinochet. With Chile’s economy tottering, the new president denationalised foreign-owned mines and welcomed investment from abroad.
‘Utah International were scared to death that Escondida would be expropriated by the government again,’ Dave Lowell says. ‘Most of us who were living in Chile at the time thought that was unlikely with Pinochet’s government, but the company was afraid to invest their own money – they wanted 100 per cent project finance.’
But before anything else could happen, controversy erupted when three Utah employees and one Getty employee claimed to have discovered Escondida. ‘None of these fellows had even been to the Escondida project but as soon as the discovery was made they claimed credit for it,’ Lowell says. ‘They also shut me out of the fun of participating in the definition drilling. I was technically separated from Escondida as soon as the discovery was made. There was a lot of bad feeling at that point, and to add insult to injury they put their names on a monument at the drill-hole that first intersected Escondida but left my name off. That sort of thing often happens when an important discovery is made; in fact, it’s more the rule than the exception.’ 4
One year after the discovery, Robert N. Hickman was brought in as president of Minera Escondida. Hickman had started with Utah in 1960 at the Lucky Mac uranium mine and then, after a stint at head office in San Francisco as a development engineer, was appointed mine superintendent at Island Copper, Utah’s iron and copper project in British Columbia.
‘Both Utah and Getty recognised that Escondida was an extremely important property,’ he says. ‘As president of Minera Escondida, I did all the sales and then I arranged the financing to develop the mine. We went to the governments of the companies we were going to sell to – primarily the Japanese, the Germans and the Finns. In Japan, it was the Japan Import Export Bank. The Japanese had never lent before to any entity where they had a minority share. And Chile at the time was still under Pinochet.’ 5
Then, in 1984, Texaco bought Getty Oil and in August the following year put its 50 per cent stake in Escondida up for sale. At RTZ, Bob Wilson saw his chance. ‘I knew that Utah had a pre-emptive right to acquiring that 50 per cent interest,’ he says. ‘This was also a pretty depressed time for the copper market, and Chile wasn’t flavour of the day as far as most people were concerned because this was still almost the heyday of the Pinochet regime, even though that was foreseeably going to come to a close before this project was up and running. That made me focus on trying to get alongside Utah. I saw them with the then chief executive of RTZ, [Sir] Derek Birkin. We introduced ourselves along the lines that, “We don’t want to go bidding against you – you’ve got a pre-emptive right, we know that – we don’t imagine you want to go for 100 per cent of this yourself. Is there a way in which you and us can get together and think about doing a joint venture?”’ 6
Indeed there was; Utah’s parent, BHP, was pleased to share the costs of development. ‘We ended up arranging a consortium to buy Texaco’s holding,’ Bob Hickman says. ‘We initially held 60 per cent, RTZ got 30 per cent and a Japanese consortium led by Mitsubishi held ten per cent. 7
‘To entice the World Bank into the thing, we gave the IDC [International Development Corporation, the private-investment arm of the World Bank] an option to buy up to five per cent of our 60 per cent share, and they ultimately bought 2.5 per cent. They also put up some funds. We made those arrangements on 17 October 1985 – my 60th birthday.’ 8
So BHP now found itself with a 57.5 per cent interest in Escondida. Just over a year later, the BHP Gulfstream headed across the Pacific with Brian Loton, Graeme McGregor and Robert Holmes à Court, who, as we have seen, had joined the BHP board on 15 September 1986. ‘We went a roundabout way – refuelled in New Zealand, stayed overnight in Tahiti, refuelled on Easter Island and then went into Santiago,’ Graeme McGregor recalls. ‘We had a look at Escondida and held discussions in Santiago about the Chilean economy – Pinochet was still in power and it was a pretty closed economy; in many ways, it was a gutsy decision to invest there.’ 9
Jim Curry found Holmes à Court ‘aloof and arrogant: he had all sorts of strange ideas – that we should sell off the Chilean copper operations because they weren’t any good.’ Bob Hickman, however, says that after a visit to the copper fields in northern Chile, Holmes à Court changed his mind. ‘We did a job on Holmes à Court,’ he says. ‘He brought his wife and his daughter. His wife was a very able person. None of them had ever been to South America before. We took Holmes à Court to northern Chile, but before we took him to Escondida we took him to Chuquicamata, one of the biggest industrial enterprises in the world. He could see it was as big as any industrial enterprise in Australia and he could see Escondida might be important, but he never understood how good Escondida was until he first looked at Chuquicamata, which had been operating at that time for 50 years and was getting down to its basic ore body. They laid out these big cross sections so he could see where these tremendous ore bodies had been and how they’d mined them. Then we went to Escondida and we took out the cross sections we had for Escondida and they looked just like Chuquicamata when it was brand new. Holmes à Court, who was our biggest critic, became a fan of Escondida. When he went back to Australia, he dropped his opposition. He was a horse-racing fan and he named one of his horses Escondida.’ 10
In 1987, BHP and Utah formalised their alliance with the creation of BHP-Utah Mineral International Corporation, thus becoming one of the largest mining and minerals operations in the world, with major operations in Japan, Europe, the United States and South America. There remained the business of Robert Holmes à Court and John Elliott to tidy up. Graeme McGregor found Holmes à Court a particularly difficult proposition. ‘He was a poker player but he was also a man of very fixed views,’ McGregor says. ‘Some of his ideas I didn’t agree with and argued strongly with him at finance committee meetings because I didn’t like the potential outcome of some of the things he was proposing. It’s no secret he wanted to break the company up – not only that, but some of the other financial engineering of gearing up certain parts of the company would have had disastrous results.’ 11
Despite their differences, Brian Loton discovered that Holmes à Court could be ‘a very charming person. I had a trip with him to London when he owned all those theatres, 12 ’ he says. ‘I was there on company business and he was there on Standard Chartered Bank business, so we just happened to travel together. He invited me to go on his plane, a Boeing 737, and we flew from Perth, stopped for fuel somewhere and landed at Luton. In London, we saw Michael Crawford in The Phantom of the Opera. ’ 13
In July 1987, the Hawke government was returned to a third term, giving Treasurer Keating the opportunity to complete his wide-ranging financial reforms. But for the empire builders and asset strippers, a particularly brutal nemesis was near at hand.
On Monday, 19 October, New York’s Dow Jones index fell 22.62 per cent. ‘Black Monday’ on Wall Street produced ‘Black Tuesday’ in Australia when the All-Ordinaries index lost 24.3 per cent. 14
‘I was in the air on my way back to Australia when it happened,’ John Elliott says. ‘I got off the plane. I can remember there were press everywhere. I knew nothing about it. That Sunday night, there had been a huge storm in London – a cyclone that had brought all the trees down. We’d left that night – you lose a day – and arrived in Melbourne on Tuesday morning. I got off the plane, went home, had a shower and went to the office. I thought, “There’s been a gross overreaction here.” We had a big superannuation fund and we told the super boys, “Get into the market.” They did and it paid off handsomely.’ 15
Holmes à Court made it clear to financial writer Terry McCrann, who called him that day, that he would liquidate all his assets, real property as well as shares. But the only buyer he could find was among his enemies. ‘Holmes à Court had never been part of the [Brian] Burke–[Alan] Bond Catholic Labor mafia,’ McCrann says. ‘Yet Burke’s government would buy all his Perth properties. And Bond his company Bell Group. Not of course to help him, but to plunder the billion dollars-plus of cash that was inside the Bell Resources offshoot.’ 16
However, what the media never discovered at the time – or subsequently – is that Burke had also reached an agreement with Holmes à Court to buy his entire BHP shareholding. The sale did not proceed because Treasurer Paul Keating vetoed it.
Both Holmes à Court and Burke approached Keating separately. ‘[Holmes à Court] wanted me to let the West Australian Government acquire his interest in BHP, which I refused,’ Keating says. ‘He’d talked Premier Burke into taking that interest up.’ 17 When Burke contacted him, Keating says, he told him, ‘The state’s got no business buying this.’ Burke protested in vain. Keating says he was most concerned that if the company ran into trouble, the relatively small West Australian community would have to bear the brunt of it. ‘[Those] problems would come to my doorstep,’ he says. ‘Anyway, I refused him. Holmes à Court was very cranky on me about that. He said, why would I turn him [Burke] off it? I said, “Well, I’ve got the national-interest considerations here, you know.” So he held the stock.’
Holmes à Court was attending a BHP board meeting in the Directors’ Cottage at the Port Kembla steelworks when he received a message that Merrill Lynch had withdrawn his billion-dollar line of credit. Jerry Ellis, who was managing the steelworks at the time, says, ‘My wife was entertaining Janet Holmes à Court somewhere in the country near Wollongong, so they were summoned to hurry back. I think he had a helicopter on standby to whisk him away.’ 18
‘Holmes à Court wasn’t totally ruined but he was gone,’ says John Elliott, who was also present at the board meeting. ‘We concluded – erroneously, as history would say – not to proceed to buy BHP ourselves. Elders could have bought him out and that would have given us control of BHP. We looked at it very hard. We could have bought BHP for $1.2 billion: look at it now, it’s worth over $100 billion. Staggering.
‘One of the things that concerned us was that BHP weren’t in control of any of their pricing. The steel business was controlled by government pricing, while oil, iron ore and coal were commodities, so we would have been at the behest of economic times. Then we spent a couple of years undoing things. The undoing of it in the end was that we formed a holding company, Harlin, which basically bought BHP’s equity in us.’ 19
BHP had indeed sold its Elders shares to Harlin Holdings in exchange for redeemable preference shares in Harlin that, with accrued interest, would amount over time to a debt of more than $1 billion.
Brian Loton recalls, ‘It was a difficult period, obviously, and you can see it pretty clearly in retrospect now. Every generation has its difficulties and challenges. As I said, [Holmes à Court and John Elliott] had unsustainable strategies and we managed the business until reality dawned.’ 20
Graeme Samuel believes BHP had a lucky escape. ‘If I think about what would have happened had the whole of BHP been acquired by Robert Holmes à Court – in the context of what ultimately happened to John Elliott and Elders – the company could have just imploded.’
An increasingly desperate Holmes à Court offered his shareholding to Kerry Packer, who declined. Paul Keating says, ‘I know a group of people said to him, “Why don’t you take the steel business? You give BHP the stock and they give you the steel business?”
‘I know the ACTU said this to him because [steel] needed a whole lot of workplace changes to make it work. The ACTU said, “You take it, we’ll make it work.” But no, he wouldn’t do it. You see, in the end, Robert Holmes à Court wasn’t a business builder; he was in the end a speculator, a great speculator, the cleverest one we ever had, but he was a speculator and so his refusal to do anything about the BHP steel division meant that he was locked in the BHP clockwork of events and they had to clear out that equity interest in some way, and he had all those debts to the banks.’ 21
The financial meltdown, however, had not stopped work on Minera Escondida. ‘We had an approved budget of US$1.143 billion and we did it for US$863 million, so we saved a hell of a lot of money,’ Bob Hickman says. ‘The financing was all tied to the negotiation of acceptable sales contracts; that gave the buyers – the Germans, the Japanese and the Finns – the upper hand in negotiations. We had great difficulty making the sales contracts and we didn’t complete that until mid-1988. We had a big signing ceremony at the World Trade Center in New York City.
‘Then we started the construction. We did our own premine stripping of some 180 million tonnes of waste in order to get to the ore body – that was the longest line in the development. We finished the job in 29 months. Originally, it had a 36-month schedule, and that’s one of the reasons we under-ran the budget.’ 22
Dave Lowell’s contract gave him a five per cent participating interest in any successful discovery, but at the last minute Utah demanded a US$3 million cap on the value of the interest. ‘I agreed to it, which was a mistake on my part,’ Lowell says. ‘I’m quite sure they would have agreed to three per cent instead of five per cent and no cap. The difference for me would have been several billion dollars.’ 23
The Los Colorados concentrator started processing ore in November 1990, and the first shipment was logged as sailing from Antofagasta on 31 December 1990. ‘Truth is,’ Bob Hickman says, ‘it pushed off 1 January 1991 but the company was so anxious to have it in calendar 1990 that we signed the documents 31 December 1990.’ 24
By this time, the geologic fraternity had given Lowell full credit for discovering Escondida. ‘BHP commissioned an article about the Escondida discovery, giving me the credit, which was distributed to people who participated in the opening of the mine.’ 25
The adjacent Zaldivar ore body had been found at the same time as Escondida. Lowell staked a claim that covered half of that ore body, which became BHP Billiton’s Escondida Norte in 2005. ‘I was paid a finder’s fee for one and a half discoveries,’ Lowell says. ‘It added up to US$4.75 million.’ 26
Over time, Escondida would be developed into the world’s largest copper mine, producing 1.483 million tons of copper in 2007 and providing BHP Billiton with one of its most valuable assets.
One of its strong supporters, Robert Holmes à Court, would not live to enjoy its bonanza. A heavy cigar smoker and diabetic, Holmes à Court died of a heart attack on 3 September 1990 at his stud farm near Perth. He was just 53 years old. His rival, John Elliott, the old Carey Grammarian, president of the Liberal Party, president of Carlton Football Club and self-made millionaire, attempted a management buyout of his Elders group through Harlin Holdings in 1989. He failed and took heavy losses. Following an investigation by the National Crime Authority, he was charged with fraudulent foreign-exchange manipulation. When acquitted, he sued the authorities – an action that resulted in his financial ruin. Elliott’s wealth had once been estimated at well in excess of $50 million. He had owned a big house in Toorak, a villa in the south of France, a holiday home at Flinders and three big farms in the country. 27 He lost the lot. 28
The battles for control of BHP through the 1980s had made its management more aggressive, more acquisitive, sharper, smarter, more worldly wise. The steel industry, however, had been defying gravity for so long that the Labor government had mounted a rescue operation in the shape of a five-year Steel Industry Plan under which the steel unions promised to refrain from industrial action in return for guarantees from BHP relating to security of employment. Productivity increased from 150 tons per worker per annum in 1982 to some 250 tons in 1984.
‘We didn’t do a bad job on the steel industry,’ says John Prescott, who took over as head of BHP Steel in 1987. ‘We gradually got political acceptance for an enormous downsizing in steel and we gradually got workforce acceptance for the need to do it. There was a huge restructuring, many redundancies – all handled voluntarily – and massive reinvestment in the industry to make what was left efficient. I inherited a loss and within a couple of years turned that around to a $650 million profit. We’d turned a very difficult industry into a profitable industry, but it was quite clear to me that even that amount wasn’t something one should be too happy about. The conclusion one was left with was that this was not the best industry to be in.’ 29
As the 1980s closed, Brian Loton added the deputy chairman’s role to his chief executive duties. ‘Brian was very much the old-style business gentleman, a very determined guy,’ says Lance Hockridge, who joined BHP in 1978 straight out of the University of New South Wales in a labour-relations role. ‘He certainly knew his stuff. He could be on the one hand personable but on the other hand had that touch of ruthlessness about him. The bottom line was that most of my peers were very respectful of Brian.’ 30
The new chairman, replacing Jim Balderstone, was Estonianborn Sir Arvi Parbo, the driving force behind Western Mining, along with Hugh Morgan. The 1990s, however, began unpromisingly with a recession that followed the oil-price spike induced by the First Gulf War. 31 Then, in May 1991, while retaining the deputy chairmanship, Loton passed the chief executive officer’s baton to John Prescott. ‘My relationship with Arvi Parbo was excellent – he’s one of the great mining figures,’ Prescott says, ‘and my relationship with Brian Loton was also very good – I wouldn’t have been appointed CEO without his support.’ 32
John Barry Prescott was born in Sydney on 22 October 1940 and educated at North Sydney Boys High School and the University of New South Wales. ‘I studied industrial relations at university and joined BHP in 1958 at Newcastle Steelworks,’ he says. ‘There were distinctions in those days between commercial trainees and cadets, and I was a commercial trainee rather than a cadet, but I became a cadet – cadets were the higher-regarded group.’
Lance Hockridge says, ‘I met John the first day I joined the company – at that time, John was assistant manager of Fleet Operations and I was in the shipping and stevedoring department. He happened to be in Sydney on business and I was introduced to him.
‘The issues that were running in those days were all about industrial relations, and so I had a good deal to do with John. When he became general manager transport, I became his manager personnel; and then he dispatched me to Port Kembla into my first operational role. We were pretty close for about ten years, then he became executive general manager steel, and while I would see him from time to time I didn’t have much to do with him. Then the wheel turned again and he became managing director, and while I didn’t work directly for him, being part of the executive group one has that kind of interaction.’ 33
As though to emphasise the end of an era of extraordinary expansion, The Big Australian had outgrown BHP House, which was closed down, and company headquarters were moved from William Street to the monolithic BHP Tower at 600 Bourke Street. No one could have predicted then that by the end of the new decade Broken Hill Proprietary Limited would have been brought to its knees and, shortly afterwards, would have ceased to exist in its then current form – largely because it had gone tilting at windmills in the Arizona desert.