CHAPTER 26
In the 2007 federal-election campaign, Prime Minister John Howard proposed the use of nuclear power as a ‘clean’ alternative to coal-fired power stations. Opposition leader Kevin Rudd’s Labor Party responded with a scare campaign that the Coalition would build 25 nuclear power stations around the country. At the same time, however, Labor reaffirmed its support for Olympic Dam – the world’s biggest uranium mine – at South Australia’s Roxby Downs and dropped its opposition to the development of additional uranium deposits.
In fact, according to Guy Pearse, ‘Mining all that extra “clean, green uranium” at Roxby Downs will reportedly generate an estimated five million more tonnes of greenhouse gases annually – roughly adding one per cent to Australia’s emissions, or the equivalent to about another million cars on our roads.’ 1
Such concerns were far from the minds of the two men meeting at London’s Sheraton Park Tower at 101 Knightsbridge in mid-October 2004. The Sheraton is an undistinguished concrete-and-glass structure on the west London skyline, but its lack of architectural grace is more than redeemed in the eyes of some visitors by its proximity to the shopping mecca of Harrods and Harvey Nichols. And Mick Davis had shopping very much on his mind when he dropped in for breakfast with Andrew Michelmore, chief executive of WMC Resources.
Since walking away from BHP Billiton in search of new challenges in July 2001, he had performed something of a financial miracle with Xstrata. The bearded sage had persuaded Glencore, the Swiss trading and mining company that owned 40 per cent of Xstrata, to allow the coal assets contained in its subsidiary, Enex, to be passed to Xstrata. Enex’s initial public offering (IPO) had failed miserably shortly after the 9/11 terrorist attack on the World Trade Center, but, with the help of Marc Gonsalves, who had departed BHP Billiton in October 2001, Davis successfully listed Xstrata on the London Stock Exchange in March 2002. Two years later, his extremely small team – initially just 17 people working from the basement of J. P. Morgan’s offices near Blackfriars Bridge – had grown Xstrata into a US$40 billion company.
Over the croissants and coffee, Michelmore, scion of an old Melbourne family, and Davis, the hard-driving South African, sized one another up. ‘That was the first time I spoke to Andrew,’ Davis says, speaking about the WMC battle for the first time. ‘I indicated to him at that stage that I was interested in putting the two companies together but I didn’t table a transaction.’ 2
Since 2001, virtually every major mining company in Australia had been taken over by foreign interests. Indeed, Davis had stunned the mining world with his purchase of MIM Holdings for $3.44 billion in 2003 after a year-long battle with its recalcitrant shareholders. 3
‘Mount Isa Mines was one of the great corporate battles,’ Davis says. ‘Although the board supported us, the management didn’t and the management found ways to fight us which used Australian corporate law very ingeniously. If you had 40,000 shareholders and 30,000 owned one per cent of the company and 10,000 owned 99 per cent, those 30,000 could stop the thing going ahead. So we nearly lost that. The whole of Australia was against Xstrata: it seemed to be Swiss gnomes backed by nefarious, shady people. I got emails to take my Nazi gold and go home. 4 It was really a very messy thing but we won that and that transaction actually made Xstrata. It was crucial.’ 5
Indeed, the deal had turned Xstrata into the world’s largest exporter of coal for heat and power; now Davis yearned to join the biggest diversified miners at the industry’s top table.
Western Mining, famous for its pioneering exploration and legendary characters such as Sir Arvi Parbo and Hugh Morgan, was the last of the big independents. And Davis wanted it – badly. In what Michelmore later described as a perfectly amiable manner, his guest raised the prospect of a merger between their two companies. Michelmore wasn’t surprised. In December 2002, as foreshadowed, WMC had demerged its alumina business – a 40 per cent stake in the AWAC joint venture with Alcoa – into a separate company, Alumina, while WMC Resources retained the company’s copper, nickel, uranium and fertiliser assets. 6 Although the demerger had been essential to sort out WMC’s partnership with Alcoa, the simplified structures had made it easier for either arm of the old company to be taken over.
Two months previously, when reporting a tenfold leap in WMC’s first-half net profits to $515 million (US$367 million), Michelmore flagged the dangers of a takeover by stressing the need for his company to diversify still further to generate a more consistent performance. ‘We are heavily weighted to the [London Metal Exchange] and are therefore price-takers and subject to huge volatility,’ he said. ‘Iron ore, coking coal, alumina, mineral sands – these would give us a different product mix that also tends to run to a different cycle.’ 7
In Knightsbridge, Michelmore politely declined that first approach from Davis and their breakfast ended on a cordial note. The Australian, however, knew instinctively that this was not the end of the matter; on the contrary, it had just been a sighting shot prior to the launch of a hostile bid for WMC’s prime asset: Olympic Dam.
Olympic Dam was the world’s seventh-largest known copper deposit and its largest deposit of high-grade uranium ore. In 2004, it had produced 225,000 tonnes of copper, more than 4000 tonnes of uranium and nearly 90,000 ounces of gold.
The ore body takes its name from a modest excavation scooped out of the claypan on Roxby Downs station in 1956 – the year of the Melbourne Olympics. It remained nothing more than a watering hole for the stock that grazed among the spinifex until Western Mining began drilling for a copper deposit that geological modelling had located in the area. Once it had established the richness of the deposit, the company built Roxby Downs – a township of aluminium-clad, transportable houses – 16 kilometres south of the underground mine and started producing copper ore in 1988. 8
WMC was also the world’s third-largest nickel producer, supplying eight per cent of global demand. Even more enticing to a predator, it had recently signed a billion-dollar contract to supply nickel to China from its mines in Western Australia. Michelmore didn’t have to wait long for the blow to fall. Before October was out, Xstrata slapped on the table a bid of $6.35 (US$4.98) per share – which valued the company at $7.4 billion.
Michelmore and his directors had no hesitation in rejecting the offer as too low, so Xstrata announced it would take it directly to WMC’s shareholders. ‘We made an approach to the Western Mining board, they rejected the approach, we then went hostile,’ Mick Davis says. 9
Davis’s tactic was to force potential rival bidders BHP Billiton, Rio Tinto, Anglo American and Vale of Brazil into the open. ‘I found out, because one of our advisers was conflicted, that BHP in fact had been studying Western Mining but hadn’t done anything with it,’ he says. ‘I suspect that if we hadn’t done anything, they still wouldn’t have done anything. I take it as a great compliment that I’ve caused a number of companies to counter-bid against me. I’m always pleased when I can demonstrate that there’s value when other people can’t see it.’
As the quest for cheap mineral assets intensified to satisfy demand in China, each company had been studying the feasibility of mounting a bid for WMC. Under Australian takeover rules, however, Xstrata could block rival bids if it could acquire a stake in WMC of at least ten per cent. Chip Goodyear knew what Davis was trying to do and, although he coveted WMC’s assets, he wasn’t prepared to show his hand just yet. Despite booming commodity prices, he was painfully aware that the slumps of the past decade had almost crippled some mining companies, including his own: the spectre of Magma that had hung over the executive suite at 600 Bourke Street had followed The Big Fella to its new headquarters at 180 Lonsdale Street. But Goodyear was also conscious of the fact that while the rising Australian dollar made WMC an increasingly expensive target for foreign bidders, it meant the company was tailor-made for BHP Billiton. And he had a plan.
‘We knew that whoever kicked the ball off with WMC, they were going to run the other way,’ he says. ‘That’s the nature of acquisitions. You kick the ball off and it doesn’t matter who you are, the guys hate you. So we wanted to be a friend and be somebody they could run to when that ball is kicked off. Sure enough, it did, and they said, “Anybody but Xstrata.”’ 10
Marius Kloppers had moved to Melbourne in 2003 in a commercial role that involved him in mergers and acquisitions, in addition to business development and marketing. ‘Marius and I developed a strategy that said we need to get close to this company,’ Goodyear says. ‘Marius developed relationships with the development team over there and so we got to know each other very well, recognising that there was a great fit here.’ 11
Kloppers concurred. ‘We always thought that WMC would auction itself,’ he says. ‘The auction would conclude and it would be easiest for the party that had been friendly towards Western Mining to be in the best position to complete the transaction.’ One of Kloppers’ contacts at Western Mining was Mike Nossal, son of Sir Gus Nossal. ‘We’d talked about the nickel business quite a bit because we felt our nickel business was a bit sub-scale and theirs was sub-scale, so there was an ongoing series of dialogues on how you could put the two nickel businesses together, but without reaching any fruitful outcome.’ 12
On 24 November, Andrew Michelmore raised the minerals reserve at Olympic Dam by 29.2 per cent to 3.8 billion tonnes as a result of recent test drilling. ‘Based on these new estimates, Olympic Dam now contains the world’s fourth-largest remaining copper and gold resources, up from seventh previously,’ Michelmore told the stock exchange. ‘Already the largest-known uranium resource, Olympic Dam now contains 38 per cent of the total global economic uranium base, up from 33 per cent.’ 13
Michelmore urged shareholders to ignore the Xstrata bid because it ‘fails to recognise the current and prospective value of WMC’s assets’. The statement warned shareholders against accepting calls from Xstrata, encouraging them to ‘only accept calls which are officially endorsed by the WMC board’. He told the Financial Times that while he believed the company could deliver better value to shareholders by staying independent, he would be happy to talk to any bidder who was willing to offer a ‘material improvement’ on Xstrata’s $7.4 billion. Michelmore said, ‘I certainly don’t blame Mick for coming along and trying to pick us up. He is ahead of the pack and he wants to pick us up before others recognise what our value is.’ He described Olympic Dam as ‘a ginormous ore body’ and added, ‘There is no question that we have the greatest suite of base-metal assets that exist certainly in Australia, but probably anywhere in the world.’ 14
The stalemate was still unresolved in the New Year when WMC produced a strong production statement for 2004 and an upbeat assessment of the year ahead. It had delivered record copper production, its nickel business had beaten targets and there had been a significant shift in the outlook for uranium. ‘Continuing strong commodity prices, higher nickel and fertiliser production, and an accelerated program of growth and development projects position WMC for a strong 2005,’ Michelmore said. ‘All plants will be operating at or near capacity.’ 15
This bullish outlook forced Xstrata to raise its bid to $8.4 billion (US$6.5 billion) or $7.20 a share. WMC’s board, however, still declined to endorse the revised offer and suggested it would seek a white knight prepared to offer an even higher price. 16
Chip Goodyear still hadn’t put his cards on the table on 16 February when he reported a record $4.1 billion pre-tax profit for the six months to 31 December 2004, more than double BHP Billiton’s 2003 interim figure. He would not be drawn on whether BHP was considering a counter-bid for WMC, switching tack to discuss the uncertainty of investing in Russia’s natural resources following President Putin’s sudden tendency to renegotiate lucrative contracts signed in the past with Western oil companies or, in the case of the Yukos oil-and-gas conglomerate, handing its assets over to Russian rivals. ‘What I would say is watch [Russia], put your toe in the water, but I wouldn’t expect any significant investments there,’ he said. ‘The issues are going to be: what are your rights as the owner [of mineral deposits]?’ 17
By 8 March, Goodyear was confident the plan was working. It was time to throw the knockout punch. That afternoon, he announced a bid of $9.2 billion (US$7.3 billion) for WMC, easily trumping Xstrata’s $8.2 billion (US$6.5 billion). 18 Deutsche Bank, acting for BHPB, had been buying WMC shares in the open market for several weeks and it had become clear to Mick Davis that the bank was trying to accumulate a 10.1 per cent stake of its own to foil Xstrata’s offer under the takeover rules.
The bank had quietly offered a select group of WMC shareholders $7.85 a share in cash, well above Xstrata’s offer of $7 and WMC’s share price of $7.46, and was close to reaching its target. Once BHPB secured its 10.1 per cent stake, it would unveil a share bid for the rest of WMC. 19
‘I thought we played that one pretty well,’ Don Argus says. ‘I think having the support of the Western Mining board was a big plus.
‘But I can remember one uncomfortable night when some of our whizz-kid advisers tried to encourage us to take up a part position in Western Mining, and that wasn’t one of our smartest moves. We were very fortunate that the Western Mining board approved the transaction the next afternoon; otherwise, I reckon the UK market would have had our ears and everything for botching up a partial bid.’ 20
‘Yes, it was stupid but there you are – they survived it,’ Mick Davis says. ‘Had BHP not come in, we would have won it at the price that we offered. I suspect they came in because it was incomprehensible to Don Argus that anybody other than BHP would own Western Mining. They would have paid any price, and the minute they came up with their price I knew the game was over and I thought the best strategy for me was to withdraw as quickly as possible. It took me by surprise – I didn’t think they would come in. Thinking about it afterwards, Don decided nobody else was going to buy Western Mining, and with Marius and Mike Salamon quite eager to do something there were strong motivations. I don’t think Chip was in favour of the deal at all, and that’s what I was banking on, but the weight of Don, Marius and Mike won the day.’ 21
Chip Goodyear says, ‘We worked through a process; we stayed in the weeds; and when we sprang out of the weeds, within 24 hours we had an agreed deal.’ 22 The board of WMC Resources advised shareholders that in the absence of a higher offer, they should accept BHPB’s bid. And once the deal was done, Mike Salamon replaced Tommie Bergman as chairman.
So how did Mick Davis take his defeat? Marius Kloppers flashes a smile. ‘You know, I never really discussed that with Mick,’ he says. ‘I think Mick probably thought that he had it; they were very close. We waited until the last minute. Mick thought it was going to be all over in a day or two and I guess had mentally pencilled in owning the assets by then. I had quite a few discussions with his principal shareholder, Glencore, afterwards and clearly Ivan Glazenberg [Glencore’s chief executive officer] was keen for Mick to buy that set of assets.’ 23
Mick, however, holds no grudges. ‘Chip came to see me a few months later to find out if I was still talking to him,’ he says. ‘I said to him, “I have no issue.” It was entirely open to them to bid against me, and they were the bigger company and had bigger resources and that was not a problem for me. They could take a different view on risk and value than I could take, so I had no issue with that at all – that’s the name of the game. You know what they say in the gangster movies, “It’s just business – nothing personal.”’ 24
Goodyear put the deal into financial perspective in an interview with Kerry O’Brien on the ABC’s 7.30 Report. ‘It’s a little over US$7 billion; our current market capitalisation is about US$85 or US$88 billion, so it’s still less than ten per cent of BHP Billiton on an overall basis. It’s a very good business, it fits well with us, but again, it’s still relatively small in the scheme of the entire enterprise.’ 25
However, he knew that the real significance lay in the massive uranium deposit. He glowed when he said, ‘In one step, we became the industry’s main player in a critical resource.’
The glow became luminescent as the uranium price rose spectacularly from US$10.10 per pound in 2003 to more than US$56 five years later. Profits soared. The company planned a huge expansion.
‘We had a different view of the future of Olympic Dam than they had,’ Mick Davis says. ‘We were going to expand and continue the underground mine. They were going to cannibalise the underground mine and go for a huge open pit. We couldn’t do the open pit. We thought the open pit was highly risky. As it turns out, I think you’ll find that for that open pit to make money it has to be bigger and bigger and bigger, so they are going to be sinking money into Olympic Dam for a long time.’ 26
But now, BHP Billiton found itself in the frontline of the political debate on nuclear power, the nuclear non-proliferation treaty and an array of environmental and heritage issues surrounding the mine itself and its location in the Lake Eyre Basin. All had the capacity to take the shine off the acquisition.
From the beginning, the underground mine required vast amounts of water to process the ore, and all of it was drawn from the Great Artesian Basin. Ironically, Sturt’s fabled inland sea had lain beneath his blistered feet as he and his party trudged endlessly through the red desert sands. One of the largest artesian groundwater basins in the world, it lies beneath nearly one-fifth of Australia with an estimated water storage of 65 billion megalitres. Individual bore depths vary up to 2000 metres, with the average being 500 metres; but around Olympic Dam it rises to the surface in unique mound springs formed over thousands of years. And as climate change and water shortage became political issues, BHP Billiton would soon find itself again in the environmental firing line.
The Labor Party had been split down the middle during the 1970s and ’80s over the issue of mining uranium. At the 1982 federal conference, Victorian left-winger Bob Hogg 27 proposed that uranium mining should be allowed where it was ‘mined incidentally to the mining of other minerals’. After a rowdy debate, Hogg’s motion was passed, and when Labor won federal power in 1983 Prime Minister Bob Hawke used this precedent to approve exports from Roxby Downs, resulting in the ‘three mines policy’ that approved Narbalek and Ranger in the Northern Territory together with Olympic Dam but banned further uranium mining. 28
Premier John Bannon officially opened Olympic Dam mine in 1988, and the following year his and the Hawke governments freed WMC from legislation requiring environmental and health reports unless agreed to by WMC and the government. This brought further protests from anti-nuclear campaigners, but without result.
Another part of the baggage BHP Billiton inherited was WMC’s condescending – and at times bellicose – attitude to the Aboriginal people of the region. In developing the mine, WMC refused to negotiate with the Arabunna people, the traditional custodians of the Lake Eyre South region containing the mound springs, and by 2006 it was using 35 million litres of water a day. BHP Billiton’s plans to expand the mine would triple the output, transform it to the world’s biggest open-cut and create a massive reservoir of radioactive and highly acidic tailings.
‘Uncle’ Kevin Buzzacott, an elder of the Arabunna people, says, ‘Since the late ’70s/early ’80s with the development of Roxby Downs and the Olympic Dam, it’s sorta turned my life upside down.
‘[They] made it a nightmare because of the destruction that these fellas done on us and on our country – desecrating and destroying the sacred sites, putting their pipelines in and their pump stations and taking very special sacred water from the Lake Eyre Basin.
‘I think they take about 50 million litres a day to Roxby. 29 They’ve been doing that now for over 20 years and we been sorta monitoring our country the best way we can, and that’s mainly from the highway. We haven’t been able to go in off the road to check certain springs and waterholes and soaks. But the ones we have checked, we could see where some have been destroyed and we could see where the water level’s gone right down.
‘We used to use the water, but we only took what we need. And we washed and bathed and stuff in it as well. We’ve never expected, not in our lifetimes, that that amount of water that WMC and BHP Billiton – these people have been taking so much we’ve never see that before. Like I said, not in our Dreamtime.’ 30
Olympic Dam spokesman Richard Yeeles says, ‘BHP Billiton regularly consults with Aboriginal communities claiming an interest in the Olympic Dam region. I am not aware of Aboriginal people in general being “deeply concerned” about the impact of BHP Billiton’s consumption of water from the Great Artesian Basin. This consumption is monitored by the South Australian Government under licence arrangements. BHP Billiton’s consumption remains within all licensed limits.
‘About seven years ago, Mr Buzzacott initiated action in the South Australian Supreme Court against the former owner of Olympic Dam, WMC, alleging genocide. The Supreme Court dismissed his action.’ 31
Chip Goodyear says he recognised the problems in dealing with communities surrounding controversial BHP Billiton operations, not least Roxby Downs. ‘The most difficult ones to handle are generally community issues,’ he says, ‘particularly in operations that have long histories where perhaps there was a different view about relationships with communities – where they’ll do what they’re told or they won’t be a factor. That’s where we find our biggest issues.’ 32
Friends of the Earth spokesman Jim Green says the extraction ‘has adversely impacted in the fragile ecology’ of the area. ‘BHP Billiton has a bore-capping program which, it claims, saves more water than the mine uses. But extraction for the mine is localised and the adverse impacts are all too apparent. BHP Billiton does not pay one cent for this massive water take.’ 33
Eileen Wani Wingfield, an Aboriginal woman from the area, said, ‘Our sites are very valuable to us. That uranium is very, very bad. It gets into underground river and everything. It kills country.’ 34
In 1994, a massive leak from the radioactive tailings was detected. Over four years, some three million cubic litres of liquid leaked through the aquifer. Since then, there has been a series of incidents, such as on 20 March 2008 when a spill of 70 cubic metres of tailings resulted from a leaking pipeline. The waste was recovered and stored in the tailings-retention system.
A month earlier, BHP Billiton reported a spill of 270 cubic metres. According to the company press release, ‘The tailings outflow was shut down immediately and the pipe section is being repaired. No employees had direct exposure to the material and there were no injuries associated with the spill. No material entered the general environment and there were no impacts on any worker or any member of the public.’
There are also concerns that the 4500 residents of Roxby Downs south of the mine may be affected by the waste. More than ten million tonnes of tailings are added each year to the 60 million tonnes already on the surface. According to Jim Green, ‘The tailings-retention system (TRS) does not isolate the toxic wastes from the environment of Roxby Downs. They are subject to erosion by rain and wind, blowing across the mine site and the township where radioactive dust particles settle on rooftops, in gardens, gutters, streets, playgrounds, or are in the air the community breathes.’ 35
Not so, says the company. According to Richard Yeeles, ‘The Olympic Dam hygiene-monitoring program shows that, in general, airborne contaminants are well controlled.
‘Radiation exposure is one of the potential hazards encountered in the mining and milling of radioactive ores, and can be controlled through effective design and management practices. Olympic Dam uses international standards and Australian legislation as the basis for its systems of radiation protection. The results show that exposure levels for workers at Olympic Dam are consistently below radiation-protection limits.’ 36
Jessie Boylan, an organiser of tours to the mine for Friends of the Earth, says, ‘There are no safe levels of exposure to radiation. Already, rare cancers are showing up in the Aboriginal people of the area.’ 37
Yeeles says there are now mutually beneficial relations between the company and the Aboriginal people in the region. The company recently concluded an agreement with three native title claimant groups as part of the big expansion plans. This would provide for annual company contributions to a trust that would be used for education, training and the development of Aboriginal businesses. He declines to say how much the company was contributing on grounds that, ‘At this stage, the Aboriginal groups have asked that the financial information remain confidential.’
In addition, he says, ‘BHP Billiton has also employed three Aboriginal men to provide them with training in archaeology to help them record the Aboriginal heritage of the area. BHP Billiton regularly employs Aboriginal community representatives as consultants to undertake heritage surveys in the region.’ 38
Jessie Boylan says protesters and miners have reached stalemate. ‘Richard Yeeles says the same old things, the same old lies. No one listens. People shout. It has become embarrassing. These people [at the mine] aren’t evil; they’re just doing their jobs. For the company, it’s just about making money.’ 39
‘Olympic Dam doesn’t make a great deal of money,’ Mike Salamon says. ‘Look in the annual report. It’s potentially huge; that’s the important thing to recognise. But the potential has not been realised yet. In fact, the WMC management had not done a good job and that’s why WMC was there to be taken. Olympic Dam was much too big an asset for that company. It was beyond their financial and every other form of capability. It will be a mine of the order of Escondida and it mines a million tonnes a day. That’s a quotable truth. Escondida will produce more copper but Olympic Dam has also got the uranium and gold.’ 40
In June 2008, it was revealed that by 2013 Olympic Dam would be producing 730,000 tonnes of copper, 800,000 ounces of gold and 19,000 tonnes of uranium. 41 Internationally, the market continued to grow exponentially. Until 2007, Australia opposed the sale of uranium yellowcake to India on grounds that it had refused to sign the Nuclear Non-Proliferation Treaty (NPT). Prime Minister Howard moved to relax the ban. When Kevin Rudd became prime minister, he reimposed it as part of an international campaign to revitalise the Treaty. Paul Keating says, ‘The Indians are not signatories to the NPT, and until people want to play the game with the NPT then supplying countries like Australia should have their guard up.’ However, it seems likely that a diplomatic formula will eventually bring down the export barrier.
At the same time, China, as a Treaty signatory, was importing increasing amounts of fuel for its nuclear power plants. By 2008, China had 11 nuclear power reactors in commercial operation, six under construction and several more about to start construction. Additional reactors were planned, including some of the world’s most advanced, to give a six-fold increase in nuclear capacity to at least 50 GWe by 2020 and then a further three-to fourfold increase to 120–160 GWe by 2030. The country aims to become self-sufficient in reactor design and construction. Almost all of the yellowcake will be imported, the lion’s share from Olympic Dam.