A quadrupling of development costs at one of BHP Billiton’s most important mines is threatening to undermine the credibility of its management on the day that Rio Tinto, its bid target, is scheduled to begin its defence.

Rio is expected to highlight a number of projects today, including its own uranium and copper mines, which it believes are undervalued by the stock market and by its rival. However, the credibility of the bidder is also being called into question.

Sources close to BHP have revealed that internal estimates for the development of Olympic Dam, a massive copper and uranium resource in South Australia, have increased to as much as $20 billion (£9.7 billion). If these estimates prove accurate, it could delay the Olympic Dam expansion by years, creating a shortfall in BHP’s future earnings.

Olympic Dam is the jewel in the crown of WMC, which BHP bought two years ago for £3.8 billion after a fierce battle with Xstrata. Both companies were willing to pay top dollar for WMC because Olympic Dam, which holds the world’s largest supply of uranium, has huge growth potential. BHP estimated at the time that it would cost about $5 billion to expand the mine, but the scale of the project has caused cost estimates to soar. Internal projections are thought to have reached $20 billion and development of the site could take many more years.

This could leave a hole in BHP’s future production forecasts, and analysts have suggested that part of BHP’s motivation for bidding for Rio Tinto could be to ease the Olympic Dam shortfall. The full study of Olympic Dam is expected to take BHP another two years to complete. A spokesman said: “We have not given any guidance on the timing or cost of developing Olympic Dam because we still have not decided how it is going to be done.”

Olympic Dam, primarily a copper resource, produces 230,000 tonnes of metal a year. It also contains 40 per cent of the world’s known reserves of uranium, which is used to create nuclear energy. The proposed expansion will double copper production and triple uranium output. A source familiar with BHP’s work at Olympic Dam said: “The internal view is that it is going to cost $20 billion. The easiest way to shore up the production figures if there is a delay to bringing Olympic onstream is to buy Rio.”

Rio Tinto has rejected BHP’s £62.4 billion bid, asserting that it undervalues the company. Tom Albanese, the chief executive of Rio, will outline today why the company believes that it is worth more than the BHP offer. He is expected to update investors on production at the La Granja copper mine in Peru, which soon will double production to 500,000 tonnes a year. There should also be an update on Rio’s investment in Ivanhoe, a Mongolian-based miner. Rio has a 20 per cent stake in Ivanhoe and rights to a further 20 per cent.

So far, shareholders have backed Rio’s insistence that its assets are undervalued and are waiting to see whether BHP increases its bid. Fund managers said last week that they were happy to hold their Rio stock, which has risen 20 per cent since BHP made its interest known two weeks ago. “We are not expecting this to become an auction as nobody else can afford Rio,” one institutional investor said. “This is going to take many months and we will wait to see what happens.”

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