BHP Billiton moved closer to developing Australia's second-biggest unmined uranium deposit by applying for environmental permits, but warned it might mothball or sell a big nickel refinery as that market languishes.

While uranium demand is being driven by rising requirements for nuclear power to replace fossil fuels as nations seek to reduce carbon emissions, nickel is mired in oversupply due to a dramatic drop-off in global stainless steelmaking.

"Increases in nuclear power developments are being held by uncertainty of supply," said Far East Capital mining analyst Warwick Grigor. "There is definitely a need for the promise of new supply sources and BHP would know that."

BHP has submitted plans to environmental authorities to develop its long-dormant Yeelirrie uranium deposit with a view to starting construction in 2011 and production in 2014, subject to government and BHP board approvals.

World spot market uranium prices, which surged to a record high of $136 in June 2007, recently recovered to around $51 per pound from only about $40 a few weeks ago. Uranium for future delivery can cost around $65 a pound.

Demand and pricing of nickel, copper and other industrial metals are more closely linked to the business cycle than nuclear power, which has a much longer time horizon and is less affected by short-term swings in consumption, analysts say.

BHP advised the West Australian Government in November 2008 of its plan to dig the mine.

Trumpeted as a major discovery in 1972, the deposit lies 1,000km north of Perth in a semi-arid region. It's a large, yet low-grade ore, regarded as Australia's second biggest find after another BHP lode, Olympic Dam.

Proponents of Australian uranium mining have been hamstrung for decades by political hostility to nuclear fuel, but long-standing bans on new mines by various state governments are gradually being lifted in the face of economic crisis.

The national government is also courting new export markets for uranium in China. Australia has 40% of the world's uranium. It is the world's second-largest supplier behind Canada.

"In my opinion Yeelirrie will go forward, subject to appropriate regulatory approvals. The demand for uranium is good, it's going to continue to grow," Australian resources minister Martin Ferguson said on radio.

Nickel refinery in balance

BHP also said it expected to finish considering options for the fate of its 76,000t per year Yabulu nickel refinery by mid-year, including its possible sale, amid growing speculation fuelled by BHP's decision to shut two other nickel businesses.

The Australian Financial Review newspaper reported BHP was holding talks with Australia's Gladstone Pacific Nickel to sell the refinery rather than close it.

"Yabulu is the subject of a future options study which is looking at all options, including potential divestment, indefinite suspension or continuing operations," BHP said. "That will be complete in the first half of the year."

Gladstone wasn't immediately available for comment. The company reportedly did not have the capital to buy Yabulu but was supported by Australian mining magnate Clive Palmer and joint venture partner China Metallurgical Construction Corp.

China Metallurgical already is funding a $1.7bn development costs for a nickel mine in Papua New Guinea, earmarked to yield 31,150t a year.

The future of Yabulu has been the subject of speculation since BHP in January closed its Ravensthorpe mine in West Australia, which was designed to feed the refinery raw material and supplement supply from New Caledonia to allow it to yield around 70,000t a year, plus 3,200t of cobalt.

A ballooning nickel surplus - more than 100,000t or one-tenth of annual global consumption sits in London Metal Exchange warehouses - was undermining attempts by suppliers to bring the market into balance by cutting output.

By James Regan, Reuters