BHP said it wouldn't meet the Dec. 15 deadline to approve the expansion but will investigate less expensive methods to increase production at the mine.
BHP Billiton Chief Executive Officer Marius Kloppers attributed the decision, announced Wednesday, to market conditions, including subdued commodity prices and higher capital costs.
"As we finalized all the details of the project in the context of current market conditions, our strategy and capital management priorities, it became clear that the right decision for the company and its shareholders was to continue studies to develop a less capital intensive option to replace the underground mine at Olympic Dam," Kloppers said in a statement.
Last October, BHP, the world's largest mining company, announced $1.2 billion in pre-commitment capital for the project and was expected to approve the expansion by June 2012. But when commodity prices began to fall, the company said it wouldn't approve any new major project before December.
The expansion was to have the potential to boost production from about 180,000 tons a year to 750,000 tons a year for decades.
Also Wednesday, BHP Billiton reported that its full-year profit to the end of June fell 35 percent to $17.1 billion from $21.7 billion last year, which it also attributed to rising costs and falling commodity prices.
Gavin Wendt, publisher of resources newsletter Mine Life told Australia's The Age newspaper that BHP's decision could have an effect on global commodity prices, especially if it prompts other large mining companies to stall their own expansion plans.
"It sends a message that 'We're prepared to leave these sorts of expansion projects on hold,'" he said.
"That in itself should send the message that the supply side is questionable and it might start to stimulate commodity prices."
BHP Billiton has said that the project would be "an economic driver for South Australia over the next 40 years."
South Australia was expected to receive about $350 million in royalties from the expanded project, which was to have created an estimated 15,000 indirect and direct jobs.
BHP Billiton Chief Executive of Non-Ferrous Metals Andrew Mackenzie praised the South Australian government's support for the project saying that it has "created an environment that is highly conducive to business investment."
South Australian Premier Jay Weatherill in a statement said BHP's decision is "a major disappointment for South Australia and the nation -- especially for those workers and businesses who had set themselves to work on the expansion project."
Referring to the resources as "world class," Weatherill said, "They belong to us, and they will be developed."
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