BHP Billiton digs deep as tough times get tougher

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This was published 9 years ago

BHP Billiton digs deep as tough times get tougher

By Adele Ferguson

The reshaping of the BHP Billiton empire, including its latest commitment to cut $US2.6 billion a year in costs and make other productivity gains, should be a clarion call to mining contractors that times are about to get tougher.

BHP's cost-cutting binge is the next stage of a trend that has been rolling out across the industry as commodity prices continue to get smashed. It is a product of miners looking for new ways to preserve profits – or stay afloat at the smaller end of the market – after allowing their businesses to get fat during the mining boom.

To put it into perspective, on Monday iron ore prices hovered around $US70 a tonne, which brings the fall this year to 12 per cent. Less than three years ago iron ore prices hit a high of $US180 a tonne. Coal, oil and other commodities are also taking a bath, crunching the profit margins of the miners.

At an investor strategy day in Sydney, BHP Billiton boss Andrew Mackenzie pledged to find $US4 billion of so-called productivity gains, across its core portfolio. The aim is by 2017 operating costs will be $US4 billion less than in 2014.

The bigger picture is to make BHP more efficient, simpler and more aligned with shareholders' interests.

In his presentation, the catchphrase was "maximising value and shareholder returns". Mackenzie listed a scorecard of commitments it had made – and fulfilled – for 2014 that included reducing capital and exploration expenditure 32 per cent to $US15.2 billion, lifting free cash cashflow, simplifying the portfolio of assets with a proposed demerger of parts of the empire, and improving capital management.

It comes as the industry braces for another year of challenges. The June quarter Australian Infrastructure Metric, which is compiled by Infrastructure Partnerships Australia and BIS Schrapnel, makes the chilling forecast that civil work will fall $15 billion or 11.8 per cent in 2015. It warns that mining will see the biggest retreat of any sector, with work done expected to be $8.4 billion or 13.3 per cent lower than the previous corresponding period.

In the June quarter, the metric, which surveys actual work won by local contractors, showed total civil work won plunged from 87.9 to 44.3 – the weakest quarterly reading since the metric was launched in March 2010.

Several contractors contacted said the flow-on effect of falling commodity prices is further squeezes on mining contractors and mining services companies. In the case of BHP it is understood to have been cutting the number of contractors working for them. Fewer contractors means fewer people working for them on the client side, less administration costs in terms of managing numerous contractors, the projects and progress claims. It also gives the miner more clout to screw contractors for better economies of scale.

The sector has been adjusting to the slowdown for more than 18 months, including the mothballing of some projects, mine closures and a paring back of expansion plans by all mining companies, including BHP.

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When Mackenzie stepped into the top job last year, he was seen as a man for the times. He replaced Marius Kloppers who had taken the top job during the mining boom. Kloppers' legendary micro-managing style, a series of botched takeovers including Rio Tinto and PotashCorp, and big-budget projects with costs spiralling out of control left shareholders underwhelmed.

Mackenzie's appointment was welcomed by staff and shareholders. The Scottish scientist and veteran of BP and Rio Tinto has been on a mission to reshape the company. Part of that has been to simplify the business after his predecessor had made it more complex by installing complex systems – and embedding a lot of unnecessary costs in the business – by centralising decision-making.

In his short time in the job Mackenzie has made some big inroads, including announcing the proposed spinoff of part of the empire to focus on core commodities. He is trying to improve productivity, cutting capital investment and shifting the focus from big ticket projects to a more measured approach. For instance, in the case of Olympic Dam, instead of killing the project he has opted to do it in stages.

There has also been a management reshuffle to ensure the company has proper succession planning in place. To this end it announced at the strategy day a change in leadership in coal, copper and human resources.

It puts three executives into the mix for Mackenzie's job when his time is up. Each will be given operational experience to reduce the leadership risk.

For now Mackenzie is making all the right noises. Indeed, he made the point that once the demerger of the business is complete the company will increase or maintain its dividend, implying a higher payout ratio. His commitment to maximising shareholder returns will be music to their ears.

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