Aggressive Cost-Cutting Ahead for BHP Billiton

Published at 06:16PM - 26/11/14

BHP Billiton’s leadership team is committed to delivering greater productivity gains and to cutting costs more aggressively. However, market analysts have voiced their doubts about the extent to which the programme will deliver results and enable a round of special dividend issues or share buybacks in the new year.

The company has already slashed over a billion dollars from its Capex spend plans for 2015/6 and has promised to drive down its operational costs further by five to fifteen per cent across its various commodity divisions.

Prices for oil and iron ore – two of its major projects – are still plummeting, requiring BHP Billiton to work towards a cost reduction of $4 billion USD by 2017. The plans to lessen Capex spend to just $13 billion USD in 2016 mean that the company will be reducing spending on new and current projects. However, shareholders have been warned not to expect special returns as a result of the cost savings.

Analysts from CLSA and Deutsche have said that they would expect any shareholder returns to be in the form of a limited and progressive increase in dividends, as well as a share distribution in the planned entity demerger next year for BHP’s non-core asset classes.

David Radclyffe, an analyst from CLSA, said that given the prices of oil and iron ore, stakeholders would have no ‘reasonable’ expectation of a capital return distribution above the base dividend rate. He added that in the current climate many stakeholders were in fact questioning the ability of major companies to even stick to their base dividend distribution commitments.

The subject of the demerger will be covered at an extraordinary general meeting for shareholders next May, and Andrew Mackenzie, BHP’s CEO, has said that he hopes to have the newly demerged company trading by 30th June.

An investor briefing last week shared plans for BHP’s copper division to absorb a significant portion of future mining spend, with a range of development project options in progress in Chile, as well as the Olympic Dam mine in South Australia. The company is planning to grow its processing facility at the Olympic Dam mine as part of broader strategic plans to increase its production by 21pc to a total annual production of 235,000 tonnes.

Investors are likely to see the project developments as positive and boding well for their own returns. The Olympic Dam project has previously failed to meet expectations, but the new and smaller plans are expected to be more manageable and in line with industry trends, which will increasingly see gradual and smaller phased developments rather than vast projects typically seen in Australia over the past ten years, costing many billions of dollars. BHP has described this strategy as running sequential ‘bite-sized’ projects, which are naturally more optimised for market conditions and drivers at that time and able to respond to an ever-changing operating environment.

BHP will also be restructuring its leadership team to accommodate several key staff departures within the newly demerged company.