BHP's 6-point plan to make money without a recovery in commodity prices

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BHP, the world’s biggest mining company, has a plan to grow the base value of the business by more than 70% even without a recovery in commodity prices to help turn around falling revenue and profitability.

Andrew Mackenzie, the CEO of BHP Billiton, spoke at the Bank of America Merrill Lynch 2016 Global Metals, Mining and Steel Conference in Miami overnight.

“Today I present a roadmap based solely on our broad suite of existing opportunities which, even without a significant recovery in commodity prices, has the potential to grow the base value of BHP Billiton by more than 70%,” he told the conference.

“Although we remain confident in the long term outlook for commodities, we are not waiting for prices to recover. We have everything we need in our portfolio right now to significantly increase the value of the company.”

He outlined six areas of attack to lift profits:

    COSTS. The name of the game in mining recently has been to cut costs. At BHP, productivity improvements have delivered annual gains since 2012 of more than $US10 billion. A further $US3.6 billion of gains are expected by the end of the 2017 financial year. Mackenzie says BHP can reduce costs faster and more profoundly than the rest of the industry. Unit costs are expected to fall to almost half the levels of those five years ago.

    VOLUME. The second string to meeting falling commodity prices is to increase production. And Mackenzie says another 10% can be added to current annual production. For example, more than 1 million tonnes of copper capacity can be added at a total capital cost of less than $US1.5 billion.

    OIL. The oil shale assets, most of which have been shut in the US, give the company a large resource base to quickly increase production when prices go higher.

    NEW PROJECTS. BHP’s portfolio of growth projects has an aggregate net present value of US$25 billion. “These projects continue to make strong progress,” says Mackenzie. For example, a decision on the Mad Dog oil project in the Gulf of Mexico is expected within 18 months.

    EXPLORATION. The company plans to increase exploration, a counter cyclical move, mainly in oil to take advantage of falling costs as others pull back. BHP plans to drill six highly prospective plays in three years within the Gulf of Mexico, Caribbean and potentially the Beagle sub-basin off the coast of Western Australia.

    TECHNOLOGY. Investments in technology to further lower costs, improve safety and increase volumes. “We have opportunities identified at a number of our major assets that we expect to create significant value over time,” Mackenzie says. A new technology function was established in February with Diane Jurgens appointed to the role of chief technology officer.

Here’s a slide from Mackenzie’s presentation to the conference, outlining the costs to be cut:

BHP shares have been hammered as its earnings fall in line with weaker commodity prices. Today the shares are up about 3% to $18.40, a long way from the year high of about $30.

The company in February posted a massive half year loss of $US5.669 billion, the big miner’s first in 16 years, and cut its dividend by more than half. Revenue was down 37% to $US15.71.

The company has also reorganised its management to create a leaner and more agile business to meet the challenge of operating in a low commodity price world.

BHP also has to deal with the fallout from the fatal mine disaster in Brazil in November last year, including its half share in a $58 billion civil claim for damages.

Analysts calculate impact from the mud slide will strip about 4% from profits.

BHP has recorded a pre-tax impairment of $US1.188 billion or $US858 million after tax for its investment in the Samarco iron ore mine.

This is made up of $US655 million for the share of losses relating to the Samarco dam failure, $US525 million for carrying value of the investment in Samarco and $US8 million for costs directly paid by BHP so far.

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