Rio Is Beating BHP In The Cost-Cutting Race Between Australia's Mining Giants

BHP and Rio are racing to cut costs out of their businesses.

It’s been just over a year since diversified mining majors BHP Billiton and Rio Tinto appointed new CEOs to navigate the companies out of the mining investment boom and into a cost rationalisation era.

Both Rio’s Sam Walsh and BHP’s Andrew Mackenzie took office with a game plan to rip out a combined $10 billion in costs across global operations over two years.

What followed was asset sales, de-bottlenecking projects to improve productivity of existing projects, internal battles for capital, project cancellations and job losses.

So 12 months on, how are the two companies faring with their cost out programs?

BHP has stripped $US4.3 billion or about 12% from its FY2012 cost base in 18 months.

Most of BHP’s cuts came from its coal, aluminium, manganese and nickel assets.

While Rio has cut $US3.3 billion or 9% from its 2012 cost base (including exploration and evaluation costs) in 12 months, the majority of the costs were ripped out of its struggling aluminium arm. At the end of 2013 Rio’s cost base sat at $US32.5 billion, compared to $US35.1 billion in 2012.

Here’s a chart which shows this:

According to a note from Deutsche Bank to clients today, taking into account the fact that Rio’s reference point is six months behind, the investment bank says Rio is leading the charge in the rationalisation race: BHP has reduced its cost base by just 1% compared to Rio at 7%.

The gap is explained by some important differences in the companies’ cost-out approaches.

“Both are doing a great job but we believe Rio is winning the contest and has more cost out potential than BHPB going forward,” Deutsche research analyst Paul Young wrote.

BHP’s plan was to effectively do more with less, in particular the company set about boosting productivity levels at its Western Australian iron ore operations.

To achieve this the BHP has put more absolute costs back into its operations to boost production, a move which Deutsche bank says has delivered $US1.5 billion in savings.

What’s ahead?

Deutsche Bank expects there is more opportunity for Rio to strip additional costs out of its aluminium and iron ore businesses relative to BHP.

In a research note released this morning Deutsche said it appears BHP has “achieved most of its available absolute cost reductions”.

Adding future gains are likely to come from its iron ore and copper divisions.

“The big miners have hit a sweet spot with the cost out drive coinciding with record production growth,” Young said.

Over the next 12 months Rio has set a $US1 billion cost savings target, BHP’s goal is to deliver $US500 million in savings by the end of the financial year.

The end game for both miners is to drive down costs and boost production which in turn will result in higher margins and stronger cash flows.

“Over the longer term, we believe both companies can deliver 4-5% production growth. Both companies are bringing on projects under budget and ahead of schedule,” Young said.

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