The pressure is mounting on BHP Billiton to detail just how it plans to meet the rising pressures from the global recession and the slump in commodity prices, especially oil and copper, and next year iron ore and coal.
Already its rivals like Xstrata and one time takeover target Rio Tinto, have cut deep.
Iron ore major, CVRD has cut production in nickel, iron ore and sent staff on holidays around the world.
And now another major, Anglo American has taken an axe to its business with deep cuts, like Rio did.
Rio’s credit rating was cut yesterday by Moody’s from the A3 to Baa1.
2009 is going to be tough and it’s going to test the managements of resource companies large and small.
This week has also seen Xstrata closing a big coal mine in Queensland and cutting jobs; Macarthur Coal chopped output 22% because of cancelled contracts and dropping staff. Oz Minerals axed staff in Queensland and Fortescue Metals revealed problems with 10 shipping contracts covering iron ore shipments.
BHP had been largely silent until yesterday when a letter to shareholders was released from chairman Don Argus in which the company said it would try and struggle through the slump.
To protect itself, the company said it would focus on "lower risk brown-field expansions" rather than "start up projects in new geographies".
It also said it was ready to respond if production cuts become necessary or if "any of our operations are cash negative".
In his letter, Mr Argus said the company had the flexibility, through its balance sheet and its portfolio, to respond to changes in business conditions.
"I want to be very clear that BHP Billiton, as a standalone company, is in a strong financial and operating position.
"We believe we are better placed than our competitors in these challenging times to respond to the fluctuating demand for our products."
"There is no doubt that these are challenging times for all of us. Uncertainty in the world’s commodity markets remains particularly high in the short-term, and we do not expect to be immune from these changes.
"However, we have excellent customer relationships and so far we have been able to substantially maintain our sales volumes through a combination of our normal long term contract and spot business.
"If these uncertain conditions persist and significant production cuts become necessary, or any of our operations are cash negative and are set to remain so, we will respond accordingly and advise shareholders and the market.
"Our priorities for cash flows remain to invest in core businesses, manage our balance sheet to a solid single A credit rating, maintain our progressive dividend policy and return any surplus cash to shareholders."
BHP shares finished up 3c at $30.78 as investors appreciated the message from the chairman who, when he last wrote in September, was confident the Rio bid would be successful.
Mr Argus said the decision to discontinue its bid for Rio had been "difficult … but one we believe (it was) right for BHP Billiton shareholders.
"As to the future, we have a portfolio of long-life, low-cost, expandable, tier one assets," he said.
"As a result of this portfolio, and low-cost position, BHP Billiton’s margins are the highest among the industry and in these difficult times, we expect to outperform our peers."
BHP Billiton also had "a very strong balance sheet," with net debt of $US6.3 billion ($A8.95 billion) at October 31, 2008, against a market capitalisation of around $US115 billion ($A163.42 billion) as at December 18, he said in the letter.
That A rating for BHP was shared by Rio, but not after Moody’s cut it on $US5 billion of its debt citing the failure to meet asset sale targets.
Moody’s warned that Rio’s earnings may also be affected by falling metal prices, including expected declines in iron ore next year, and put the company on a negative outlook.
Rio has revealed plans to cut 14,000 jobs, more than halve capital spending to around $US4 billion, and sell mines to reduce debt by $US10 billion by the end of next year. It cancelled a big alumina project in Saudi Arabia.
Moody’s said Rio needs to sell assets over the next few months to help clear debt. Rio has already postponed asset sales from this year aimed to cut the debt taken on from the Alcan purchase in 2007.
Rio currently has around $US38 billion of debt.
“A key factor in the company’s rating will be its ability to execute on its divestiture program and reduce debt over the next 12 months,” Moody’s said. That includes $8.9 billion due next October and $10 billion due a year later.
Rio shares fell 32c to $40 on the ASX yesterday They are down 38% since BHP scrapped its hostile takeover bid on November 25, blaming Rio’s debt, slumping metal prices and global financial markets turmoil.
Meanwhile Anglo American has followed Rio in hacking into capital spending for the next year, announcing a 50%-plus chop yesterday.
Anglo is a top five global miner (with Rio, BHP, Xstrata and CVRD of Brazil) and controls the world&r
