It was a case of forget the gloomy news in yesterday’s coal and copper briefing from BHP Billiton (BHP) and buy the ’sugar hit’ from the surprise Chinese interest rate cut.
So up and up went BHP shares, jumping more than $1 or 3.7% to $32.90, while the picture painted in the BHP briefing was more in tune with the sell off in mining and mining-related shares last week (and for much of the past six months).
BHP signalled to the market that there will be more cost cuts in its huge coal business, especially in coking coal in Queensland and in thermal coal in that state and NSW.
BHP Billiton indicated it saw limited prospect of a quick turnaround in the coal business – coking coal (used in the steel industry) has a slightly better outlook to that of thermal (or steaming coal, used predominantly in power generation)
In yesterday’s presentation BHP said it intends to reduce costs a further 10% in coking coal operations to less than $US90 a tonne, while costs in its steaming coal mines will be cut by a further 15% to less than $US45 a tonne.
“All of our Coal operations remain cash positive despite the low price environment and are well placed for margin expansion when prices are expected to recover in the medium term,” BHP said.
“Productivity in the Coal business has improved significantly in the last two years, with unit costs cut by 37 per cent in metallurgical coal and by 21 per cent in energy coal.
"The Group is targeting a further 10 per cent reduction in unit costs at Queensland Coal in the 2015 financial year and a 15 per cent decline in unit costs at New South Wales Energy Coal by the end of the 2016 financial year,” the company added.
Coking coal output is planned to rise 4% over the next year or so, while steaming coal production will remain flat because there’s no demand growth in the market, now, or in the immediate future.
That will undoubtedly mean more job losses, reduced business for service companies and pressure on other suppliers, such as rail giant, Aurizon.
BHP vs XJO 2Y – BHP underperforming the broader market, promises further cost cuts
BHP said it saw little prospect of a turnaround in the underlying fortunes of the steaming coal sector until uneconomic production is shut down.
A number of steaming coal producers are locked into so-called ‘take-or-pay’ shipping contracts with rail operators such as Aurizon and Asciano, which means it is cheaper for them to remain in production even though they are losing money, as they wait for prices to recover.
And the company’s Western Australian iron ore mines are not exempt – BHP again confirmed plans yesterday for cost cuts of around 15% in cash production costs by June next year. That will take the average cash cost to below $US23 a tonne from $US25.89 a tonne in 2013-14.
BHP said it will also cut capital spending by more than expected.
BHP said it was now “targeting US$4 billion of annualised productivity gains in its core portfolio by the end of the 2017 financial year, a US$500 million increase on previous guidance.
“Improved capital productivity will allow planned investment to be reduced from US$14.8 billion to US$14.2 billion in the 2015 financial year and to US$13 billion in the 2016 financial year with no change to expected production growth,” the company said yesterday.
It also revealed changes in senior management, with marketing boss Mike Henry becoming head of coal (a big ask, which will test him, but see if he has what it takes to be a contender for the CEO’s role).
Aluminium head Daniel Malchuk has taken over the prize role of President of BHP’s huge copper business. That means Mr Malchiuk moves out of the unwanted aluminium assets to be sold off in the spin off next year, and returns to the main company.
Mr Malchuk’s brief will include Olympic Dam where BHP revealed ambitions to further boost production by ‘debottlenecking’ the mining, production and processing operations and simplifying them.
That could lift exports from Olympic Dam by an extra 50,000 tonnes of copper a year by 2018.
The copper position came open when Peter Beaven became CFO of BHP after former CFO Graham Kerr moved to head up Spinco, the demerged entity that BHP will spin out next year.
And the former boss of the coal division Dean Dalla Valle will replace Mr Henry and become marketing, health, safety and environment boss based in Melbourne.
But buried in the copper briefing was a significant warning for shareholders about the performance of the huge 57% owned Escondida mine in Chile – copper production will drop sharply this financial year.
"After three years of strong growth at Escondida, production is expected to fall in the 2016 financial year as a result of significant grade decline. This is expected to mark the low point in production for the remainder of the decade.
“The life extension of the Los Colorados concentrator and the completion of the Water Supply Project in 2017 will allow Escondida to run three concentrators and maintain production for a decade, without the need for any major investment,” BHP said yesterday.
But BHP is looking to copper to assume a rising share of its attention in coming years because of a looming shortage from around 2018.
“Industry production will be increasingly challenged by structural factors including grade decline and higher strip ratios,”BHP said today yesterday. Availability of power and water will also be “a significant constraint in several countries,” it said.
Bloomberg says that around 4.5 million tonnes of new production capability will be needed to meet copper demand by 2022, according to Wood Mackenzie Ltd. The copper supply gap may reach 2 million tons in 2018, according to Goldman Sachs Group Inc.
Output at the Olympic Dam copper, gold and uranium mine will rise to about 235,000 tons a year in the 2018 financial year through a $US200 million program to allow full utilisation of a smelter and refinery (That’s the ‘de-bottlenecking’ referred to above).
And BHP is looking at ways of extending the life of the Spence copper mine in Chile by about 50 years beyond a planned 2025 closure date.
And finally, BHP had good news for shareholders – the cost cutting and reductions in capex will help sustain the company’s dividend payouts in future years and management won’t fritter money away on wasteful investments.
In fact, judging by comments made at yesterday’s briefing by CEO, Andrew Mckenzie, shareholders can expect to be favoured by more dividends wherever possible rather than buybacks.
Mr McKenzie said investors can be reassured that the still substantial amounts of investment the giant plans to make in the next three years, plus the cost cuts, will help allow it to maintain dividends in the face of weak iron ore and crude oil prices.
BHP yesterday announced that capex in 2015-16 will drop to $US13 billion (down 40% from 2012’s levels, when the company was spending heavily on iron ore, coal, oil and gas and copper). At the same time it also boosted its productivity savings by $US500 million by the 2016-17 year.
“We are able to drive productivity both in capital and in our operations at a pace that we can more than counteract the impact of price and ensure that our dividend is covered,” Mr Mackenzie told Bloomberg.
He said the dividend, BHP’s credit rating and selected high quality investments had priority over share buybacks.
That’s a comment that will upset a lot of big foreign investors and analysts who regard share buybacks as essential capital management tools.
BHP lifted its full-year dividend for 2013-14 4% to $US1.21 a share.
“We will strike the right balance between investment in high-return opportunities and returning cash to shareholders,” Mackenzie said in yesterday’s briefing statement from BHP.
“In almost any circumstances we can see, we are very comfortable and very confident in our ability to continue to meet that basic commitment we have to our shareholders,” Chief Financial Officer Peter Beaven told investors.
He said BHP will seek to continue to “run a strong balance sheet, to make sure that we selectively invest for good and importantly keep that progressive dividend intact’
That’s something to remember in coming years.
