Dryblower on the great conversion of BHP Billiton

NOT since the conversion of St Paul on the road to Damascus has Dryblower heard of a more dramatic transformation than BHP Billiton’s revelation that it is not so much a mining company as a business focused on shareholder returns.
Dryblower on the great conversion of BHP Billiton Dryblower on the great conversion of BHP Billiton Dryblower on the great conversion of BHP Billiton Dryblower on the great conversion of BHP Billiton Dryblower on the great conversion of BHP Billiton

 

Staff Reporter

If true, the share price of the world’s biggest miner (sorry, shareholder-return company) will soar this week, rocketing through $50, on track to hit the magic $100 mark.

Such a stock market event will obviously not happen, despite the curious attempt to put a shareholder-friendly face on a business better known for being management-friendly.

But the comments attributed to BHP Billiton chief executive Marius Kloppers that shareholders will come first in the future is a profound shift in direction that says as much about the outlook for the entire mining industry as it does about one company.

The exact quote from Kloppers, as reported in the Australian Financial Review newspaper, is: “We are not in the commodities business, we are in the shareholder return business”

De-coding precisely what Kloppers meant in those 14 words is one of the more important jobs in the mining industry since the boom started 10 years ago and is now struggling to maintain its momentum under the weight of the ongoing global financial crisis.

Implications in the message from Kloppers include:

  • BHP Billiton pulling the plug on a number of major investment projects.
  • Management ranks at the world’s biggest miner being thinned and staff salaries trimmed.
  • Contractors and suppliers to BHP Billiton facing price cuts.
  • Union members expecting a much tougher management response to wage and condition demands.
  • New investment proposals being forced to clear very high “return on capital” hurdles, and
  • Operations performing poorly being cut-back, sold, or closed.

More on the potential impact of BHP Billiton’s new shareholder-friendly face later; first, a bit more about what the man said, and why he said it.

The primary reason Kloppers said what he did is that he is facing an investor revolt. Major shareholders, especially pension fund managers who have to meet cash withdrawal demands from fund members, need money in form of higher dividends from BHP Billiton.

It is the fund managers who have been voting with their feet, selling BHP Billiton shares and driving down its share price, because the return on their investment has been seen as miserly, with project developments, which please management, first in line for the company’s cash.

With their other investments, particularly anything they own in Europe, also delivering dud returns, the fund managers have turned on Kloppers and demanded that they, the real owners of the business via their status as shareholders, get better treatment than the hired help in the management ranks, and in the company’s mines.

That message, despite being wrapped in euphemisms and indirect speech, is what Kloppers means when he says BHP Billiton is a very conservative company that “has as its objective to invest in its businesses throughout the cycle, keep the balance sheet strong, and, thirdly, maintain our progressive dividend.”

“We want to invest throughout the cycle, but we will do so at a pace and at a timing that every project that we approve will be a project that has got a return and is accretive to shareholders,” Kloppers is quoted as saying.

Once his verbose and wandering comments are passed through an Enigma de-coding machine and applied to Dryblower’ five bullet points noted above, this is what Kloppers is trying to say:

  • On new projects – expect delays, such as the Jansen potash project in Canada being slowed significantly. The Olympic Dam expansion in South Australia will take longer than planned but the Port Hedland outer harbour will proceed as planned.
  • On management changes – expect more upheaval as seen recently in a number of divisions with new and keener executives called in to make the cuts older managers would find difficult.
  • On contractor costs – expect suppliers to be asked to re-submit slimmed down proposals or risk losing a major client.
  • On union disagreements – expect BHP Billiton to adopt the Alan Joyce “nuclear” option as he did when grounding the Qantas fleet last year. Top of the hit list, closing the BMA Alliance metallurgical coal mines in Queensland until workforce sanity prevails.
  • On new investments – managers can expect a much closer grilling on the long-term rates of return on capital invested, and
  • On the future of high cost, or loss-making operations, such as the nickel and aluminium divisions – expect plant closures and more asset sales.

It is this list of likely events which puts a more personal face on what the BHP Billiton shareholder revolt means, why Kloppers has made his astonishing claim about not being a commodities company, and why BHP Billiton is about to be rocked to its core.

This article first appeared in ILN's sister publication MiningNews.net.

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