COLUMN-BHP, Rio Tinto show commodity game has changed: Clyde Russell

Tue Oct 22, 2013 10:49pm EDT

--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, Oct 23 (Reuters) - The latest production reports by Anglo-Australian mining giants BHP Billiton and Rio Tinto show just how much the commodity market has changed in the past year.

BHP and Rio's quarterly statements underline that mining is now a game of producing the highest volumes at the lowest costs, while at the same time scaling back on spending.

This seems like a logical response to concerns over slowing demand growth from top consumer China, whose appetite for commodities drove a decade-long boom in developing projects to boost supply.

The jury is still out on whether the major resource companies stopped spending in time to avoid a major bust in commodity prices, or whether new supply still in the pipeline will deliver a crashing end to the China-led boom.

Certainly both BHP and Rio made much of their efforts to boost volumes at lower costs, while scaling back capital expenditure.

This change in emphasis came about in the middle of last year when both companies abruptly changed direction from spending massively to boost supplies to curbing costs, selling non-core assets and running existing operations harder.

BHP, the world's biggest mining company, said on Oct. 22 that iron ore output jumped 23 percent in its fiscal first quarter from the same period a year earlier.

The company also increased its forecast for full-year iron ore output by 2.4 percent to 212 million tonnes as it ramped up expansion projects in the state of Western Australia.

In doing so it joins Rio in boosting production of the steel-making ingredient, with the company on Oct. 15 reporting record quarterly output.

Rio, which gets two-thirds of its revenue from iron ore, said it is also on track to ramp up annual output to 290 million tonnes by the first half of 2014, and eventually to 360 million tonnes, at which point it would overtake current global leader Vale.

Rio boosted coal output to a record in the three months to September and said it was on track to increase copper production.

BHP also reported output gains in thermal and coking coal, copper, nickel and aluminium.

The increase in volumes was accompanied by cuts to spending, with Rio saying it would exceed its target of $750 million in 2013, having already achieved $729 million in the nine months to the end of September.

BHP said it is continuing to build on the $2.7 billion in savings achieved in the year to June 2013, "with strong momentum maintained" in the September quarter.

Both BHP and Rio replaced their chief executives this year, trading deal-makers and expansion champions for men with reputations as strong operators.

So far BHP's Andrew Mackenzie and Rio's Sam Walsh have delivered on their commitments to extract more value from existing assets and to scale back new developments.

This was largely done at the behest of equity analysts, who had criticised both companies and competitors such as Anglo American for not delivering returns to shareholders from the extended commodity boom.

While both the share prices of BHP and Rio have gained since last year's lows, they are still some way below their post-2008 recession peaks.

BHP is up 24.4 percent since last year's low on July 18, while Rio has gained 33 percent since its bottom on Aug. 30.

However, both shares are around levels that prevailed in 2007.

In contrast, the S&P GSCI index of commodities, which is a good comparison for BHP as it contains a significant energy component, has risen 29 percent since mid-2007.

However, the index is up 13.2 percent since its low last year on June 21, meaning BHP has outperformed the benchmark in the past year.

The spot Asian iron ore price has gained 124 percent since pricing started in November 2008, and 53 percent since the 2012 trough, reached on Sept. 5.

This means Rio is still underperforming against the commodity from which it derives the bulk of its earnings, and while BHP is doing a little better, neither are exactly stellar performers.

The benchmark Australian stock index, the S&P ASX 200 , has jumped 35 percent since its 2012 low in June, and by 7.8 percent since mid-2007, meaning it has produced higher returns than the resource giants over both the last 12 months and the last six years.

It appears both Mackenzie and Walsh have gone some way to convince equity investors that the shift in strategy was a good decision, but the market isn't quite ready to reward their companies with share prices that outperform.

Disclosure: At the time of publication Clyde Russell owned shares in BHP Billiton and Rio Tinto as an investor in a fund, and may own other shares mentioned in this article as an investor in a fund.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.