LONDON Aug 21 Mining firms are wooing investors
with aggressive cuts after years of profligate spending, but BHP
Billiton says the greater challenge will be improving
productivity, if major producers are to ride an eventual
BHP, Rio Tinto and others big and small have
promised shareholders they will slash billions of dollars of
spending, shedding jobs, reining in wages and cutting back on
fringe costs, such as staff travel.
Rio says it tells employees in its iron ore unit to use
low-cost airlines or teleconferencing - a far cry from a time
when chartering flights to remote mines were the norm and tales
abounded of truck drivers on six-figure annual dollar salaries.
But that was the easy bit, the chief financial officer of
BHP Billiton, the world's largest miner, told Reuters.
"When you talk about costs there are two elements. One is
how you tighten your belt and make the easy changes," said
Graham Kerr, a BHP veteran put in charge of finance last year.
"The second is productivity," he said in an interview.
"Getting more out of your existing people, your equipment and
your infrastructure. Productivity will deliver more benefits
over time, but takes a little more time to be done."
BHP said this week alongside its report on annual earnings
that it had cut $2.7 billion of "controllable" costs - new
exploration projects, for example, but not fuel for existing
operations. That figure amounts to a reduction of roughly 7
percent in spending per tonne of copper equivalent production.
The saving - $2.2 billion at the operating level - helped
offset an $8.9-billion hit to operating profit caused by lower
prices for BHP's products.
The bulk of the saving came from cutting back on exploration
and development - $1.5 billion out of the $2.7 billion - a
decision Kerr is confident carries little risk for the future.
BHP has already been pulling out of regions where mining has
been developed only recently, including parts of west Africa,
and it has been concentrating instead on its core deposits.
Exploration is now focused on copper, with no spending planned
on new, greenfield projects seeking other minerals.
"We don't need more iron ore, more energy coal, more
nickel," Kerr said. "We have our resources in the right location
and we understand them very well."
Analysts tend to agree the large miners have enough to work
on and can afford to slow the search for new deposits, cutting
one area - exploration - that does not affect current production
and where, arguably, they can make up lost time later.
Since smaller firms are struggling to raise cash to develop
new mines, the risks of losing out on a major find are also
"The view taken now is no one else is exploring the gaps you
are pulling out of," said one London-based industry adviser who
spoke on condition of anonymity. "You are not necessarily
missing out on the next big opportunity."
And the big miners have enough to work on for now. "Rio has
enough in their larder anyway for the next 10 years, 20 years,"
said analyst Paul Gait at Sanford Bernstein in London.
Having cut costs, BHP's Kerr said, the challenge now is to
get more out of existing assets - and this at a time when many
miners are finding ore grades falling, particularly in copper.
BHP plans to spend over $16 billion in 2014 on growth,
maintenance and exploration - below 2013 and less than initially
planned but still a very large share of the $18.2 billion it
generated in net operating cash flow in the year to June.
For some other miners, the drive for efficiency can mean
organisational shifts - the simplification of Anglo American's
divisional structure, for example. And for all, it has
meant a focus on new technology - BHP's new chief executive has
compared it to Formula One's search for constant improvement.
But for most now, it will mean improving what they get from
their existing mines, to permit increased output that can offset
lower prices - and make the most of any future surge in demand.
BHP, Kerr said, has improved its comparison of performance
between sites and has, for example, made truck use at Goonyella,
its Australian coking coal mine, 25 percent more efficient.
He also highlighted improvements at Escondida in Chile, the
world's largest copper mine, which has increased volumes going
through a concentrator - though BHP was also fortunate to strike
higher-grade ores at the site during the financial year to June.
And in due course, BHP believes, world demand will improve.
"As some of our peers reduce capex, stop projects, stop
growth, demand is going to continue to grow in China and we are
well positioned to feed that demand," Kerr said.
"I see upside for us."