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BHP outlines plan to drive returns

The company provided a strategy update on Wednesday.

The mining giant outlined its path to generating incremental future returns on Wednesday that is designed to be as low risk and flexible as possible.

At the top of its list is its intent to drive returns through cost efficiencies, something it has been no slouch at doing over the last few years as it has reduced unit costs by 40% since financial year 2012 (the company reports at the end of June). This has led to “productivity gains” as the company calls it, of some $11 billion a year.

These efficiencies are possible thought the sheer scale of BHP’s business. Take the case of Western Australia Iron Ore. BHP, with its minority partners, aims to increase capacity to 290 million tonnes per annum, which in turn is projected to lower unit costs to $14 per tonne. Across the other major commodities the company is active in, conventional petroleum and copper, unit costs are expected to fall to $10 per barrel and $1 per pound respectively.

Some of the cost reductions will be driven by what BHP calls exploiting “latent capacity” – a catch-all phrase for working smarter, more efficiently and by removing bottlenecks in certain key areas of infrastructure. For example, the company will execute the Caval Ridge Southern Circuit at its coal operations in Queensland Australia. This will see an 11 kilometre conveyor belt being constructed to move coal from the mine to the plant which will eliminate the need for trucks, thereby allowing the plant to operate at its nameplate capacity of 10 million tonnes per annum. These initiatives should generate average returns of 75% for what the company considers to be relatively low risk undertakings.

Where the company is prepared to take risk is on existing or adjacent projects in its current portfolio. These notably include the Mad Dog Phase 2 projects – deepwater conventional petroleum in the Gulf of Mexico – for which board approval was granted in February. This will add production of 140 000 barrels of oil a day from 2022. Copper expansion at Spence (Chile) and Olympic Dam (Australia) have the ability to raise copper production a quarter of a million tonnes per annum. BHP also continued to advance the giant Jansen Potash project in Canada.

The company will also continue to implement technology to advance its agenda. BHP has now replicated the remote operations centre used in Western Australia for iron ore in its coal operations in Queensland. At Escondida in Chile, they are trialling the use of the sensors to analyse copper in real time, while it remains in the ground.

BHP’s share price was 2% higher on Wednesday in London at £12.90 per share. The share price was marginally weaker in Johannesburg at R220.85 per share.    

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Thulisile Nkomo

Thulisile Nkomo

NFB Private Wealth Management
Moneyweb Click an Advisor
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