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BHP Billiton

Known as the “Big Australian” because it is the country’s largest company measured by market capitalisation BHP Billiton is a mining, oil and gas company headquartered in Melbourne. The mining giant was created in 2001 through the merger of Broken Hill Proprietary (BHP) and the Anglo-Dutch Billiton.

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Miners shift focus to stay in game

BHP and Rio Tinto are ramping up production at the lowest costs while cutting spending as concerns grow over demand from China

PUBLISHED : Friday, 25 October, 2013, 3:23am
UPDATED : Friday, 25 October, 2013, 3:23am

The latest production reports by Anglo-Australian mining giants BHP Billiton and Rio Tinto show just how much the commodity market has changed over 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 mining firms 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 shift 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 Tuesday that iron ore output jumped 23 per cent in its financial first quarter from a year earlier.

The company also increased its forecast for full-year iron ore output by 2.4 per cent 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 last week reporting record quarterly output.

Rio, which gets two-thirds of its revenue from iron ore, said it was also on track to ramp up annual output to 290 million tonnes by the first half of next year, 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 US$750 million this year, having already achieved US$729 million in the nine months to September.

BHP said it was continuing to build on the US$2.7 billion in savings achieved in the year ended June, "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 scale back new developments.

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 per cent since last year's low on July 18, while Rio has risen 33 per cent since its bottom on August 30. But both stocks 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 gained 29 per cent since mid-2007.

The spot Asian iron ore price has soared 124 per cent since pricing started in November 2008 and 53 per cent since the trough reached on September 5 last year.

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.

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 is not quite ready to reward their companies with share prices that outperform.

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