By Samantha James
One hundred and thirty years on, BHP Billiton is an old company with new tricks. Despite price drops affecting its major commodities– iron ore, coal and copper – BHP Billiton made more than US$44 billion in revenue for fiscal 2015 and reported a 9 per cent increase in overall production.
THE company in its current form was created in 2001 when BHP and Billiton merged. BHP’s first discovery was made in 1883 in Broken Hill, NSW and Billiton’s was at Billiton Island in western Indonesia.
After the merger, the diversified entity quickly grew to become one of the largest mining companies in Australia and the world.
Following the demerger of South32 in May 2015, the company retains four key commodity ‘pillars’ – coal, copper, iron ore and petroleum – with core operations in eight countries. A fifth possible commodity, potash, is being investigated by the company.
On 15 August 2015 the company celebrated 130 years since incorporation, and the significant economic and social contributions made in that time.
Humble beginnings
BHP began operating as Broken Hill Proprietary in 1885 after sheep farmer Charles Rasp discovered a rocky outcrop of lead and silver in the fields of NSW. By 1890 it was one of the largest mining companies in the world, and one of the first in Australia to enlist American experts.
In 1912 the company branched out to iron ore and steel, assisting in the construction of the Sydney Harbour Bridge. BHP became an international entity with the purchase of Utah International in 1984, extending its operations into the US, Brazil, Canada and Chile.
Billiton formed in 1860 after two Dutchmen discovered tin in Indonesia. The business was expanded in 1935 to include bauxite mining, and it became one of the biggest miners in South America when it was purchased by Royal Dutch Shell in 1970. By 1997 the company had been restructured and floated on the London Stock Exchange.
BHP and Billiton merged four years later to create the world’s largest diversified resources company.
BHP Billiton chief public affairs officer Tony Cudmore said the company had been successful in the years since because of its commitment to the company’s original ethos and loyalty to its operational charter.
“What continues to makes us successful is that we take a long-term view of our business,” he said.
“Our strategy remains unchanged since the merger of BHP and Billiton in 2001. We understand the cyclical nature of commodities, which is the basis on why we take a long-term strategic approach.
“We use the BHP charter to guide the way we work and act, as we have done so for over a decade.
“Our charter sets out our purpose and values and how we measure success. It is the single most important means by which we communicate who we are, what we do and what stand for as an organisation.”
Mr Cudmore said the company had maintained some of the qualities that founder Charles Rasp possessed – “the ability to think creatively and to see opportunity and promise that might not always be obvious to others”.
Since merging, BHP Billiton has acquired interests in several flagship projects across the world. Its main businesses remain in Australia, with coal, copper, oil and gas and iron ore projects in WA, NSW, South Australia and Queensland.
BHP Billiton owns 57.5 per cent of the largest copper mine in the world –the Escondida mine in Chile – and 100 per cent of Australia’s largest underground mine – Olympic Dam.
The company jointly operates seven coal mines in NSW and its main iron ore business in the Pilbara region of WA is one of the biggest in the world.
In 2015 BHP Billiton was undertaking a feasibility study at its potash projects in Canada with the view of potentially developing a fifth main commodity pillar.
By demerging its non-core nickel, manganese, silver, aluminium and energy coal assets into South32 in May 2015, the company simplified its strategy to include just 12 operated assets and seven non-operated in Australia, South America, US, Canada, UK, Africa and Asia.
Mr Cudmore said the shift offered “scale, diversification and simplicity”.
“The demerger significantly simplified BHP’s portfolio. We have an unrivalled portfolio of truly tier-one assets for our chosen commodities in the world’s premier basins and provinces.
“Post demerger, [our] remaining assets are absolutely on strategy and have earned their place in the portfolio. Each one is long-life, low cost, upstream, and expandable, and collectively they are diversified by commodity, geography, and market.”
Safety and sustainability
BHP Billiton had a bad year for safety in fiscal 2015; despite a 2 per cent reduction in total recordable injury frequency, there were five fatalities at its operations.
Mr Cudmore said safety was the company’s top priority, and had been since the first major safety incident was reported at the Broken Hill mine in 1906.
“Safety has always been and continues to be our number one focus. Over time we have continuously improved our understanding of safety controls and exposures, and through technology have seen further improvements,” he said.
“There is no doubt that fiscal 2015 was a very disappointing year.”
Mr Cudmore said it was important for the company to establish a “safety culture”. He said BHP Billiton investigated and attempted to learn from any major incident, to improve existing safety practices and prevent incidents across the organisation.
“We know that wherever possible we must engineer out and remove exposures.
“The remaining risk is around decision-making where we focus on building the best safety culture we can, where our supervisors are focused on checking controls and our people feel safe to speak up with new ideas and to stop work if it becomes unsafe,” he said.
These goals were made under the company’s sustainability framework, underpinned by BHP Billiton’s charter. BHP Billiton stated in its 2015 sustainability report that this framework valued “putting health and safety first, being environmentally responsible and supporting our host communities”.
“We firmly believe that being a good citizen in our communities is absolutely vital to our ongoing success. We have been committed for decades to contributing to our communities,” Mr Cudmore said.
“We are building on this commitment by adopting a new approach to social investment, in which we are focussing our efforts in the core areas of governance and transparency, capability and inclusion, and the environment.
“We are also very proud of our forum on corporate responsibility, where civil society leaders come together with our chief executive and other company representatives to discuss and debate key environmental and social issues of relevance to our company and industry.”
In 2015 BHP Billiton contributed US$225 million towards community investment.
Resilient fundamentals
BHP Billiton reported a 21 per cent decrease in revenue for the 2015 financial year, but still managed to earn a total of US$52.3 billion in revenue. Profit for the year totalled US$1.9 billion.
The company stated that it’s underlying earnings before interest, taxes, depreciation and amortisation (EBITDA) of US$21.9 billion and underlying EBITDA margin of 50 per cent for the 2015 financial year “demonstrate[d] the quality of our portfolio and its resilience in challenging markets”.
BHP Billiton chief executive Andrew Mackenzie said that the company was in a better position now than it had been in previous years.
“We do not require the same level of investment to grow as in the past,” he said.
“Improved productivity can further stretch the capacity of our existing operations to increase volumes at very low cost.
“For example, in WA Iron Ore we can increase the capacity of our system from 254 million tonnes today to 290mt over time with minimal investment, while making more than US$20 per tonne margin at today’s prices.
“Beyond this, we continue to reduce development costs within our project portfolio. However, we remain focused on value and will only approve projects when the time is right.”
This was reflected in a capital and exploration expenditure for the financial year, which was cut by US$2.5 billion to US$8.5 billion, prompted by the volatility in the Chinese market. Mr Mackenzie said in the short term he expected this to continue.
“In the short term we expect ongoing economic reforms in China to contribute to periods of market volatility.
“While we remain confident in the long-term outlook for commodities demand as emerging economies continue to urbanise and industrialise, we have lowered our forecast of peak Chinese steel production to between 935mt and 985mt in the mid 2020s. This backdrop will favour low-cost producers with economies of scale.”
BHP Billiton forecast an ongoing weak price environment and commodities impacted by flooded markets in the near term.
However it stated that it expected a deficit in copper supply by 2020, a “robust” long term outlook for metallurgical coal as supply of premium hard coking coal dwindled, and steel production demand growth in India, the Middle East and South East Asia.
