BHP Billiton is taking a knife to capital expenditure

BHP Billiton chief executive Andrew Mackenzie has used a mining conference to announce his company will slash capital expenditure.

Mackenzie said capital and exploration expenditure would fall to US$9 billion in the 2016 financial year from US$12.6 billion in 2015.

He said the reduction reflects ongoing improvements in capital productivity along with the deferral of some shale development and the Inner Harbour Debottlenecking project in Western Australia Iron Ore.

Meanwhile, BHP expects to cut its unit costs at WAIO by 21 per cent to US$16 per tonne during the 2016 financial year.

Unit costs at Escondida (Chile copper) are expected to fall by 16 per cent on a grade adjusted basis.

Mackenzie said BHP had secured productivity gains of nearly US$10 billion in recent years, and said the demerger of South32 would deliver even more benefits to the company.

“We believe we can go even further with a simpler portfolio and improve margins by reducing costs more deeply than the competition,” he said.

With iron ore and metallurgical coal markets currently “well supplied” Mackenzie said BHP does not expect to invest significantly more in these businesses at this time.

“Instead our capital will be focused on the commodities we believe will have attractive supply fundamentals,” he said.

“We believe grade decline in copper and field decline in oil will constrain industry production and support a recovery in prices over the medium term. The potash industry has largely exhausted brownfield expansion options and new greenfield supply will be required.

“Our diverse portfolio of growth options will allow us to select the markets in which we can create the most value.”

Over the next decade, Mackenzie said attractive growth projects at Spence, Olympic Dam and Escondida will help to embed BHP as one of the largest and lowest cost copper producers.

“BHP Billiton’s investments are expected to generate substantial value. Our pipeline of development projects has an expected average rate of return in excess of 20 per cent and we will continue to test all investment decisions against challenging criteria that include buying back our own shares,” Mackenzie said.

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