BHP follows in Rio’s belt tightening footsteps

The new heads of mining are embarking on a new era of slashing costs with BHP now joining in, moving to cut spending by 18 per cent in the 2014 budget. 

Newly appointed BHP CEO Andrew Mackenzie has said “substantial” cuts will also be made in 2015 and 2016.

Rio’s new boss Sam Walsh also announced earlier this year that the company will execute a raft of cost saving measures.

Between the two mining giants it is expected a combined $10 billion of cost savings will slashed from operating expenses, reinforcing Australian Mining’s reports earlier this week that an abrupt halt in mining capital expenditure could send the country into a mining fuelled recession as the retail and housing markets struggle to fill the gas during an economic rebalancing.

 BHP’s cost cutting announcement has also backed concerns that the mining boom has well and truly peaked, SMH reports.

According to the SMH, BHP's peak was in 2012 and it is now moving towards a downward trend. 

Addressing an industry conference in Barcelona on Tuesday, Mackenzie said the miner would reduce capital and exploration expenditure to $US18 billion for the next financial year, down from $US22 billion the previous year. 

He warned that BHP’s spending would continue to ‘‘decline substantially’’ going forward, favouring productivity efficiencies and attempting to maximise profits from existing projects, whilst freeing up cash flow.

As BHP reshuffles to work existing assets harder, slashing the exploration budget means Greenfield exploration tasks will also be minimised and is inline with announcements made earlier this year that no new projects would be commissioned in the near future.

“You will recognise my passion for our productivity agenda and this extends to our development projects,’’ he said.

‘‘Put simply, we must challenge ourselves to increase returns from new investment, in the same way that we need to squeeze returns from our already installed infrastructure.’’

The news has cast a cloud of uncertainty around a number of projects currently in the pipeline, including the timing of the Canadian potash expansion.

In February BHP announced cost savings to the tune of $1.9 billion triggered by a 58 per cent decline in first half earnings.

Mackenzie officially took over from previous front man Marius Kloppers last week, and in his first industry address said the spending cuts were an extension of BHP’s long-held strategy.

“Our enduring strategy has worked well for the company and its shareholders,’’ he said.

‘‘In fact, strict adherence to this strategy is what has differentiated us and I intend to give it an even sharper focus.”

Addressing an investor meeting last week, Rio’s Sam Walsh said he expects commodity market volatility to continue in the short to medium term.

Mackenzie yesterday echoed these sentiments saying despite “underlying volatility” the global economy will continue to strengthen.

He explained that global growth would fuel resource demand citing good growth data coming out of China and the rallying of the US economy.

Mackenzie said BHP would hone its focus on the major basins where BHP has retained a competitive edge, including Pilbara iron ore, Queensland coal, Escondida copper in Chile and onshore petroleum in the US.

‘‘We believe our strategy … will deliver stronger margins throughout the economic cycle, a simpler and more capital efficient structure, a substantial increase in free cash flow and growth in shareholder value,’’ he said.

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