BHP Billiton weighing future





Forbes magazine
Benjamin Fulford,
September 2, 2002

The world's largest mining company shows off its muscle.

The $200 billion global mining industry is consolidating, and it looks as if this will lead to less volatile prices for minerals. When copper prices plunged last November, Billiton, the world's largest mining company, announced it was cutting back production by 250,000 tonnes a year, or 10% of production. Other major producers followed suit, sending copper prices shooting up from a 15-year low of $1.37 a kilogram before the announcement to $1.60 three weeks later and a recent level of $1.68. The action signaled the emergence of a group of mining giants with both the power and the will to moderate price cycles whose fluctuations have harmed mining companies and their customers.

This change will affect many people, because "almost everything you touch is made of metal or involves metal," points out Brian Gilbertson, a South African who's taken over the management of the company, based in Melbourne, Australia. The successful production cutback crowned a turnaround by Paul Anderson, 57, an American chief executive hired in 1998 from Duke Energy to fix up BHP.

Anderson, who just retired, and Gilbertson created their company in June 2001 by merging BHP and the U.K.'s Billiton to form a company with $18 billion in revenue and $2 billion in profit. With a market capitalization of $29.4 billion, BHP Billiton topped Alcoa to become the world's largest mining company and joined Rio Tinto and Anglo American in a giants club accounting for half of the global mining industry's resource equity value of $200 billion.

Anderson shook the tired, 117-year-old BHP back into profitability. Before World War II, the Australian government could not write up its budget until it saw BHP's own budget and how much tax it would pay. The company had become so inbred, "they could not see the obvious," Anderson says. For a century, the company had ended its fiscal year on May 31 even though the date confused investors.

In his first couple of years at the helm, Anderson completely reorganized the company, shut down unprofitable mines and shifted the focus of managers from production to shareholder value. He successfully spun off the steel division, a noncore asset, this year. He also introduced U.S. management techniques, such as Six Sigma statistically based cost reduction. But in the end, he realized there was little he could do about changes in the price BHP received for such commodities as copper, aluminium, iron ore and oil (it is the world's 19th-largest oil producer).

When he was contacted by Brian Gilbertson, 58, head of Billiton, a U.K. mining conglomerate, there was a meeting of minds, and they agreed to merge. "We had a vision of the industry consolidating into three or four majors," because assorted models of cash-flow risk all pointed in that direction, Anderson says.

In the past most mining companies were focused on a single commodity, he explains. The result was extreme price volatility. A producer would invest in huge capacity increases when prices were high, but so would all its competitors. The inevitable overcapacity forced producers to ship more to earn more. In the end, the highest cost producers had to shut down, but by then everybody had suffered.

This past November, even though BHP was the lowest-cost producer of copper, "we decided the copper was worth more to us in the ground," says Chief Development Officer Charles Goodyear, who works out many of the algorithms that track the volatility of cash flow. Others in the industry followed suit, and prices stabilized. BHP Billiton could afford to do this because it sold other commodities, like coal and oil, whose prices were stable or rising. With its lowered risk profile, the company is confident in its ability to weather the current commodity slump and raise its price-earnings ratio above its current level of 15 (Alcoa's is 19; Anglo's is 10).

The industry, and BHP Billiton, still face big challenges, because historically commodities prices have fallen by an average of 2% a year, meaning they constantly have to run just to stay still. Consumption, meanwhile, stays closely linked to GDP growth. Fortunately, though, the rapid growth in mineral demand in China and other parts of Asia means there are still plenty of expansion opportunities. China, for example, will be needing structural steel to build a Manhattan's worth of new buildings each year for the next two decades, meaning it will be needing plenty of iron ore from places like the BHP Billiton mining complex around Pilbara in Western Australia.

Nonetheless, even though digging dirt out of the ground and selling it to the Chinese seems to be a straightforward business, running a mining conglomerate is, in fact, one of the most complex of jobs.

Anderson, for one, does not seem too unhappy about retiring from a company that runs 100 operations spanning every time zone: mining for diamonds in the Canadian arctic, copper in Chile and Peru, iron ore and coal in Australia and South Africa. It also smelts aluminum in Mozambique, operates offshore oil rigs in the Gulf of Mexico and the U.K. and is a partner in a $10 billion natural-gas plant in Australia, that country's largest resource project. "I don't want to wake up and worry any more about what is happening in Mozambique or South Africa or the highlands of Peru."

How many other CEOs would have to worry about such things as the murder of an employee in tribal warfare in Papua New Guinea or having trains blown up by guerrillas in Columbia while dealing with changes in accounting and tax regulations around the world?

A visit to the company's gigantic Mt. Whaleback iron-ore operations near Newman, in a remote part of Western Australia, illustrates how complex and sophisticated modern mining operations need to be.

The Pilbara operations entail digging up red dirt, (which happens to be 64% iron), putting it on trains and then loading it on ships. It is an awful lot of dirt though, 200,000 tonnes, enough to make 100,000 cars, and it has to be shipped without fail every day. Behind these numbers lie world-record-breaking engineering challenges as well as some unusual social issues.

To dig the ore out of the ground as efficiently as possible, a mine pit headquarters office uses specialized computer software to monitor the location of each 240-tonne truck and send it to the nearest 450-tonne digging machine ready to serve it. Algorithms are also being worked that have so far this year squeezed 25% out of fuel costs by calculating the optimal use of the trucks. The house-size trucks dump the ore 24 hours a day into massive grinders that crunch it down to potato-size chunks and then spew it onto conveyer belts.

From there the ore is loaded onto the the world's largest train and the heaviest moving object on earth. The biggest train they have is seven kilometers long and carries 82,000 tonnes of ore. Making a train that big and heavy keeps the engineers busy dealing with problems ranging from wheels that crack to engines that burst. At Port Hedland on the Indian Ocean the trains are flipped over automatically, and the ore is dumped onto conveyer belts and machines that load it onto waiting Japanese, Chinese and Korean ships.

The process is so automated that the company would need only half a dozen people to run it from ground to ship. The truck and train drivers could soon be replaced by automated systems that rely on algorithms to optimize fuel consumption.

BHP has less-technical problems to contend with as well. "We pulled 170 poisonous snakes out of our camp," in one month alone says Geoffrey Conie, head of a project known as Area C, a 15-kilometer-long, 890-million-tonne mountain of ore that will be dug up and exported over the next 50 years or so.

A policy of hiring enough Australian aborigines to lift them up to 12% of the workforce (their proportion of the local population) is also proving to be a big job. Their culture is not adapted to the 9-to-5, Monday-to-Friday, year-round routine much of the world follows, says Eric Brahim, a BHP Billiton officer who is himself of aboriginal descent.

"It is a very traditional lifestyle; they have ceremonies from October to February, and they have many funerals (often of distant relatives) to attend as well. If they fail to return to their community for these events, they can get beaten up," he says. As a result aboriginal employees "sometimes just vanish." To meet its quota BHP Billiton is educating aboriginal children and otherwise taking a holistic, long-term approach.

If you consider that the Pilbara iron-ore complex is just one operation in one country out of 100 operations in more than 30 countries, you begin to sympathize with Gilbertson as he deals with unions in Australia, guerrillas in Columbia, accountants in America and a thousand other challenges.

Still, he expects a smooth transition, noting that "there is not one decision Anderson took in the past year that I disagreed with."



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