Why BHP held a capital markets day

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Capital markets day

BHP Billiton (BHP) held a capital markets day in London on October 27. The presentation mainly focused on BHP’s iron ore and petroleum businesses.

A second presentation will be held in Sydney on November 24. It will include presentations on copper and coal. BHP might provide fiscal year 2015 and fiscal year 2016 capex expectations at the presentation.

In this part of the series, we’ll discuss the key takeaways from the presentation in London.

Cost reduction

The presentation focused on maximizing production and minimizing costs to offset the impact of lower commodity prices. The focus was also on protecting the dividend and the single “A” rating.

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Cost-reduction targets

 BHP set explicit cost-reduction targets for each of its divisions:

  • 15% in Western Australia Iron Ore (or WAIO)
  • 5% at Escondida
  • 10% at Queensland Coal
  • 10% at US Onshore

Dividend payments

Management reiterated its stand on either maintaining or increasing dividends every reporting period. The current focus on cost savings and capital efficiency should free up enough cash to cover the dividends. BHP provided three measures to support the dividend and protect the single “A” credit rating.

  • Potential for more material efficiency in addition to $3.5 billion
  • Further reduction in the capex guidance of $14 billion—without affecting the volumes
  • Potential sale of the Fayetteville Shale gas field in the US
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Productivity gains

Management highlighted that they’re targeting an additional $3.5 billion in productivity savings by fiscal year 2017. This includes a $2.3 billion reduction in cash costs and a $1.2 billion volume-related gain. 61% of these productivity gains are expected to come from the iron ore division. We’ll discuss this in more detail in the next part of this series.

Capex

Management stated that they can significantly reduce capex, relative to their current plans, while maintaining their growth trajectory. Its capex guidance for fiscal year 2015 is $14.8 billion. There’s a scope for material capex reduction in fiscal year 2015 and fiscal year 2016—given management’s indications.

Capital management and productivity-led efforts are seen across the board in other iron ore companies—including Rio Tinto (RIO), Vale S.A. (VALE), and Cliffs Natural Resources (CLF). They’re also undertaking efforts to reduce costs to weather the weaker commodity price environment. These companies are part of the SPDR S&P Metals & Mining ETF (XME).

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