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What is driving productivity gains at BHP?

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Mar. 11 2015, Published 11:51 a.m. ET

Productivity gains

In November 2014, BHP Billiton (BHP) committed to deliver a further $4 billion of annualized efficiencies by the end of the 2017 financial year. The company has made considerable progress towards this during the half-year period with $2.4 billion already delivered. A broad-based improvement in productivity underpinned a significant $1.8 billion reduction in controllable cash costs during the period. Another $530 million were delivered due to productivity-led volume efficiencies.

The company expects to deliver in excess of $3 billion in productivity gains by the end of this financial year. This will bring the total gains to almost $10 billion since the company began its productivity initiatives back in 2012.

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Adding sustainable value

An important thing to note is that these productivity gains at BHP are sustainable and will likely continue to deliver value every year. These outcomes are the result of the investments BHP has made over recent years in the standard processes, systems, and structures across its portfolio.

According to the company, the South32 de-merger will support the critical impetus to drive the next wave of productivity benefits.

Rate of productivity gains slowing

Another key thing to take note of is that the company’s productivity gains are slowing, as the company expects only $1 billion from fiscal year 2015 to fiscal year 2017. This expectation implies that the rate of cost-control improvements is slowing, as the company has already taken care of the low hanging fruit.

Cost reduction and capital efficiency is vital for miners. It’s particularly important for iron ore miners in this depressed iron ore pricing environment. This depressed iron ore environment has led BHP and other companies, including Rio Tinto (RIO), Vale SA (VALE), and Cliffs Natural Resources (CLF) on a definite cost-cutting spree.

These companies are part of the iShares MSCI Global Metals & Mining Producers ETF (PICK). The ETF invests in metals and mining companies. Rio Tinto, BHP Billiton, and Vale form 11.5%, 18.5%, and 3.1% of PICK’s holdings, respectively. The SPDR S&P Metals & Mining ETF (XME) also invests in some of these stocks.

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