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What is driving reduced capex guidance for BHP?

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Reduction in capex

BHP has reduced its capex guidance by $2.6 billion in fiscal year 2015 to $12.6 billion and by $2.2 billion to $10.8 billion for fiscal year 2016. The projects included in this guidance are the de-bottlenecking of the Port Hedland port and the concomitant expansion of Jimblebar, Mad Dog 2, and the Olympic Dam.

The company’s US onshore business is the major contributor to the decline in capex. The capex for this division has been cut by $0.6 billion in fiscal year 2015 and $1.6 billion in fiscal year 2016.

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Drivers of capex reduction

In the US onshore segment, the company is preserving high-value resources for development when prices recover. The company also continues to see significant reductions in the capital cost of well development. Other drivers for capex reduction are weaker currencies and continued capital efficiency.

20% target for average rate of return is intact

Despite a substantial cut in capital expenditure, BHP still expects its portfolio to generate an average rate of return in excess of 20%. According to the company, it needs less capital to execute the projects, and its portfolio is exceptionally strong. It would be quite commendable if the company is able to achieve this rate of return, particularly when prices of almost all of its major commodities are falling.

Other companies, including Vale SA (VALE), RIo Tinto (RIO), and Cliffs Natural Resources (CLF) are also trying to reduce their respective debts in order to weather this low-commodity environment more efficiently.

The iShares MSCI Global Metals & Mining ETF (PICK) provides diversified exposure to the metals and mining sector. BHP’s listings form 18.9% of PICK’s holdings. The SPDR S&P Metals & Mining ETF (XME) also invests in metals and mining companies.

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