BHP Billiton has increased its target for productivity gains within its core portfolio to US$4 billion by the end of the 2017 financial year, a US$500 million increase on its previous guidance.
The company said in a press release that the increase in annualised target for productivity gains and the new guidance highlighted its ability to reduce investment without compromising growth.
“By significantly simplifying the portfolio the proposed demerger will allow us to redesign BHP Billiton and create an organisation that supports better productivity. The Group’s core assets generated more than 96% of its operating profit in the 2014 financial year, so we can cut complexity and lower costs without losing the benefits of scale and diversity,” said BHP Billiton CEO Andrew Mackenzie.
“Put simply, we can organise a company that operates 12 large, core assets differently to one with 30 operated assets of varying sizes across a broader range of commodities. We can bring senior management closer to the operations, reduce duplication and cut functional costs to maximise shareholder value.”
He said by focusing on the productivity of its largest businesses, BHP can deliver a step-change improvement in performance and greater value for its shareholders.
“Our commitment to a solid A credit rating and a progressive dividend policy has underpinned sector-leading shareholder returns. From this strong foundation we will strike the right balance between investment in high return opportunities and returning cash to shareholders,” he said.
“Improved capital productivity gives us additional flexibility. We are reducing the cost of bringing on new production and can lower our investment without slowing volume growth. As a result, we will reduce planned capital and exploration expenditure from US$14.8 billion to US$14.2 billion in the 2015 financial year and expect to invest US$13 billion in the 2016 financial year.”
BHP also provided updates on its Copper and Coal businesses. With regard to its copper operations, the company said it is well positioned to endure the hardships presented by various structural factors, including grade decline and higher strip ratios, as well as the restricted availability of power and water in several countries. It said productivity initiatives including low cost debottlenecking projects are expected to offset grade decline over the medium term.
“BHP Billiton is not immune to these challenges, but the Company is well positioned to respond. Operational performance continues to improve, with unit costs at Escondida expected to fall by 30% in the three years to the end of the 2015 financial year. Meanwhile productivity initiatives, including low cost debottlenecking projects at Escondida, Spence and Olympic Dam, are expected to offset grade decline within the Copper business over the medium term. And longer-term growth projects at Olympic Dam and Spence could support total copper production capacity of well over 2.0 Mtpa with first quartile average C1 costs,” BHP said in the press release.
In Coal, BHP has managed to re-establish its competitive advantage by closing high-cost capacity and sustainably reducing costs. The Company said that all of its Coal operations remained cash positive despite the low price environment.
“Productivity in the Coal business has improved significantly in the last two years, with unit costs cut by 37% in metallurgical coal and by 21% in energy coal. The Group is targeting a further 10% reduction in unit costs at Queensland Coal in the 2015 financial year and a 15% decline in unit costs at New South Wales Energy Coal by the end of the 2016 financial year.”
