BHP's tough love for FY13

AFTER revealing a profit dip yesterday and cancelling the imminent expansion of Olympic Dam, BHP Billiton chief executive officer Marius Kloppers said its assets must earn their right to sit in its diverse billion dollar portfolio heading into FY13.
BHP's tough love for FY13 BHP's tough love for FY13 BHP's tough love for FY13 BHP's tough love for FY13 BHP's tough love for FY13

BHP's aluminium and nickel operations have been sidelined and the Outer Harbour expansion at Port Hedland has been pushed out until a more suitable time when iron ore exports require additional port capacity.

Kloppers told media through a live webcast from London yesterday the company was determined to close operations that were non-cash generating with tough love always being used in the organisation over many years.

"Next year we will re-sequence our options again," he said.

"We need to our match our development expenditure levels, some which are going through profit and loss, to the capital sequence.

"You can't just keep developing options then put them on the shelf for a couple of years, if you know that they're going to move out."

In evidence of demand for particular products changing over time, Pilbara iron ore, copper projects and oil and gas investment in the US, came out on top of BHP's FY13 budget.

Despite achieving a 12 consecutive iron ore production record in Western Australia for the FY12, including a 19% rise in Pilbara sales to a record $A173 million in the period, BHP confirmed the Outer Harbour would not be approved at Port Hedland in the next year.

The existing port arrangements were deemed sufficient for current export levels and the point at which an additional outer harbour was required had now been pushed out on BHP's investment and development timeline.

"While we'd like to think we have perfect insight, maintaining options for our business is important," Kloppers said.

"We cannot start something from scratch if a cashflow comes through; we only deploy cash to valuable options that are ready to meet that return.

"We always need to have options running and drop off and defer options as circumstances change."

Kloppers said the having the outer harbour up its sleeve was still a valuable option to consider.

"We certainly want to do some development but we need to stage our activities," he said.

"We don't anticipate any approvals over the next year."

Meanwhile, BHP chief financial officer Graham Kerr said weaker commodity prices had been the single largest impact on its profitability in FY12.

"Weaker commodity prices and cost pressures have presented a challenge for the industry," Kerr said.

"This pressure was most notable on our base metals business with lower prices reducing underlying earnings before interest and tax by $1.6 billion.

"I am confident of the cost saving initiatives that we have implemented and will ensure that we are very well prepared for the challenges which lie ahead."

BHP's nickel and aluminium markets experienced a compression in uprising margins over recent years.

This reflected both structural weakness in their end markets and substantial cost pressure which has been exasperated by weakness in the US dollar Kerr said.

"Our decisive action to close or suspend various operations and the optimisation of our development program also led to an impairment totalling $342 million," Kerr said.

"Specific actions which contributed to the charge included the decision to study an alternative less capital intensive design of Olympic Dam expansion, the temporary suspension of production at TEMCO, the permanent closure energy intensive silico manganese alloy production in South Africa, the indefinite cessation of production at Norwich Park and the suspension of other minor capital projects."

"At Nickel West we stripped out costs by reducing mining activity at Mt Keith and by restructuring functional support with no associated impact on production."

These assets were excluded from the miners' portfolio due to the high Australian dollar, high energy costs, and a low rate of capacity to generate cash.

BHP said it would tip $4 billion into oil, shale and Permian Basin development in the US and spend a further $750 million on oil exploration.

Mineral exploration would consume $750 million of the exploration budget in Fy13, including $200 million dedicated to copper greenfields sites and brownfields expansion.

Shares in BHP were up 1.3% to $33.59 in morning trade.

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