It’s easy to see why BHP-Billiton decided to cancel the proposed $30 billion expansion of Olympic Dam.
Ever since the news sent a tremor through the South Australian economy in August 2012, BHP has reduced its debt and concentrated on productivity and efficiency.
The global mining giant’s CEO Andrew Mackenzie spoke overnight about the company’s production and efficiency model at the Bank of America Merrill Lynch Metals, Mining & Steel Conference in Miami.
McKenzie reaffirmed BHP’s commitment to “creating a simpler, more productive and capital efficient organisation”.
He told the conference BHP had embedded $4.9 billion of “sustainable productivity gains which will increase to $5.5 billion by the end of this financial year.”
“By doing what we said we would do in the first half of the year, we increased free cash flow by $7.8 billion and underlying return on capital to 22 per cent.”
Debt has been reduced through $6.5 billion worth of divestments in the last two years.
The company plans to exit West Africa and has been trying to sell its 41.3 per cent stake in Mount Nimba in Guinea since July 2012.
The company reduced capital expenditure by 25 per cent and spending will decline again in the 2015 financial year, he added.
“By reducing the rate of investment, we have created strong competition for capital, and now expect an average rate of return of more than 20 per cent for our portfolio of low-risk, largely brownfield development options,” Mackenzie said.
“The case for continued simplification of our portfolio is compelling, and this remains a priority.”
There is still a view within the State Government that the Olympic Dam expansion will still go ahead, in a more staged format.
Similar views are held by some business leaders and economic analysts, including Deloitte Access.
It’s difficult, however, to read that into Mackenzie’s comments which don’t fit the notion of a capital intensive expansion using heap leaching technology that’s yet to be proven.
“We continue to study the next phase of simplification, including structural options, but no decisions have been made,” Mackenzie said.
“We will only pursue options that maximise value for BHP Billiton shareholders.
“Over the past 10 years, we have built a strong track record of capital management. Today, our balance sheet is strong, and getting stronger. We have a solid A credit rating and our progressive base dividend is comfortably covered by free cash flow.”
Perhaps it’s time South Australia let go of the expansion dream and plan its economic future on today’s reality.
