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Peter Beaven: BHP Billiton’s new numbers man
THE AUSTRALIAN JULY 04, 2015 12:00AM
Barry FitzGerald
Resources Editor
Melbourne
Peter Beaven, BHP Billiton's new chief financial officer. Picture: Stuart McEvoy. Source: News Corp Australia
BHP Billiton’s new chief financial officer Peter Beaven learned at a young age how uncertain the world can be.
It should hold the 48-year-old chartered accountant in good stead, given BHP and the rest of the industry must navigate the uncertainties surrounding global economic growth, and its impact on commodity prices.
As a young boy Beaven’s British father, a finance diplomat with Britain’s Colonial Service, had to move the family to South Africa after Portuguese East Africa crumbled in to disarray following Portugal’s withdrawal, leading to the country’s independence as Mozambique in 1975.
It was on a day’s notice, and everything the family owned and treasured had to be left behind for the dash to his mother’s homeland of South Africa.
“That was kind of an interesting exposure at a pretty young age to how uncertain the world can be. Then we lived in what was then Rhodesia (now Zimbabwe), and there was a war on, and that was equally uncertain,’’ he says.
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MOREMore growth to come: Beaven
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Beaven learned from the experience that “you can’t take stuff from one place to the other, but you can always take an education’’.
He got his early education at an English boarding school in the wilds of the Zimbabwean bush, where sport dominated and lessons were an afterthought.
“It’s one of those strange things about the English: they can transplant themselves into the middle of nowhere. We played sport and we used to go to classes in the off time. So we had cricket and rugby and athletics and swimming and hockey and so on,’’ Beaven told The Weekend Australian. Life as one of BHP’s top executives does not allow time for competitive sport. Beaven says now it is a case of trying to stay fit with some running and cycling.
On the latter, working at BHP’s global headquarters in Melbourne’s Collins Street has its benefits thanks to the flat topography. “We tried to cycle a bit in Santiago (where he was previously BHP’s copper boss) but, you know, you’re cycling in the mountains there.’’
Beaven’s tertiary education choice at South Africa’s Natal University reflects a preference for analytical decision-making.
Medicine, engineering and law were ruled out, deemed not as portable as accountancy. “Nobody can stop you from taking your profession,’’ Beaven says.
It’s a decision that’s perhaps more important to the son of a diplomat, and one that is better understood in light of Beaven’s experience of fleeing Mozambique as a child. Little wonder then that he struggles to define where “home” is.
Born in Cascaise in Portugal, but carrying a British passport, Beaven says he doesn’t have a particular sort of nationality, which could also be said about his accent.
“When people ask me, I say I am from a bunch of countries and leave it at that.’’ His wife is a Melburnian, and his two children are Melbourne-born. “It’s been a great place to me, so if Australia will have me, I’ll stay,’’ Beaven quips.
After the seven years it took to become a chartered accountant, Beaven went to London to work as an investment banker with the since consumed Kleinwort Benson. “One of our clients at that point was BHP Petroleum, so I came here for a year on secondment working in 1997, and so I did some deals for them. And then I met my wife in Australia.’’
As it was, the first deal was a doozy — the 1998 sale of BHP’s Hawaiian oil refinery at Barbers Point. When told of the asset and BHP’s wish to exit, Beaven thought BHP was pulling his leg.
Acquired in 1980, Pacific Resources, as it was known, was sold for $275 million. “It was a great deal, and it was a great thing to do as you can imagine,’’ Beaven says. He then stayed on as a contractor for BHP, which by then was well in to “clean-up and fix-up’’ stage under its American chief executive at the time, Paul Anderson.
Beaven worked on the sale of the manganese interests to Billiton, which were subsequently re-acquired in the 2001 merger with the out-of-Africa Billiton, only to be shunted off again with the recent spin-out of South32.
He also worked on BHP’s exit from platinum with the shutdown and sale of the Hartley platinum project in Zimbabwe, and BHP’s sale of its IT business. On the buy side, there was the hostile bid by BHP and partner Mitsubishi of Queensland coal group QCT Resources for $830m in 2000.
“That was kind of fun,’’ Beaven says. He worked on that deal with another future contender to one day become BHP chief executive, BHP’s coal boss Mike Henry, who was with Mitsubishi at the time.
After three years as a contractor, Beaven was to further hone his merger and acquisition, and divestment, skills as head of UBS’s natural resources team in Melbourne. His stint there included advising BHP on the 2001 merger with Billiton.
Beaven became a BHP employee when former CFO Chip Goodyear became CEO, replacing former Billiton boss Brian Gilbertson who had a short stay after the departure of Anderson.
Then came two years for Beaven as chief development officer of the carbon steel materials business, and then five years running the manganese business from Johannesburg, and finally, 4½ years in Santiago to run the global copper business.
It was the departure of former BHP CFO Graham Kerr to South32 that served up Beaven’s chance to become CFO.
Early in his tenure, he is showing an eagerness to talk beyond the standard brief for a CFO of filling in the numbers after the CEO has had his say. The industry has tended to talk about company-specific issues, to shareholder-specific issues, he says. “I think there are community-wide issues that I think we also have a legitimate voice to, and a debate that we should participate in.’’
Like his CEO Andrew Mackenzie, Beaven deconstructs the debate, triggered by Fortescue’s Andrew Forrest, around the cause of the collapse in iron ore prices. “Something very, very obvious occurred, something we called in 2011 because that was the last time we made a substantial investment execution in iron ore. So we knew this was going to happen. It’s basic economics,’’ Beaven says.
He said the bigger and remaining question was: what was Australia going to do about it?
‘The next level of the debate should really be taking place around the competitiveness of the mining industry and what are the causes for the loss in productivity. And it’s not just in the mining industry but it’s across a number of industries here in Australia.”
He acknowledges that the industry itself must accept most of the blame. “We’ve taken our eye off the ball in terms of productivity, the use of human capital, and I think there is a lot of improvement that we have made, but we can continue to make.”
While the heat in the iron ore blame game between Rio Tinto and BHP on one side, and Forrest on the other, has died down, the taxation of multinationals continues to bubble. Again, Beaven does not shy away. “There is a lot of interest, I think rightly, in corporate tax at the moment — how much are companies paying? How much should they be paying? It has to be a debate about what is fair and what is in Australia’s best interest.’’
But he adds that any “real debate about tax has to be about global competitiveness and the role that tax regimes play in that.’’
He says the companies had to be “transparent to ensure people have confidence in the concept of fairness’’. To that end, BHP is to release a global tax and transparency report later this year, including more detail on a country-by-country and project-by-project basis.
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BHP in $US2bn writedown of US petroleum business
THE AUSTRALIAN JULY 15, 2015 2:39PM
Matt Chambers
Resources Reporter
Melbourne
A Petrohawk drilling rig in Texas. Source: Supplied
BHP Billiton has flagged a long-awaited second writedown on $US20 billion of its US shale oil and gas purchases, saying it expects to recognise a $US2bn ($2.7bn) after-tax impairment in its full-year results next month because of field complexity and lower oil prices.
The writedown is worth around $US2.8bn ($3.76bn) before tax.
The major part of the writedown will be on the Hawkville gas field because of its complexity, rather than because of the impact of price falls, indicating the acquisition was not performing as well as had been hoped.
”The gas-focused Hawkville field accounts for the substantial majority of this charge reflecting its geological complexity, product mix, acreage relinquishments and amended development plans,” BHP (BHP) said.
“The remainder relates to the impairment of goodwill associated with the Petrohawk acquisition.”
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After the writedown, BHP’s onshore US business will have net operating assets worth about $US24 billion, excluding roughly $US4 billion in deferred tax liability, it said.
The new writedown follows a 2012 writedown of $US2.84bn on BHP’s Fayetteville gas assets because of low US gas prices, and brings total pre-tax impairments from the acquisitions to $US5.64bn.
In good news, BHP upped the potential on its Permian field by 50 per cent from its previous estimates.
“While the impairment of the Hawkville field is disappointing, it does not reflect the quality of our broader onshore US business,” US oil and gas president Tim Cutt said.
“The Black Hawk continues to exceed expectations, the Permian offers significant upside across multiple zones and the Haynesville, one of the industry’s premier dry gas positions, provides an excellent development option as market conditions improve.
“With industry-leading drilling costs and recoveries, we are well positioned to realise significant value for shareholders as we develop our high-quality resource base.”
Investors were less convinced, pushing BHP shares down 1.3 per cent to $26.74 by 2.25pm (AEST).
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BHP Billiton profit set to crash to decade low
THE AUSTRALIAN JULY 23, 2015 12:00AM
Matt Chambers
Resources Reporter
Melbourne
BHP Billiton Source: TheAustralian
BHP Billiton is set to log its worst underlying net profit in a decade and worst reported profit in 12 years, with up to $US5 billion ($6.7bn) of writedowns and other charges, mainly on its US petroleum assets and the South32 demerger, adding to the impact of sliding iron ore, oil, copper and coal prices.
BHP yesterday said $US2.1bn of exceptional items related to the South32 demerger would hit its 2014-15 bottom line, adding to $US2bn of after-tax impairments on its 2011 US shale acquisitions revealed last week and up to $US1bn of new charges that will hit its underlying full-year profit.
In its fourth-quarter report yesterday, the mining giant not only flagged hits to 2014-15 profit, it said production would fall this year in three of its four main commodities (iron ore being the exception), exacerbating concerns about its ability to meet its progressive dividend policy.
“A number of additional charges and impairments have driven a downgrade to 2014-15 earnings,” Citi analyst Clarke Wilkins said.
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Mr Wilkins said guidance for oil and gas, coking coal and copper were all disappointing and below the bank’s estimates.
Citi is predicting full-year net profit of $US3.1bn when BHP releases its results on August 25. Credit Suisse is expecting reported net profit of $US2.4bn.
This is down from $US13.83bn in 2013-14 and either would be its lowest since 2003, when it reported a profit of $US1.9bn.
The charges led Citi to cut $US700 million from its 2014-15 underlying profit expectations, which strips out exceptional items, leaving it to forecast underlying profit of $US8.29bn. Credit Suisse was more severe, cutting its underlying full-year earnings by about $US1.5bn to $US7.6bn.
Either would be the company’s lowest result since 2004-05, illustrating the pressure miners are under as the China boom ends and commodity prices plummet.
The extra charges include writedowns to copper operations and the Neptune oilfield in the US Gulf of Mexico ($US200m to $US300m), copper business redundancies ($US100m to $US200m), US onshore drill rig termination charges ($US50 to $US100m) and $US382m of copper provisional pricing adjustments. Patersons Securities analyst Rob Brierley said he thought the report would be received negatively.
“Further asset impairments and additional expenses caused by lower prevailing commodity prices call into question BHP’s ability to sustain its progressive dividend policy,” Mr Brierley said.
“This year looks like being a challenging year for BHP but it has the balance sheet and asset base to ride through it.”
Credit Suisse analyst Paul McTaggart said he did not believe the progressive dividend policy was at risk but that reduced guidance would see debt rise and more capital expenditure cuts.
The financial warnings came with a generally solid production report that exceeded expectations, especially with guidance that BHP would put an extra 16 million tonnes of iron ore on to the market this year.
But the company flagged its first oil and gas production drop in a decade, saying record 2014-15 production of 256 million barrels of oil equivalent would shrink to 237 million barrels as it pulls back production at the US shale oil and gas assets its spent $US20bn buying in 2011 and has since spent $US15bn developing.
Not all analysts had a negative view of the report. “The one-off costs and impairments contain no major surprises,” Morgan Stanley analyst Menno Sanderse said.
“Production volumes were slightly better than our estimates (except copper) but realised prices were slightly weaker, while guidance for 2015-16 is in line, except for petroleum.”
BHP shares fell 55c, or 2.1 per cent, to $26.27 yesterday but this cannot be seen as a direct reaction to the report, with rival Rio Tinto falling 2.5 per cent as iron ore came under pressure.
BHP managing director Andrew Mackenzie said he was happy with BHP’s performance.
“Our businesses performed well over the 2015 financial year,” Mr Mackenzie said. “We have improved the performance of our equipment, reduced costs, and increased volumes, despite a significant reduction in capital spend.
“Our simpler portfolio following the demerger of South32 will help us maintain the pace of operational improvement, further supporting cash generation, margins and returns.”
A strong fourth quarter pushed BHP’s 2014-15 West Australian iron ore production to 254 million tonnes (including partners’ interests), beating guidance of 250 million tonnes and leading to this year’s guidance of 270 million tonnes, which was more than many analysts were expecting.
Full-year copper production of 1.7 million tonnes was in line with expectations, with this year’s new guidance of 1.5 million tonnes influenced by known operational issues.
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- Aug 25 2015 at 12:07 PM
- Updated Aug 25 2015 at 12:12 PM
BHP Billiton's $US6.5b question: Five things to watch in its result
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/h/f/z/4/y/image.related.afrArticleLead.620x350.gj6xcy.png/1440477220726.jpg[/img]The $US6.5 billion question being asked ahead of BHP Billiton's full-year results on Tuesday afternoon is how the miner will protect its annual progressive dividend in the face of a painful commodity price rout. Stefan Postles
[Image: 1426318537894.png]
by Amanda Saunders
The $US6.5 billion ($9.1 billion) question ahead of BHP Billiton's full-year results on Tuesday afternoon is how the miner will protect its annual progressive dividend in the face of a painful commodity price rout.
When the results are announced on Tuesday afternoon about 4:15pm AEDT (just after market filings begin in London at 7am local time) investors will also be keen to see how the slimmed-down giant can expand, after spinning out South32, and a massive pullback at its US onshore division. The results come one day after BHP Billiton shares slumped 9.2 per cent in London trade, its worst day since November 2008, in Monday's plunging markets.
Analyst consensus expects BHP's underlying earnings to have declined by more than half to $US6.6 billion, ex-South32, compared with the year-earlier $US13.4 billion.
As UBS analyst Glyn Lawcock says, the big question everyone is asking whether BHP can protect its dividend, and ensure it is maintained.
"And if you believe they can, how they can do that – that's the billion dollar question," he told Fairfax Media.
Here are five things to watch out for in BHP's result:
1) GROWTH AND PRODUCTIVITY
Investors will want to know how BHP plans to reverse the "ex-growth" position it finds itself in for the first time in 15 years.
While costs cuts and productivity improvements will help shield its margins from the cash flow crunch, it faces years of being ex-growth unless oil and gas prices stage a big recovery, or it makes a major acquisition, Deutsche analyst Paul Young said.
Investors will also want to know if the miner will gear up to fund growth. As UBS analyst Glyn Lawcock says, it is a matter of semantics. Some investors argue BHP will gear up to fund its $US6.5 billion dividend, others argue that gearing up is to fund growth. BHP's cash flow covers its dividend and sustaining capital.
There is also desire for more clarity on how much productivity can save - and how - given chief executive Andrew Mackenzie won his leadership on the plan to spin-out "non-core" assets into South32.
UBS says BHP could provide updated guidance for group production growth on Tuesday, using financial 2015 as the new base year, which could see growth of between 0 and 5 per cent. But 2016 does look very tough - iron ore is the only of BHP's four key "pillar" commodities forecast to grow volumes in the year.
2) DIVIDEND
BHP is set to stick to its progressive dividend policy, which ensures the dividend is maintained or increased in US dollar at each half-year payment. Any move to cut the dividend, or change the policy, would blindside investors and analysts.
It will cost BHP about $US6.5 billion for financial 2015. Australian investors who argue it doesn't make sense for a resources company and restricts the miner from making countercyclical acquisitions or investments, while there is also a growing chorus of criticism out of London.
BHP is expected to keep its final dividend flat, at US62¢ a share, which is an underlying payout ratio of more than 150 per cent. That would put the full-year dividend at $US1.24 a share, up from $US1.21 last year.
While UBS does not expect BHP to cut its dividend, Mr Lawcock says it has a "range of levers" to support it, including increasing debt, reducing capex, cutting costs, deferring projects, selling assets, or paying its dividend in scrip.
3) CAPITAL SPENDING
BHP is expected to make fresh cuts to capital spending on its already heavily reduced 2016 target of $US9 billion. It has guided for $US12.6 billion for 2015. Rio, Glencore and Anglo American all unveiled capex cuts at their interim results earlier this month.
UBS is tipping 2016 capex of $US7.7 billion, and says the miner will likely reduce its guidance below $US9 billion, while Deutsche puts it at $US8 billion.
BHP's productivity drive is giving it more flexibility, as is big cuts to spending on its struggling US onshore oil and gas division, and deferral of a $US500 million inner harbour project, which would have seen the miner reach its ultimate 2017 expansion target of 290 million tonnes more quickly..
4) COST-CUTTING TARGET
Investors are expecting BHP to raise its three-year, cost-cutting target of $US4 billion by financial 2017. BHP said in February it was on track to have pulled out at least $US3 billion in the first 12 months. The big fall in the Australian dollar against the US currency - down more than 20 per cent in the past year - is accelerating the cost-cutting program. The oil price collapse - the price of Brent crude has fallen 60 per cent in the past 12 months - while squeezing profits on BHP's second-biggest earner, is also helping BHP reduce operating costs.
Net debt is also crucial. Net debt is expected to have crept back up to $US25.4 billion, from $US24.9 billion as of December 31.
5) M&A
Will Mr Mackenzie talk to the importance of M&A to growth? He has flagged possible acquisitions in copper and oil at a project level.
Deutsche's Mr Young has told The Australian Financial Review that if BHP's wants to revamp its oil business large-scale mergers or acquisitions were the only option to restore growth, unless oil and gas prices staged a big recovery.
"But if you look at the history, the question is, do they have the licence to do so?" he said.
"The world's biggest mining company, with very low-risk, tier-one assets, in low-risk jurisdictions, should not be in a position where they are ex-growth – the valuation opportunity for BHP has always been that they can grow while everyone else is not."
The global miner's decision to pull back from its ambitions in the US onshore shale oil and gas sector – because the division has been rendered largely unprofitable by the oil and gas price collapse – coupled with a decline in BHP's conventional oil production, had made the miner "ex-growth", Mr Young said.
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01-11-2015, 06:47 AM
(This post was last modified: 01-11-2015, 06:56 AM by greengiraffe.)
What does Singapore get in return with no tax rev earned from BHP operations - vibrancy, other economic spinoffs and something to shout about...
BHP's Singapore hub earned $US5.7 billion ($7.9 billion) in profits over eight years to 2014, across its whole portfolio, and Singapore has earned almost zero tax income on those profits.
BHP is in mediation with the ATO over a claim that it owes $522 million in back tax on those profits; one suspects other claims might be triggered if settlement is made or court challenges are lost.
Since being appointed chief executive just on two and a half years ago, Andrew Mackenzie has consistently said the market needs to track him, not trust him.
Opening the bonnet on BHP's Singapore operations to AFR Weekend aligns with that commitment, and shows an awareness of the risks of allowing the Singapore issue to fester.
Inside BHP Billiton's Singapore marketing hub
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/k/m/m/h/8/image.related.afrArticleLead.620x350.gkmgqm.png/1446194673225.jpg[/img]Vicky Binns, Arnoud Balhuizen, Stacie Wu and Alan Chirgwin are running the show in Singapore. John Ho
Locked away in an understated office in the heart of Singapore's financial district are the brains of BHP Billiton's operations.
From 10 Marina Boulevard, you can see a line of container ships snaking into Singapore's harbour that makes Newcastle Port look like a milk bar.
The view is good but the tax rate here is even better. And no matter what BHP says, it is unquestionably a big part of why the Global Australian is here.
Singapore could edge ahead of Collins Street in Melbourne to become BHP's biggest corporate office, with the latter in the midst of a deep round of job cuts. Both hubs have about 400 staff, although they are some way short of the headcount at its operations centre in Perth.
Singapore's government provided a sweetheart deal on tax a decade ago to make sure BHP's marketing hub stayed put. The Australian government couldn't, or wouldn't, match it.
But BHP is at pains to make it clear that Singapore is not just a brass plate.
MARKET INTELLIGENCE
It is here, across five floors in the banking district of the Asian city state, that marketing president Arnoud Balhuizen and his team formulate the closely guarded market intelligence that directs cargoes to their highest-value customers, informs capital allocation and shapes BHP's long portfolio strategies. It was in Singapore, for example, that BHP drove the reformation of the global seaborne bulk commodities market by forcing the embrace of index pricing for iron ore.
The marketing team builds its commodity models from information gleaned from diving through the highest level economic data, or after gathering frequent flyer kilometres for face-to-face encounters with Chinese retailers and iron scrap merchants. There is absolutely nothing random in anything that marketing achieves.
Take, for example, BHP's view of the Chinese steel market and its outlook. It is sensitive enough that BHP felt the need to announce recently it had stepped back from its long-standing view that the Middle Kingdom's steel production would plateau at 1 billon tonnes a year. Balhuizen's people reckon that steel will peak at 935-985 million tonnes but that its plateau will last longer than previous imagined.
This downshift was informed by a complex of forces. All have been identified and assessed through a prism BHP calls the "seven levels of steel". This sees evidence gathered and assessed at every level of iron ore's transformation into steel and then finished products.
Today they will be poring over China's new five-year plan and assessing the long-run effects of Thursday's end to the one-child policy.
DATA-CRUNCHING
More routinely though, the data-crunching starts with people gathering in scrapyards to count and date dumped machinery, and includes conversations with local architects in China to measure the depth of basements being placed in homes. The deeper the basement, the higher the building and the more steel will be used in its manufacture.
The data is then assembled and assessed in Singapore, where everything the Global Australian extracts is sold and where everything it uses is bought and distributed.
When asked about Singapore's tax appeal, Balhuizen doesn't shy away from the miner's great deal.
"Of course in any operation, we look at cost efficiency, we will look at putting things in place in the most effective way.
"I think everybody would expect us to do that. Operational costs, access to financial structures, tax structures, are part of the total balance."
When asked if there could be a lesson there for the Australian government – that governments have to compete for business, in much the same way that businesses have to compete for custom – Balhuizen says: "The Australian community could have done one or two things maybe a bit better.
"But the place where we have built our hub, and the things we have done on market transformation, would not have been possible in any other place than Singapore."
TAX DEBATE
BHP this year unwittingly confirmed itself as a public enemy number one in Australia's debate about tax minimisation, because of the way it uses its Swiss-registered, Singapore-based marketing business to trade its suite of mining and energy production, including Pilbara iron ore and Bowen Basin coal.
The tax hub basically works this way. Say the price of iron ore is $100 a tonne. BHP marketing would acquire that tonne from the miner's iron ore business for about $US97 a tonne. This generates the taxable income of the iron ore business in Australia. The $US3 difference is the marketing fee BHP charges itself to sell it to customers, who are mostly Chinese, from Singapore. The profits from this fee flow are not taxed in Singapore. But it is subject to tax on being returned to Australia and BHP's other ownership constituency, the UK.
The ATO feels that this Singapore Sling means that Australia earns less tax than it should. The taxman apparently accepts that the miner should earn a marketing margin and is comfortable with the way profits are then distributed from Singapore to BHP's dual-listed arms. But there is dispute over the quantum of the marketing discount. BHP will not confirm the size of that discount, but informed speculation puts it pretty close to the flat 3 per cent fee that fellow dual-listed iron ore giant, Rio Tinto, charges itself for marketing services that are also based in Singapore.
BHP's Singapore hub earned $US5.7 billion ($7.9 billion) in profits over eight years to 2014, across its whole portfolio, and Singapore has earned almost zero tax income on those profits.
BHP is in mediation with the ATO over a claim that it owes $522 million in back tax on those profits; one suspects other claims might be triggered if settlement is made or court challenges are lost.
Since being appointed chief executive just on two and a half years ago, Andrew Mackenzie has consistently said the market needs to track him, not trust him.
Opening the bonnet on BHP's Singapore operations to AFR Weekend aligns with that commitment, and shows an awareness of the risks of allowing the Singapore issue to fester.
BHP's marketing team of about 410 across 10 offices, including 215 people in Singapore, are the only ones in the business who really know what herbs and spices go into the demand, economic and commodity price forecasts. And omission is just as important as inclusion. Houston, Texas, is BHP's smaller marketing hub, with 65 staff.
Stacie Wu, BHP's vice-president of market analysis and economics, says it all starts with the macro. They look at everything from headline numbers in a country, down to industrial production and electricity generation. China is the main focus, followed by India.
But on commodities, a bottom-up approach is taken, from the number of of air conditioners and washing machines to average kilometres driven.
"We will actually go out and meet with some of the big retail companies, for example, in China," Wu says. "We will interview them, which is quite interesting for BHP."
MARKETING DRIVES INSIGHTS
Balhuizen points to the importance of monitoring the growth of e-commerce in China and how it impacts on transportation and steel construction. As it grows, it will change city planning, the number of commercial buildings, and transportation. While that might mean less steel, it is a positive for BHP's energy division.
In drilling down for detail, the miner looks at steel intensity by measuring, for example, the depth of the basements in different Chinese cities.
"Looking at basements, we will talk to local architects for example, to get a sense of what the trends are," Wu says. "They look at floor space per capita – which is driven by population and GDP growth."
Marketing is responsible for demand forecasts, while supply is the domain of the commodity businesses. But the price forecasts that stem from both supply and demand are up to marketing too.
They update their forecasts one or two times a year.
And of course, marketing dictates allocation of capital, and which mines to open or not to open, and which to shutter.
The insights that inspired BHP to pull back on iron ore investment in 2012 were driven from marketing. The early identification of a structural shift in patterns of Chinese demand resulted in the canning of a $US20 billion iron ore port development in the Pilbara and, the following year, of plans for a $5 billion coal terminal at Abbot Point in Queensland.
But Balhuizen is quick to qualify that "there's also things we did wrong, so let's not sit here and say that we got everything right". Splashing $US20 billion to acquire a blend of gas and oil-rich shale provinces in the United States is an example of where "the price has disappointed and where marketing takes accountability".
The gas price hasn't done what was expected, Balhuizen says, but they are still good, tier one assets.
Balhuizen is a Billiton boy. The Dutchman joined the company two decades ago to work in its Netherlands marketing and trading business.
DIVERSE TEAM
BHP Billiton's marketing model was born when BHP and Billiton merged in 2001, and two hubs were created, one in The Hague and one in Singapore. The bigger hub was in the Hague, but as the revenue base shifted from Europe to Asia with the China boom, Singapore became the main game. The Hague hub was closed in 2012.
Half the global marketing team is female – and across both genders there are 34 different nationalities.
"If there is one team in BHP Billiton which can bring this diversity, it's marketing," Balhuizen says. "I see it as one of my legacies."
As well as Singapore and Houston, BHP has marketing offices in Shanghai, Delhi and Tokyo, as well as London, Santiago, Brisbane, Adelaide and Perth.
Its analysts, economists and technical teams can include chemists, or engineers specialising in blast furnaces, mining or deep ocean work. Some have degrees in finance, humanities, law, business or economics.
They also enlist market research houses such as IHS and Wood Mackenzie, and international mining associations. Wu, who joined BHP in 2008, is a former strategy consultant herself.
In Singapore sit the vice-presidents of marketing for three of BHP's four commodity "pillars". There is Vicky Binns in copper, Alan Chirgwin in iron ore and Shaun Verner in coal. Petroleum is Houston's domain.
FORECASTS
Marketing feeds economic and price forecasts into other arms of BHP for "cashflow analysis, cashflow decisions, capital decisions and portfolio decisions", Wu says.
It feeds data back to the coalface, so quick changes can be made to production or mine planning, to decrease costs. For example, they could advise iron ore to start mining a different type of product earlier, to meet new demand from a customer willing to pay a premium for it.
In September, BHP revised its "peak steel" forecast for production in China by 2025 to 935 to 985 million tonnes, from 1 billion tonnes.
But Wu is clear: "We don't want to be changing our view on sentiment. We have to be able to explain why, and credibly. We can't just wake and say, 'You know what, we think it's lower today'."
The revision was inspired in part by a study the marketing crew ran on building demolitions, which showed that a lot of them were being done on urban planning sites.
"You had the wrong type of building in the wrong part of the city, and all that has actually been flushed out now [through demolitions]. Effectively that [urban] planning is more advanced now. So we believe those life cycles are extending … and that drove down our long-term outlook on steel." That delays the availability of scrap material.
But they need to decipher, from the "gigantic" volume of information, what is actually material.
ASSESSING PROSPECTS
For China, the fundamental view is that Chinese growth will slow gradually over the next 15 to 20 years, but off a very large base.
China and India have a much more immediate impact on the business, so they account for most of the analysts' time. But BHP keeps "scanning" for up and coming countries like Vietnam and Indonesia, "which could drive significant demand in the longer term … we're talking 15 plus years".
On a macro level, BHP will look at an economy's population, demography and education. From there they look at property prices, retail sales, industrial production, electricity generation.
Wu says they did an education study in India, "which often surprises people, but we're trying to understand the potential for those economies to develop". They also assess a country's ability and capacity to enact reform.
"That allows us to form a view on how those economies are going to evolve, and specifically things like how quickly might they grow, what's the role of manufacturing versus agriculture versus services … that then dictates commodity demand over time."
They also assess a country's ability and capacity to enact reform. In India – which BHP is positive about – they are tracking stalled land acquisition and GST reforms.
From there they drill down again to a sector like steel across manufacturing, construction, infrastructure and consumer durables. And then they look at sub-sectors of those, for instance, residential compared to industrial construction.
BHP is getting more comfortable with the transparency on data in China.
"We feel that the data today is as reliable, if not more, than back when, you know, the growth rate was 10 per cent, so we don't think there has been any degradation," Wu says.
BENEFITS TO AUSTRALIA
BHP argues that wins from marketing in Singapore – like achieving a benchmarked system for iron ore up – have poured and continue to pour billions back into the Australian economy. The transparency of the system has seen Australian product get a greater quality premium, and realised a freight advantage against Brazil.
Balhuizen maintains that no other miner could have achieved the benchmarking because "they don't have the cross-power commodity" to do it.
"Because it's now in place, people tend to forget … how expensive it was to have it not in place. And those successes we are now replicating in the other commodities. It's all about being in one place, being a hub, being truly central and replicating it and having a global team who can look at those things. Being connected to the rest of the world is very, very important."
But inevitably the public conversation about the slightly different offshore trading hubs that are used by BHP and competitor Rio Tinto are being shaped by the dark politics of tax and mining companies. An incompetent attempt to extract a bigger share of the miner's boomtime profits through a super profits tax cost one prime minister his job and left a former Treasurer permanently scarred.
The miners won that fight courtesy of an effective campaign that announced the substance of the industry's tax and royalty payments. But one victory has not ended the long war. There remains a hangover from that – and doubt in the public mind about whether miners pay an appropriate level of resources rent to the nation.
Singapore will remain a key front in what shapes as a long battle.
Amanda and Matt travelled to Singapore as guests of BHP Billiton.
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Singapore portal for BHP Billiton's Asian generation
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/k/m/m/i/c/image.related.afrArticleLead.620x350.gkppv0.png/1446541553273.jpg[/img]Arnoud Balhuizen, BHP Billiton's president of marketing, is predicting that Singapore will become a major LNG trading hub. John Ho
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by Matthew Stevens
Singapore is BHP Billiton's portal to Asia's raw materials, hungry manufacturers and traders, but it is a two-way door, according to the bloke who runs the Global Australian's suddenly controversial global marketing hub.
Arnoud Balhuizen says BHP's 15-year-old Singapore office has become an "incubator" of a broadening base of youthful international talent that will see BHP evolve into an organisation with an increasingly Asian face over the coming decade.
"We have 34 different nationalities in the organisation," BHP's marketing president said at the recent roundtable in Singapore with The Australian Financial Review. "If there is one team in BHP Billiton that can introduce this diversity, it is marketing. You can call it the incubator of foreign talent, which is introduced to the rest of the organisation. This is one of the core duties here in Singapore."
Singapore is home to 400 or so BHP employees, making it arguably more heavily populated than the company's spiffing new Melbourne HQ. About 200 of that Singapore population work for Balhuizen. But their boss regards the city state as an transition point for people just as it is for iron ore, coal, copper and anything else BHP buys or sells.
Through Singapore BHP aims to attract regional and global talent that will be seeded back through the organisation from Perth to Brisbane and from Houston to Melbourne. Balhuizen's newest hiring horizons are China and India and his targets stretch from very traditional mining engineering graduates to next-gen drivers and divers of big data.
Balhuizen's pitch is that Singapore is the right place for a new generation of regional talent to familiarise themselves with the way big commerce works and with the way an Australian company and culture works.
"There's a good example of a Chinese student that came on the graduate program and she went on to work in a coal mine in Illawarra, then to a smelter in Mozambique and then came back to Singapore, did an MBA. Now she is a marketing manager based in Shanghai. And she will be there for a while, and we will try and send her somewhere else"
Balhuizen is the bloke who broke the iron ore banks at Qingdao Port. And he says that the lessons learned from reformation of the iron ore market continue to inspire BHP's determination to capture "value that is rightfully ours" by driving structural change to markets and, along the way, opening opportunities at margins.
VALUE OF PROXIMITY WASTED
Balhuizen was the marketing vice president who stared down Chinese and Japanese customer anxieties and now incomprehensible competitor scepticism over two confronting years before helping to sever the nexus between iron ore supply contracts and their annual price sets.
Resistance to index pricing finally collapsed in February 2010 when China's second biggest steelmaker, Baosteel, and the world's biggest iron ore producer, Vale, wrote index pricing into their supply contracts.
Under the annual fix, Australian and Brazilian producers earned pretty much the same price for their product. The customer would then pay the cost of freight. It cost more to land the stuff from Brazil because it had to travel further. The way BHP saw things the value of proximity was being wasted.
Worse still, China's arrival as a source of mainstream demand in the seaborne iron ore market after 2004-5 left the market under supplied, creating a very apparent pricing arbitrage between the annual price and the spot price. But because nearly 90 per cent of the major's tonnes were being sold under long-term contracts, the upside to this sudden and ultimately unusually enduring shift in market balance was leaking to the customers
Today we have a daily index iron ore that is set on a landed price in China. That means the Australian producers simply earn more for their iron ore than their Brazilian competitors because they get to keep the difference in the cost of shipping the stuff to China. Right now that freight differential is worth maybe $US7 a tonne. That translates more than $US4.5 billion ($6.3 billion) to the producers. That is, in the end, good news for the tax man given that whatever component of that income is returned to Australia as profit is then subject to income tax.
BHP people recognised the shifting tectonics of the bulk commodity markets as far back as 2006, which is when the long march to index pricing was kicked off by then Singapore-based marketing boss Marius Kloppers.
These days it is Balhuizen who runs the whole BHP marketing shebang in Singapore and that means only that his appetite for value identification and recovery can be spread across the sweep of Global Australian's commodity portfolio.
Belhuizen's team have done much to corral global steelmakers into the recently launched indexed trading of coking coal, an effort he describes as "a bit of a Groundhog Day". And the Dutchman who arrived at BHP with the Billiton merger is keeping a weather eye on the liquid natural gas market, which he reckons has nearly all the ingredients necessary to promote the cause of index driven pricing based on its own fundamentals rather than those of the oil market.
The guiding principle for coking coal is the same as it was in iron ore. "We're only going to get back what is rightfully ours," Balhuizen said.
COMPLEXITY IN SIMPLICITY
The simplicity of this statement disguises a complexity of ambition.
Short term and forward price discovery is essential to efficient operation of markets. A prerequisite for that to happen in bulk commodities markets is a liquid spot market. A decade ago about 95 per cent of BHP's iron ore was delivered to market under long-term contracts. Today it sells 25 per cent on spot terms with the rest on contracts that have terms no longer than, maybe, six years. And the price of every contracted tonne is set, at least in part, by the daily index.
The transparency created through this structural shift is being used to inform the next step in value enhancement. By cross-fertilising an ever deeper pool of technical knowledge about its steel, copper and energy customers with ever clearer price signals, BHP has developed a growing awareness of who will pay most for what. As a result, it is able to direct more of the highest value product to prepared to pay the best price.
This mechanic of value discovery is already working nicely in iron ore and it will be increasingly deployed in coking coal and in the copper concentrate market, where BHP entertains ideas extracting a premium for Escondida product because it produces a lower volume of slag in refining. And then, there is gas.
As it is with iron ore, copper and oil, not all LNGs are the same. The east coast variety of LNG is quite different to stuff exported from Darwin and Karatha. Gladstone's LNG is made of leaner stuff. It carries not much in the way of the heavier gasses like propane and butane. But the WA and NT stuff does. But, as things stand, it is being priced on the same basis as the Gladstone product. This means only that the market structure is allowing value to leak from the producer to the customer.
"If I was accountable for a big energy portfolio, I would drive my teams to say; 'If you have rich energy, you need to get a better price than the people with lean energy'," Balhuizen explained.
"I'm thinking gas is very interesting," he added. "We [BHP] are a relatively small player on the LNG market. But the way we think about markets [means] we seem to have a relatively big influence over markets, and it is a fascinating market.
"Singapore is becoming a big LNG trader, everyone is setting up a hub here and there's going to be a very interesting dynamic," he predicted.
Balhuizen described a recent gig as a speaker at an LNG conference as "like déjà vu".
"You know, I was hearing exactly the same arguments that people used to me seven or eight years ago. I am told it [a spot LNG market] will never work, the stock market is not big enough, the utilities will not take the risk on the market."
Balhuizen recalled a conversation with a panel member who worked with Cheniere. It is the ambitious new US entrants to the LNG business. Its plans include driving a spot market to identify the price arbitrage created by the fact US gas is going to be so much cheaper for so much longer than equivalent production from competitors in the North Asian market, competitors like Australia.
"I spoke to someone from Cheniere and I said; 'Well, just go after it because this is exactly what they told me about iron ore'."
Matthew Stevens travelled to Singapore as a guest of BHP Billiton.
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BHP share hit from Samarco dam disaster in Brazil tops $10bn
Barry FitzGerald
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Resources Editor
Melbourne
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BHP Billiton Source: TheAustralian
[b]The hit on BHP Billiton’s market value in response to the Samarco iron ore tailings dam disaster in Brazil has grown to more than $10.8 billion, plunging the group’s shares to seven-year lows.[/b]
In the second day of trading after the collapse of two tailings dams sent more than 60 million cubic metres of waste material hurtling down the valley floor and on to the town of Bento Rodrigues and beyond, BHP shares yesterday fell $1.28, or 5.6 per cent, to $21.42.
The fall takes BHP’s plunge since first news of the disaster to $2.05 a share, or 8.7 per cent, with the seven-year low reflecting growing investor concern with the reputational damage from the incident as much as the cost of the clean-up and the loss in earnings from the profitable operation, owned by BHP in a 50:50 joint venture with Brazil’s Vale.
BHP’s first priority remains dealing with the human tragedy caused by the collapse of two of Samarco’s four tailings dams. Brazilian officials yesterday raised the death toll to three people.
That number could rise as at least 28 people have been confirmed as missing, including 13 workers for Samarco. Officials of Minas Gerais state, where the dams are located, said that the chance of finding more survivors was fading.
“Hope decreases as time passes,” Fernando Pimentel, the state’s governor, told reporters yesterday. The tailings that burst from the dams with devastating impact were a mix of sand, ultrafine iron ore and water.
Chief executive Andrew Mackenzie and BHP iron ore president Jimmy Wilson were yesterday en route to Brazil to see first hand the impact of the collapse of the interlinked Fundao and Santarem dams which have accumulating waste material since 1977.
“They will be working with stakeholders and local authorities to determine what additional resources we can provide to support their response effort,’’ a spokesman said. “Ultimately we must be guided by Samarco and the authorities as to how we can best support the response. We have already deployed a small group of health, safety, environment and geotechnical BHP experts to Brazil to support Samarco,’’ he said.
The number of people in the communities affected by the incident is yet to be confirmed, BHP said in a statement yesterday. But the local authorities have reported that at this stage there are at least 15 people downstream from the dams, and Bento Rodrigues, unaccounted for.
BHP chairman Jac Nasser said on Sunday that words could not express the impact of the tragedy on the employees and contractors of Samarco, and the local communities.
Deutsche told equity clients yesterday that it was assuming the mine could be shut until the 2019 financial year, and that clean-up costs might be more than $US1bn ($1.40bn). “This accident will add further pressure to BHP’s cash flow, growth and safeguarding of the progressive dividend,’’ Deutsche said. BHP’s ability to maintain or increase dividends under its progressive payout policy was already under pressure from the commodity price rout.
“It could be months before Vale, BHP, state and federal governments complete their assessment of the incident. The clean-up, community support, litigation and rebuilding of the tailings dam (if approved and deemed feasible) could mean that Samarco is shut for years,’’ Deutsche said.
Samarco contributed $US369m to BHP earnings in the 2015 financial year and before the dams burst, Deutsche was expected a retreat to $US308m in 2016 because of weaker iron ore prices.
Meanwhile, BHP has confirmed a report in June that it would seek to improve its working capital position by increasing its standard payment terms for suppliers from 30 to 60 days.
BHP said the move would align the company with the rest of the industry. Existing contracts are not affected. Nor are supply contracts held by small local community vendors, assuming they can pass a “small vendor” test.
The extension of payment terms is already in place at other mining groups and is part of the broader industry’s response to the squeeze of cash flows caused by the broad retreat in commodity prices. But with much of the easy cost-savings already achieved last year, the search for more savings is becoming far-reaching.
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Financial impact of Brazil dam disaster weighs on BHP Billiton
- RHIANNON HOYLE
- THE WALL STREET JOURNAL
- NOVEMBER 10, 2015 11:02AM
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Homes lie in ruins after the Samarco mine disaster. Source: AP
[b]Investors continue to dump shares in BHP Billiton after last week’s deadly dam breach at its jointly owned iron-ore mine in Brazil, even as the company sought to clarify responsibility for the disaster that has already claimed the lives of at least four people.[/b]
A further 20 people are still missing.
The mining company said it hasn’t determined what caused one dam to fail and another to be “affected” last Friday (AEDT) at the mine in Minas Gerais state. It said its chief executive, Andrew Mackenzie, and the head of its iron-ore business, Jimmy Wilson, would head to Brazil later this week to assess what further support it could provide toward the response effort.
BHP (BHP) also stressed in an emailed response to questions from The Wall Street Journal that Samarco Mineração SA, the company it 50-50 owns with Vale SA of Brazil, was “responsible for the entirety” of the operations at the iron-ore mine.
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It came as Brazilian authorities confirmed they had halted all operations at the mine, which a state environment official said “can only resume operations once the investigation is finished and measures are taken to repair the damage”.
State officials gave the order to close the mine due to the seriousness of the incident and the need to investigate the risks for the population and the environment, officials said.
Samarco said the state Civil Defence authorities are in charge of the rescue operations, and that it is supporting those efforts. The company said in a written statement that it has rented seven helicopters for use by rescuers, delivered food and water, and found housing for 588 residents left homeless. Samarco didn’t respond to a request for additional comment.
Vale didn’t reply to a request for comment.
BHP appoints half of the directors on the board of Samarco, and receives “regular reports” on its operations, BHP said. It declined to comment further about the nature of its oversight of Samarco.
Nonetheless, as more information about the extent of the damage caused by the dam burst emerges, analysts are trying to figure the potential bill for BHP and Vale. The dam breach was the largest spill of its kind to date, according to David Chambers, president of the non-profit Center for Science in Public Participation, whose group has tracked these types of failures back to 1915.
The cost to the companies, including for clean-up and rebuilding, could top $US1 billion, said Paul Young, a Sydney-based analyst at Deutsche Bank, who estimated the mine could be closed until about 2019. He described the dam burst as “catastrophic.”
BHP’s Australian shares ended yesterday down 5.6 per cent to $21.42, taking total losses since news of the accident broke to 8.7 per cent and the stock to its lowest level in seven years. BHP is dual-listed in Australia and the U.K.
The hit to BHP’s market value had last night grown to $10.8 billion.
Vale American depositary receipts were off 2.1 per cent on the New York Stock Exchange overnight.
“The uncertainty regarding clean-up and legal costs is likely to be an overhang on” shares, said Jefferies analyst Christopher LaFemina, who added that the reputations of BHP and Vale, which have relatively good safety records, would emerge damaged.
BHP said there are three so-called tailings dams used to store mineral waste and water at the mining operation. One burst, spilling the contents into the collection of waste held back by a second — as well as across a rural swath of southeastern Minas Gerais, where it inundated the village of Bento Rodrigues. The third dam is being monitored by Samarco, the mine’s operator, BHP said.
“At this time, there is no confirmation of the causes of the tailings release,” BHP said in its regulatory filing.
Morgan Stanley analysts said it was unclear whether insurance would cover part of the cost for Samarco, which operates as an independent company. Samarco was holding $US700 million of cash and $US4.9 billion of debt on its balance sheet at the end of June, Morgan Stanley said.
“Potentially, the Samarco joint venture will have to reapply for its operating and environmental licenses,” the Morgan Stanley analysts wrote in a note.
Fitch Ratings has put a negative credit watch on four classes of Samarco debt. The ratings agency cited concerns about lower iron-ore production following the accident, as well as the potential for the company to be hit with regulatory, legal or environmental penalties. If “the cause of the breach was due to a technical error, the penalties could be more punitive,” Fitch said.
Brazilian officials have raised the death toll to at least four people, two of whom were found in the path of the mud flow, and a third who died while receiving medical treatment. That number is expected to rise, with more than 20 people still missing.
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A fireman rescues a dog trapped in mud after tailings dams burst near a Brazilian village.
“BHP Billiton will continue to work with Samarco, Vale, the local communities, local authorities, regulators and insurers to assess the full impact of this tragic incident,” BHP said.
More than 600 people were left homeless by the mudslide, a spokesman for the state government said.
A small group of survivors protested against Samarco outside the city hall in Mariana, the nearby town where the evacuees from Bento Rodrigues have been taken.
State prosecutors recommended that Samarco pay baseline monthly damages equivalent to the minimum wage ($207 a month) to each family that lost its home.
They also urged the company to set a timetable for resettling victims in new homes.
“We are trying to resolve all this without going to court,” said prosecutor Mariana Guilherme de Sa Meneghuin.
But “if Samarco doesn’t comply with our recommendation, we’re going to let the justice system rule on fulfilling these measures,” she said.
The shutdown will reduce BHP’s iron-ore production this fiscal year — cutting into profit when falling commodity prices already are already making it more difficult for the company to keep its promise to maintain or lift shareholder dividends. Samarco last year accounted for roughly 3 per cent of BHP’s underlying earnings.
Analysts also expressed concern that any costs borne by BHP for cleaning up after the dam spill could eat into its ability to pay a dividend, an attraction of the stock for investors. BHP aims to either maintain or boost its dividend each year.
“This accident will add further pressure to BHP’s cash flow, growth and safeguarding of the progressive dividend,” said Deutsche Bank’s Mr Young.
The Anglo-Australian mining company said it is now reviewing its full-year iron-ore projections. Samarco had only recently ramped up output after an expansion that included the construction of a processing plant. The mining operation has the capacity to produce 30.5 million tonnes a year of iron-ore pellets, used in steel production.
With Andrew Peaple
Wall Street Journal, AFP
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The harsh cost of BHP Billiton's Brazil crisis
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[Image: 1447416886670.jpg]BHP is working with partner, Brazilian miner Vale, to minimise the impact of the Samarco disaster. AP
When Andrew Mackenzie got to the 18th floor of BHP Billiton's Collins Street HQ on Friday November 6, the company's response to the disaster unfolding at its jointly-owned Brazilian iron ore mine was in full swing.
But as soon as he arrived, Mackenzie went off script and made two things very clear.
Firstly he would front a press conference that day to address the catastrophe caused by the collapse of tailings dams at a BHP-owned mine in Brazil. And then he would fly to the disaster site.
There was some debate from advisers over timing but Mackenzie was clear – those two things were non-negotiable and had to happen ASAP.
[Image: 1447357223006.jpg]Vale and BHP committed to setting up an emergency fund, understood to be at least $US100 million. AP
Mackenzie was in Sydney when he first learned of the deadly mudslide caused by the failure of a tailings dam at the Samarco iron ore mine in the Brazilian state of Minas Gerais.
He had attended the annual Business Council of Australia dinner in Sydney, but on hearing of the disaster early on Friday morning he got on the first flight to Melbourne to convene a meeting with the company's all-powerful group management committee.
Iron ore boss Jimmy Wilson, a director of Samarco, which BHP owns in equal part with Brazilian iron ore giant Vale, dialled into the meeting.
After holding the press conference late on Friday, Mackenzie made plans to head to Brazil.
[Image: 1446969484871.jpg]A girl runs between mattresses covering the floor of a arena used to shelter people displaced after a dam burst in Mariana, Minas Gerais state. AP Photo
HEART OF THE DISASTER
With Wilson, he took a commercial flight to Dallas, and then a private jet to the town of Belo Horizonte. They landed on Tuesday, before taking a chopper to the heart of the disaster zone.
Mackenzie always knew it was going to be a tough fiscal 2016 for BHP Billiton.
But for all the mining giant's scenario planning – its framing of commodity prices and where markets might go, its climate change forecasts, its move to get on the front foot over tax in Singapore, its defeat of Andrew Forrest's pricing inquiry push – it appears not to have been prepared for a disaster such as Samarco.
[Image: 1447074562932.jpg]Samarco says it has not yet determined why the dam burst, or the extent of the disaster. YouTube
There has been no similar event in the past 100 years for the miner.
And most often in business, it's what you don't know that kills careers. As fund manager Tim Schroeders of BHP shareholder Pengana Capital says, the tragedy in Brazil had "focused attention back on the vulnerabilities of BHP".
The size of this disaster should not be underestimated.
NINE DEAD, 19 MISSING
At least nine people are dead and 19 are missing. Almost 640 people lost their homes and are being put up in hotels in nearby Mariana, with the town of Bento Rodrigues the worst hit.
The deadly red sludge has spread to the river Rio Doce, reaching 440 kilometres downstream from the mine site, and hit 11 communities. It has raised the ire of Brazilian president Dilma Rousseff, who visited the disaster site on Thursday, and slapped preliminary fines worth 250 million reais ($94.4 million) on BHP and Vale.
The cost of the clean-up and any compensation has been put at around $US1 billion, ($1.4 billion) but it is almost inconsequential compared to the damage to BHP's reputation.
This incident will hang over the company for decades, soaking up time and energy and resources – not unlike BP's Gulf of Mexico disaster, albeit with a much smaller clean-up bill.
That is not lost on Mackenzie, who ironically served his formative years as a BP oil man.
Mackenzie met Vale's chief executive Murilo Ferreira and the pair fronted a media conference on Wednesday and pledged their commitment to the relief efforts with a $US100 million emergency fund.
But while BHP has established a number of cross-functional teams to deal with the crisis – dozens of people are working on it – the company is hamstrung by the fact that it is Samarco, and not BHP, that is operating on the ground.
SAMARCO'S LEAD
BHP can provide support and advice, but Samarco must lead the local relief efforts.
Samarco delivered 96,000 litres of water, 3175 basic food baskets and 5000 snacks and meals. At least 600 emergency kits have been rushed in by the company – with mattresses, sheets, towels, blankets and personal-care kits. They've also sent in animal feed, and have 10 helicopters ready for rescue missions. Emergency trucks are on hand 24/7 in affected areas.
BHP has not tried at hide from its responsibility, despite the fact the joint venture was run as an independent operation, but it has raised questions about what the company knew about potential problems with the tailings dams – and perhaps most importantly, when it knew it.
For example, revelations that an independent report warned of potential problems with the tailings dams in 2013, have raised questions about BHP's oversight of the joint venture, particularly given its focus on safety and the environment.
BHP's highly respected iron ore boss Jimmy Wilson is a member of the Samarco board and, with his fellow directors, will face scrutiny in the coming months and years as Brazilian regulators and officials pursue Samarco through the courts. Class actions and other compensation claims could also be pursued in the United States.
There will also be some who question if BHP should be operating in joint ventures where it does not have operational control.
QUESTIONS OF APPROPRIATENESS
"There are questions about appropriateness of some of those joint venture structures," Schroeders, of Pengana Capital, says.
"Are they policing those with best practice? That will be reviewed, and they may come up with stricter procedures around those JVs."
"It probably just means BHP doesn't commit to those types of structures in future as opposed to dissolving the existing ones."
BHP has three South American joint ventures that are presently operated on an arm's-length basis by management independent of any of the shareholders.
Those ventures are Colombian coal crown jewel Cerrejon, and giant copper mine Antamina in Peru, while the third is Samarco.
But even before Brazil, safety was likely to feature on the agenda of BHP's annual general meeting in Perth this Thursday, given the five fatalities the miner had in the 2014-15 year. Mining industry players have been quick to point out the irony in of these tragedies occurring for a miner vocal on safety.
But the Brazil disaster will only add to the fireworks at what was already looming at a feisty annual meeting.
SHARE PRICE PLUNGE
As evidenced by the 33 per cent fall in the BHP share price since – it now languishes at levels not seen since before the China boom started in late 2005 – shareholders are not happy.
Before the disaster, the main issue the miner had been preparing to deal with at the annual meeting was discontent over a new scheme to shift funds from the Australian arm of BHP to the United Kingdom arm to prop up the annual dividend payment to its British shareholders.
The scheme effectively means some of the BHP's franking credits will be burnt when they are transferred to Britain as part of the dividend manoeuvring – because British shareholders can't use them.
Such is the size of the BHP franking credit pile, there is little chance the Australian dividend will remain anything but fully franked. But there are some local shareholders uneasy with the BHP proposal and they are likely to make themselves heard next week.
For most investors though, it is not franking credits attached to BHP's dividend that is causing the most consternation, but the company's dividend policy.
Despite the cyclical nature of mining companies, BHP has promised its dividend will not fall in US dollar terms.
It's a promise that delights yield-hunting shareholders, who are now enjoying a dividend yield at 8 per cent, an unheard of level for a miner at the bottom of the cycle.
INVESTORS UNCOMFORTABLE
But a growing number of investors – many of whom shied away from commenting in the wake of the Samarco disaster – are uncomfortable with the progressive dividend.
Andy Forster, senior investment officer at Top 20 BHP shareholder Argo Investments, says the big question for the miner is "ultimately is sustainability of progressive dividend".
"They are cost cutting aggressively and pumping more volume but [are] really just lowering the cost curve and hence prices," Mr Forster said.
"These are clearly challenging times with the oil price and Brazilian developments."
As Schroeders points out, when commodity prices are as low as they are now, paying out twice what you are earnings per share are becomes hard to justify. Especially when events such as the Brazil disaster underline what a unpredictable business BHP is in.
"Samarco is an exception because of the loss of life, but in terms of mining-related operating incidents, that's part of the business that they are in," he says.
'OLD ACORN'
"You do end up digging up the old acorn of the progressive dividend," he says.
"I don't think there is any threat that BHP can't cope with it [the financial impact of Brazil disaster] but it's a question of this millstone they have around their neck, called the progressive dividend policy, that's of their own doing.
"Maybe the board needs to rethink the appropriateness of the strategy, they can still pay out a high proportion of earnings in dividends but they shouldn't be wed to it [the dividend policy]."
A week into the miner's Brazilian disaster, BHP's shares fell to within cents of the price it traded at before Chinese demand for minerals started to take off in late 2005 and turned it into a $200 billion company.
BHP shares fell again on Friday, down 2.8 per cent to $20.13, the lowest price since December, 2005. That is with the exception of a few days in November 2008, if the price is adjusted for the South32 demerger.
Former BHP chairman Don Argus said the Brazil disaster would throw up lessons for the miner. Just as happened with the long- running environmental disaster at BHP's Ok Tedi mine in PNG.
OK TEDI LESSONS
"There are some learnings from the Ok Tedi piece, and I don't know whether there are similarities or not, and I'm sure there will be lots of learnings here, when they can finally disclose what really happened," Mr Argus told The Australian Financial Review.
At Ok Tedi, with the approval of the PNG government, tailings from a copper mine were systematically poured into a river system for more than two decades. But it is difficult to compare that with the Samarco incident – and no lives were directly lost.
Stepping back from Brazil crisis, Deutsche Bank analyst Paul Young says the biggest issue facing BHP remains its oil division.
The global miner's decision to pull back from its ambitions in the US onshore shale oil and gas sector after the collapse in oil and gas prices, coupled with a decline in BHP's conventional oil production, had made the miner "ex-growth", Mr Young said.
Mackenzie has been looking at oil and is acutely aware of the need to buy to top up reserves. But for now, much of management's time will be tied up with Brazil.
As Mackenzie and Wilson make the long trip back from the heart of the disaster zone, and prepare for the annual meeting on Thursday, they must be having the same thoughts. Surely it can't get worse than this?
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Mackenzie's human response shines in a week of Brazilian gloom
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[img=620x0]http://www.afr.com/content/dam/images/g/k/u/r/l/z/image.related.afrArticleLead.620x350.gkyjow.png/1447399817210.jpg[/img]A rescue worker covered in mud, searches for victims at Bento Rodrigues. AP
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by Matthew Stevens
As much as some might not like to hear it, there can be no question that BHP Billiton's response to the tragedy its Brazilian joint venture has inflicted on the people of Minas Gerais has been something substantially stronger than the textbook might require.
Debate will quite rightly rage over whether or not the joint owners of Samarco, BHP and Brazilian giant Vale, could have averted the breach of the Fundao dam wall that swept away the village of Bento Rodrigues.
But, for all the blunt blame game very understandably playing out Brazil, there is no evidence to support the view that BHP has displayed anything like a lack of concern for the victims, living or dead, of the Samarco mudslide.
The President of Brazil, Dilma Rousseff, has proclaimed that Vale and BHP are responsible for the accident just as they will be for the clean-up.
The government has already declared "preliminary sanctions" totalling $94 million against the owners of Samarco for damage caused to the local river system and six villages hit by the mudslide.
It is reported too that the President believes "several laws" have been flouted. It is not clear whether she was referring to the causes of the incident or Samarco's response to it. But the company and its dam management are already the subject of criminal and civil investigation by federal and state prosecutors in Brazil.
Meanwhile in a meeting between Rousseff and the chief executives of BHP and Vale, the President has made it clear she expects them to pay for the clean-up and fully compensate the families of the nine dead, the injured and the more than 500 that have been left homeless by the catastrophe.
But from the moment the breadth of this horror story became apparent, there was never any question that this would be the minimum the world should expect of Samarco's owners.
While patently less coy about its liability than fellow owner Vale, BHP's wait-and-see narrative has just as certainly been crafted in the name of risk and liability management.
ACTIONS SPEAK LOUDER THAN WORDS
But, in this situation more than ever, actions speak louder than words. The most senior management at BHP has responded to this disaster with convincing energy. And probably the most informative and unscripted moments of that response were shaped even before its all-powerful group management committee gathered in emergency session last Friday.
Chief executive Andrew Mackenzie had been in Sydney when news came through of the catastrophe and its obvious human toll.
By the time he arrived in Melbourne to lead the response effort he had decided two things. He and iron ore boss Jimmy Wilson would personally eyeball the damage in Minas Gerais as soon as humanly possible and he would front local media that afternoon.
These decisions were tested by some on BHP's Crisis Management Executive. It was wondered whether it was appropriate for BHP to own this distant crisis so early in tragic evolution. To his personal credit, Mackenzie was having none of it.
Whatever the social, commercial, diary or legal constraints might be, he and Wilson would be in Brazil by the start of the week and he would face the media to express solidary with those affected by the dam failure.
With that decided, the protocols of disaster mitigation recovered a routine that is baked by practice into the management of all big mining companies. To understand this point, you have to appreciate that miners are pretty much always run by engineers of one kind or another. And engineers, by inclination and training, build order from chaos by creating a clear, repeatable process.
It has appeared at times that both Vale and, to a slightly lesser degree, BHP have taken refuge in the fact that this calamity occurred under someone else's watch.
Sure, they each own 50 per cent of this thing and have shared equally in the bounty it has generated over the decades, but Samarco is an entity that operates independently of each of its owners. In other words, there is no direct look-through, for example, from BHP management to Samarco.
DESIGN FLAW WARNING
This determination to announce pre-existing distance and to ensure it is maintained sits central to BHP's inability to reflect the suggestion that Samarco management was warned of design flaws that could see its dam's collapse into calamity.
As it turns out, photographs we have subsequently seen of the broken dams would suggest that the risk quite sensibly recommended for further review by a Brazilian review team did not sit central to the breach at Fundao.
BHP finally acknowledged this reality in releasing a statement on Friday afternoon.
"BHP Billiton notes that the Instituto Pristino report, that has been the subject or recent media commentary, refers to a potential future risk relating to the interaction between Vale's waste rock pile and the Fundao tailings dam.
"We understand from Vale that the inspections undertaken by them and the photographic evidence indicate that this waste rock pile is intact and has not failed into the Fundao dam."
The twisted caution evident in this statement is indicative of the level of legal prudence in all that BHP says about Samarco and its disaster.
The reasons why BHP has so actively avoided any level of transparency on its ability to influence Samarco management would seem to be pretty obvious. The legal liability issues here are dauntingly complicated. If there is human or institutional fault here, the implications for Samarco management and its directors might be dire indeed. Two of those directors are men of the highest calibre appointed by BHP in Wilson and the popular iron ore strategy guy Tony Ottaviano.
But there are other issues too. For example, both BHP and Vale are listed in the US while Samarco's debt trades across North American markets. It would seem likely then that all three might be exposed to legal liability in one of the most dangerously costly jurisdictions on earth.
But the instant and permanent realities of our digital age mean that images of a deadly river of water and mud surging through the villages downstream from Samarco's broken mining complex were almost instantly soaking the internet and they will forever scar BHP's reputation as a sustainable miner.
The reality is that BHP's only course from here is to excessively compensate those people who have lost all and recover and restore what the urbanity that has been swept away in Minas Gerais. Mackenzie's determination to act on the very human instinct to see what has happened should be received as a statement of intent.
The intent has been enunciated in others ways too. BHP and Vale have set up a $US100 million fund to pay for the emergency response. Vale has been criticised for the lethargy of its response. But it has provided logistical muscle, equipment and a steady supply of the necessities of life like fresh water and food. And, outside of Mackenzie and Wilson, BHP has sent a team of technical and crisis management experts to help arm Samarco's response.
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