Christopher Niesche: BHP investors seeing smaller cheques

Cost savings are a key part of the Australian mining giant's strategy. Photo / AP
Cost savings are a key part of the Australian mining giant's strategy. Photo / AP

BHP's enormous Caterpillar 793F dump trucks need an astonishing 984 litres of oil to lubricate their rear axles.

In the colder months in West Australia's Pilbara mining region, this oil flows at only four litres a minute which means it takes four hours to replace the oil. Recently, BHP started heating its gear oil to 30C, allowing the oil to be pumped at 50 litres a minute and the trucks to be refilled in just 20 minutes. These multimillion-dollar trucks are now spending more time carting iron ore and less time in the workshop.

It's just one example of how BHP is scouring its businesses for cost savings and working its assets harder, and how deeply it will drill down into its day-to-day operations to achieve that.

Cost savings are a key part of the Australian mining giant's strategy as it works its way through the commodities slump and positions itself for the stronger iron, coal, oil and copper prices that it is hoping for in the future.

The iron ore division also operates 31 excavators of 600 tonnes and larger. These enormous diggers require servicing every 15,000 hours. Previously this involved removing each individual component - engine, splitter box, valves and pumps - which would take about two weeks. Instead, the company now uses a frame that holds all of these components, which can be taken out and replaced with a new frame. This takes only six or seven days and is another way that BHP is getting more work out of its billions of dollars' worth of machinery.

These are among the ways the world's largest diversified miner is taking costs out across the business and the strategy has unlocked US$10 billion ($1.37b) in productivity gains since 2012. BHP says it is on track to deliver a further US$1.8b worth of savings this financial year.

If ever there was a time the company needed to tighten its belt, it is now. BHP has slumped to its worst profit result, last week reporting a US$6.3b ($8.66b) full-year loss thanks to writedowns on the carrying value of its United States shale oil division and costs incurred by the collapse of the miner's Samarco Dam in Brazil, which cost 19 lives and billions of dollars.

Taking those extraordinary costs out, the company posted an underlying attributable profit of US$1.21b, a long way below last year's underlying profit of US$6.4b. That's mostly due to the fall in the prices of commodities produced by BHP, which slashed US$10.7b out of BHP's operating earnings (ebitda).

But what will catch investors' attention more than this is the dividend cut.

Shareholders will receive total dividends of US30c per share, down from US$1.24 last year. The lower payout shouldn't have come as a surprise to investors. BHP had previously announced it was changing its dividend policy from a "progressive dividend" that rose every year to one where it pays out at least half of its underlying attributable profit to shareholders.

Had it paid out the minimum, shareholders would have received just US14c a share, but this is probably cold comfort to those who have seen their dividends fall by three-quarters.

While investors were warned, there is nothing like the reality of a lower dividend cheque to focus the mind. BHP is a favourite stock among retail shareholders, who own 40 per cent of the company. Many retirees hold it as a key part of their investment portfolio and are relying on the dividends to fund their lifestyles.

Many will ask themselves "Where to from here?".

They will have to make a judgment call. The cost savings have allowed BHP to see through the commodities downturn in strong shape - it has retained its A credit rating - and positioned the company to take advantage of any upswing in commodity prices.

In the short-term, BHP expects commodity prices to remain volatile, but in the longer term, thanks to continuing economic growth from China, India and South East Asia, "the demand for our commodities will continue inexorably to increase", BHP chief executive Andrew MacKenzie said.

This is what counts for BHP.

For every time the iron ore price changes by US$1 per tonne, BHP's operating earnings change by US$217 million.

One commentator calculated that if the price held at its current level of around US$61 a tonne instead of the average price of US$44 a tonne in the past financial year, it would add nearly US$4b to its earnings.

BHP's loyal investors will have to balance the lower dividends the company is paying with the rewards that will flow when - and when is the big question - commodity prices rise.

- NZ Herald

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