As in 2007, BHP's succession process has been handled carefully
TWO-AND-A-HALF months after he took over as chief executive of BHP Billiton in October 2007 Marius Kloppers executed plans that had been brewing inside BHP for about a year and announced that BHP was planning a $US135 billion merger with its closest rival in the global mining game, Rio Tinto.
Kloppers' time at the top of BHP was punctuated by the global financial crisis, but until the end of 2011 also marked by phenomenal demand for commodities as China industrialised. During that boom miners paid the going rate to boost their production and takeovers were definitely on the agenda. Prices were so good that production costs were a lower-order issue - but when the boom started to cool towards the end of 2011, everything changed. Kloppers began winding BHP's expansion plans back, and squeezing operational costs.
BHP moved faster than some of its big competitors, but Mackenzie is making it clear that he thinks more can be done: his focus will be "laser-like", he says, and it will be lifting the productivity of the top-tier mining and petroleum assets that BHP already owns. One risk is that BHP soft-pedals on expansion for too long, but softer commodity demand, easier commodity prices and low interest rates create a window for him to act.
As it was in 2007, the succession process has been handled carefully by BHP: an internal choice and a staged handover are signs of that, and Mackenzie was a contender from the moment he was head-hunted five years ago by Kloppers, who had been told soon after he took over by former BHP CEO Paul Anderson that he needed to begin building a talent pool that could be drawn on eventually to replace him.
It's possible, nevertheless, that Mackenzie's appointment will see others depart, as it did in 2007 when the then chief financial officer, Chris Lynch, missed out on the top job and decided to go. The internal short list this time included the head of BHP's ferrous and coal businesses, Marcus Randolph, and its boss of aluminium, nickel and corporate development, Alberto Calderon.
Kloppers beat the four-year average for CEOs in this country by a year and a half. He delivered a best-in-class shareholder return, led a historic shift from contract pricing to market pricing for iron ore and coal, cut BHP's injury rate by 36 per cent and presided over a 9 per cut in greenhouse gas emissions despite a massive increase in BHP's minerals production.
His time at the top was distinguished not so much by what was acquired or losses that were taken on some projects, but by traps that he avoided.
BHP booked writedowns of $US2.8 billion last year on its $US20 billion expansion into shale gas in the United States, and as Kloppers sacrificed his short-term bonus, speculation swirled that his time was up. Coming as it does on the heels of Rio Tinto's removal of Tom Albanese as chief executive last month, news that he will be replaced by Mackenzie could feed theories that he is part of a wave of executions over misconceived ventures.
He certainly has some entries on the debit side of the ledger. Detractors cite the bid for Rio that was abandoned in November 2008, the withdrawal of a $US40 billion bid for Canada's Potash Corporation of Saskatchewan in 2010 at a cost of $US300 million in the face of Canadian government opposition, last year's shale writedown, losses of $US3.6 billion in 2009 on the closure of the ill-conceived Ravensthorpe nickel mine in Western Australia, and even last year's decisions to slow down iron ore port expansion in the Pilbara and suspend the open-cut expansion of the Olympic Dam copper uranium mine in South Australia.
BHP has significantly outperformed its peers while he has been in charge, however.
Its share price has risen and fallen as the financial crisis and commodity boom have exerted their influence, and at its current level of $38.61 is not much above prices of about $35 a share in the middle of 2007.
Over the same period BHP has returned $US36.3 billion of cash in dividends and buybacks, however, including $US24 billion in dividends, and on a total shareholder return basis that wraps the share price change and payments to shareholders, BHP's return has been 49 per cent. The next best big mining group was Brazil's Vale group, which returned 17 per cent. Rio Tinto returned 4 per cent, Xstrata returned minus 41 per cent, and Anglo American returned minus 47 per cent.
In the same period BHP also delivered underlying earnings before interest and tax (EBIT) of $US121.4 billion, ahead of Vale ($US91.4 billion) Rio Tinto ($US88.7 billion), Anglo American ($US44.3 billion) and Xstrata ($US34.2 billion).
Kloppers' time as CEO was shaped by the timing of his appointment in October 2007, when the global crisis was building despite a sharemarket recovery from a mid-year slump.
He went public with the Rio merger proposal in December of that year, and launched a hostile takeover offer a few months later after Rio refused to engage. In November of 2008, however, as the financial crisis was inducing a global economic heart attack, he told his board that BHP should abandon the bid.
Backing out would cost BHP $US450 million, but Rio was loaded with debt after its $US38 billion takeover of the Alcan aluminium group in 2007. Taking over Rio without knowing how the global crisis would turn out would amount to betting the company, Kloppers told the board - and the board agreed.
Kloppers claimed on Wednesday that the decision to drop the bid laid the foundations for the group's rise to the top of the global mining league table and there's no doubt BHP avoided a mess: writedowns announced along with the departure of Tom Albanese last month mean that Rio has written off almost three-quarters of the amount it paid for Alcan.
Mackenzie has been with BHP long enough to know what it's got and how it works, and the 38 per cent lower $US9.8 billion underlying December half EBIT that BHP also announced on Wednesday shows there is work to do.
He will "sweat" BHP's existing assets, look to keep BHP's growth options open as he does, and try to ensure that the big US shale gas and oil play delivers.
More than two decades of experience with BP will help him there.