BHP leads a better mining sector
When BHP reports its full year results today, profits won't be the most important announcement made. It is widely expected that management will announce a split of the company. BHP will retain its 'four pillars' – iron ore, petroleum, coal and copper – with potash a potential future pillar. Gone will be aluminium and alumina, nickel, zinc, silver and perhaps some thermal coal mines.
It will be the biggest change in the world's biggest miner since the company was created and it signals an important change for the mining industry.
For too long, miners have been exempt from high expectations. It's been ok for miners to generate poor returns on capital, throw away wasteful levels of expenditure and chase wild acquisitions because mining has been seen as an investing frontier: a capital intensive, cyclical sector that would never generate decent returns.
Low expectations from investors and analysts have allowed miners to get away with some of the worst examples of value destruction. Rio Tinto, once famous for its conservatism, almost went under because of a silly acquisition. BHP was saved from itself twice: once when a takeover of Rio was blocked and again when it tried to buy PotashCorp. Xstrata, Anglo American, Barrick and Newcrest are just a few examples of miners that have collectively written off over $100bn of assets because of poor investment decisions.
Many investors have realised that the greatest resources boom in a century has come and gone and they have barely benefited. Finally, investors are demanding more from the mining industry. Expectations have risen.
Just about every major miner in the world has scaled back on capital expenditure, shed assets and cut costs. Some of this has been needed because of falling prices but it is also a response to investor demand. BHP's split, should it happen, is a turning point. The mining industry has matured.
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