BHP's radical transformation is good news for shareholders

BHP is set to transform itself from a growth company to a shareholder distribution company, unlocking more of its cash flow by embarking on a sweeping productivity drive.

While most of the analysis of BHP has been on its NewCo spin-off, the changes coming for BHP in the future are even more fundamental.

Chief executive Andrew Mackenzie and his board will create a BHP that is different to anything we have seen from the Big Australian for most of the last century. BHP is transforming itself from a growth company to more of a shareholder distribution company.

In his KGB interview (to be published shortly), Mackenzie gave us a peep into a totally new set of BHP strategies. (Note: we have a new video display system so that you can go straight to the questions and answers you are most interested in if you're short on time.)

First, leaving aside the outlook for minerals, Mackenzie is bullish: BHP is going to achieve its profit growth by becoming a lot more efficient. Mackenzie confessed that BHP was stung by the research of PricewaterhouseCoopers, which showed that Australian miners, led by BHP and Rio Tinto, were the most inefficient in the world outside of Africa (Some hard truths for our biggest miners, August 15).

Mackenzie offers reasons for this bad management but he is clearly intent on making fundamental changes to rectify the situation. BHP has already implemented moves that will reduce costs by $6.9 billion and is promising another $3bn over three years. But in his KGB interview Mackenzie revealed that a big slab of the $6.9bn in productivity improvements came from the mines that are set to become part of NewCo. He is using the NewCo operational techniques to change the existing mines.

Mackenzie would not promise any more than a further $3bn in productivity gains. But if he takes PricewaterhouseCoopers’ advice and looks at the equipment efficiencies (not pay rates) that BHP’s North American rivals achieve, there is far more productivity to be achieved than what Mackenzie is promising.

I believe Mackenzie knows it is there and I am sure he will not be 'snowed' by his mine managers saying it can’t be done. BHP has never looked at mining in this way before, so the mine managers who stay with BHP will face a massive culture change.

The second fundamental change is the way BHP is now looking at its two major non-oil expansion projects, Olympic Dam and Canadian Potash. Mackenzie revealed that potash is being developed slowly and BHP is looking to do it in the most efficient way and is waiting for the potash market to improve so that it will be a very profitable project. And he is doing the same thing at Olympic Dam in South Australia, where there are technology issues and BHP is erecting a leaching pilot plant. But BHP will not be rushing into Olympic Dam until the market for uranium and copper are much stronger and he is confident the technology issues are solved.

This is not the BHP of old. It means that far more of the BHP cash flow will be available to shareholders.

I pressed Mackenzie to look after Australian small shareholders by paying dividends rather than capital returns. I did not win there but I the registered the fact that most small shareholders want dividends. Mackenzie pointed out that they are gaining a big rise in income because BHP will hold its dividend rate despite NewCo being floated and they will also receive the NewCo dividend if they hold the shares. And, by maintaining dividend on a smaller earnings base, it means that BHP is effectively distributing over 50 per cent of last year’s profit rate. The capital return comes via the float of NewCo.  

Mackenzie hints that BHP will retain a 50 per cent plus distribution rate but some may come via capital returns to look after institutional shareholders. And of course, given that Mackenzie has curbed capital spending, BHP can do that.

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