Figures out, now talk turns to succession

With BHP Billiton's December quarterly production figures now in the public domain, attention has turned to its financial result next month and more importantly when the board might unveil its replacement for the mining giant's chief executive, Marius Kloppers.

The talk is no surprise given Rio Tinto's shock move late last week to replace its chief executive, Tom Albanese, and write down $US14 billion of asset valuations in its Alcan aluminium business and its coal business in Mozambique.

It also follows a shift in investor sentiment towards companies with disciplined capital management principles, something that Rio Tinto and BHP have been grilled over in recent years.

Moves are already afoot at Rio Tinto as outlined in an internal memo to staff this week by Rio's new boss, Sam Walsh. In the memo, Walsh made it clear he wanted to create a culture of "greater accountability and responsibility" and outlined a commitment to unlocking greater value for shareholders.

It is an interesting situation, with analysts including JPMorgan's Lyndon Fagan expecting BHP's financial results on February 20 to include more detail around its cost reduction program. "Assuming BHP go down the same path as Rio and target a 10 per cent reduction of the cost base longer term, this would be about $4 billion per year. In our view, the market is looking for more specific targets from BHP, and any announcement with the financial results would be positive for the share price," Fagan said in a note.

There is also an expectation that BHP will follow Rio's lead and take the knife to the value of some of its assets. These include aluminium and nickel and possibly its Petrohawk business. But in the scheme of BHP's diversified portfolio, the write-downs, speculated to be up to $US6 billion, are peanuts.

As Goldman Sachs reveals in a report, between 2007 and 2012 Rio has written off $US34.4 billion in assets, compared with BHP's $US7.6 billion.

But it could have been an entirely different kettle of fish if BHP Billiton under Kloppers had been successful in its takeover bid for Rio in November 2007, shortly after Rio inked its highly criticised $US38 billion acquisition of Alcan.

It went on to sweeten the offer in February 2008. Put simply, the BHP Billiton board should be thanking its lucky stars that the European regulators effectively pushed it into aborting its takeover bid.

If the deal had gone ahead, BHP would have been making the massive write-downs on Alcan and the directors of Rio, including Albanese, would have been written up as heroes for selling the business at a premium.

Hindsight is always easy but BHP's decision to bid for Rio after Rio had bought Alcan raises questions about what was going on in their heads. BHP would have known that Alcan was a dog. All big mining companies run the rulers over each other and BHP at one time or another would have looked at Alcan and known that it had one really good asset, the hydroelectricity business in Quebec, while the rest of the business included unfunded super liabilities, a huge unionised workforce in France and a packaging business that was non-core.

Nevertheless, it puts the whole issue of succession back on the table after it was raised in November with a leak in the Financial Times that a search firm was looking for a replacement.

It was followed up with tempered comments by chairman Jac Nasser at the annual meeting: "We have a process. We have a management team that has performed exceptionally well over the last decade, and particularly over the last five years. Marius has been an exceptional leader of that team. I think one of the things that people forget is that this is a company that didn't happen upon its success by accident."

Sources close to the company say the board's preference is to replace Kloppers with an internal candidate to portray a smooth transition. The speculation is that an announcement will be made in the next few months as the company is effectively operating in a hiatus until a new boss is installed.

Since Kloppers became chief executive on October 1, 2007, BHP's share price has gone backwards from $44.50 to a latest close of $37.06 a share. In the past year the share price has flatlined, in sharp contrast to the broader market which rose 13 per cent.

With a yield of about 3.1 per cent, it is no surprise that investors will want the company to follow the mantra being displayed by Sam Walsh. "We must treat the company's money like it is our own and act like owners of our businesses not managers," his memo said.