Kloppers leaves an even Bigger Australian

Despite a drop in interim profit, the reign of Marius Kloppers will be remembered as a successful one, where BHP Billiton expanded and diversified amid conditions that upended its peers.

The closing of the Marius Kloppers era at BHP Billiton was handled far more smoothly and gracefully than the abrupt and traumatic termination of his counterparts at Rio Tinto and Anglo American. That’s not surprising because Kloppers has been clearly the most successful chief executive in the sector within what has been a very volatile and challenging period.

Where the Rio and Anglo successions were abrupt and forced on BHP’s rivals, Kloppers' was long in the planning and by mutual consent. Much of that is attributable to Kloppers himself who followed, he said yesterday, advice given to him by former BHP chief executive Paul Anderson on the day his got the job nearly six years ago that he should immediately start thinking about his successor.

Kloppers gave chairman Jac Nasser and his board a number of strong internal candidates for the job. The appointment of Marcus Randolph or Alberto Calderon wouldn’t have surprised or unsettled the market, or the company.

The board opted for Andrew Mackenzie, a former very senior BP and Rio Tinto executive who Kloppers pursued relentlessly until he finally convinced him to join BHP – after a year of forced "gardening leave". Mackenzie, with deep and broad experience in the oil industry, in petrochemicals and in minerals, is uniquely qualified to lead BHP, with its unique blend of mining and oil and gas operations.

While there may be some question mark over the extent to which Kloppers determined the precise timing of his departure – he referred to the "mutuality" of the decision – from the moment he became chief executive Kloppers made it clear within BHP that he saw his preferred tenure as about five years. As it happened, he will have lasted nearly six.

The decisions last year, forced by the steep downturns in commodity prices, not to proceed with the mega projects that were on BHP’s drawing boards – the Olympic Dam expansion and the Outer Harbour project at Port Hedland – may well have crystallised both Kloppers and his board’s thinking about timing.

The massive expansion in BHP’s portfolio that Kloppers has presided over has, in the near term at least, slowed and Mackenzie, who spoke today of his focus on productivity and capital discipline, fits the more introspective times BHP faces.

There are mixed views about Kloppers in the market, albeit more for what he didn’t do (the bid for Rio, the attempted iron ore joint venture with Rio and the failed bid for Potash Corp) as for what he did.

Given the extraordinary volatility created by the global financial crisis which erupted soon after he became chief executive and the performance of BHP, not just relative to its peers but in absolute terms, during that period and beyond, it is difficult not to see his tenure as extremely successful.

BHP has produced total shareholder returns of nearly 50 per cent since 2007-08 while Rio, Vale and Anglo have destroyed shareholder value.

As Nasser said yesterday, Kloppers reinvented the pricing model for iron ore and other commodities and brought new discipline and a global template to BHP’s own policies and processes.

Where Rio's Tom Albanese was at the helm while nearly $US35 billion of value was shredded by the disastrous Alcan acquisition and the misjudged Riversdale Mining transaction, and Anglo's Cynthia Carroll botched the massive Minas-Rio iron ore project in Brazil, BHP is now a major player in US shale oil and gas after $US20 billion of acquisitions and its operational record is pristine by comparison.

The other key feature of Kloppers' period as chief executive is that where virtually the entire industry stopped investing during the financial crisis BHP kept spending heavily to expand its portfolio and to put real distance between itself and its peers.

He’s left Mackenzie with a company in very strong shape and with considerable options, most obviously (but not exclusively) to expand the US shale gas presence and to build the potash business now under development in Canada. There are a host of prospective big projects within BHP’s famous bubble charts of projects under development or capable of being developed.

He’s also given him the foundations of his own succession plan, with BHP’s chief financial officer, Graham Kerr, and chief marketing officer, Mike Henry, elevated to the group management committee late in 2011 in what Nasser and Kloppers said should have been an indication that the end of Kloppers’ tenure was in sight.

The announcement of Kloppers’ retirement and Mackenzie’s elevation overshadowed the release of BHP’s interim earnings yesterday which were, as expected, down sharply. Profit excluding exceptional items was down 43 per cent to $US5.7 billion with the fall in prices, particularly iron ore prices, wiping $US5.7 billion from earnings before interest and tax relative to the December half of 2011.

While there were ‘’exceptional’’ losses of $US2.8 billion, mainly related to writedowns in the value of BHP’s nickel and alumina operations as a result of price declines and the strength of the Australian dollar, those were expected and are, in the context of both BHP and the disfigurement of its peers’ results by writedowns, quite modest.

While BHP is, with the rest of the sector, now very focused on costs – it says controllable cash costs have been reduced by $US1.9 billion on an annualised basis – the legacy Kloppers will leave BHP with when he departs after an orderly handover in May can be seen, not just in the 30 per cent-plus margins the group is generating and the underlying return on capital of 18 per cent, nor in the depth of management, but in the $US90 billion or so that will have been invested in the business by the time he departs.