(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, June 19 There has been no
shortage of advice doled out to incoming BHP Billiton chairman
Ken MacKenzie on how to boost the world's largest mining
company, but ultimately his role comes down to a fairly
Does BHP want to be a cutting edge mining company
always on the prowl for the next big opportunity, or does it
want to be a cautious, dividend-focused cash generator,
something akin to being the telecoms utility of the mining
If there is anything that can be learned from the
performance of BHP, and indeed most of its global mining rivals,
in the past decade, it's that escaping the ups and downs of the
commodity cycle is extremely difficult for a miner.
BHP's Australia-listed shares ended at A$22.99 ($17.51) on
June 16, down 8.3 percent since the end of last year, but still
above the closing low of A$14.20 on Jan. 21, 2016.
On that view BHP's share price performance doesn't actually
look that bad, with the stock gaining rapidly from the January
low last year on the back of sharp gains in the price of its
main profit earner, iron ore, as well as other commodities,
But over the longer term, BHP's performance becomes much
The stock dropped to just above A$19 in November of 2008, in
the wake of the global financial crisis.
Buying BHP at that point would have been a good investment
as the shares took off as China poured massive amounts of money
into resource-heavy infrastructure projects in order to
stimulate growth after the global downturn.
BHP rode the wave to a peak of A$44.89 on April 11, 2011,
but after that it was all downhill until the low of January
2016, as iron ore and coal notched up five consecutive losing
BHP'S ROLE IN ITS OWN DOWNTURN
It would be a simple argument to say that BHP merely tracked
the decline in commodity prices, but that ignores the company's
own complicity in causing prices to slide.
In common with its peers, BHP decided to use the cash
generated from the sharp rise in commodity prices on the back of
Chinese stimulus to dramatically boost production, particularly
in iron ore.
As soon as one major producer decided that the China story
was a never-ending gift to miners, basically they all had to
follow or stand to lose market share.
The management and board of BHP at the time made the mistake
of believing the optimistic view of forecast Chinese steel
output, while ignoring the historic fact that virtually every
commodity boom is ended by too much supply being built.
The company was perhaps too loose with its cash. With the
benefit of hindsight it overpaid for its U.S. shale assets and
it frittered money away on failed attempts to take over a
Canadian potash producer.
It took a few years to realise the errors, and BHP
dramatically shifted course when appointing Andrew Mackenzie as
chief executive in May 2013, with his razor-like focus on
driving down costs and pulling back from the deal-making beloved
by his predecessor Marius Kloppers.
BHP today still appears to be running very much along the
lines Andrew Mackenzie set, namely a strong focus on
cost-control and boosting efficiencies in order to generate
strong cash flow.
The problem is some investors want more, with activist
shareholder group Elliott Management pushing for BHP to exit its
U.S. petroleum business and focus more on giving returns to
The appointment of former packaging executive Ken MacKenzie
as chairman can be chalked up as a victory for Elliot, given the
hedge fund's demand for board renewal and new thinking.
But how much should MacKenzie listen to shareholders such as
Elliott, given they are most likely focused on maximising
returns on a fairly short-term basis, as opposed to longer-term
investors such as pension funds that make up the bulk of BHP's
It's here where MacKenzie has to look at what kind of
company BHP wants to be.
If he chooses the Andrew Mackenzie model of trying to be the
best at digging up and shipping various minerals, then BHP
should focus on returning as much money as possible to
shareholders as dividends, while making it explicit that those
returns will be linked to the vagaries of commodity prices.
On the other hand, BHP can try to run as leanly as possible
while still aggressively seeking expansion opportunities using
the cash generated from its existing operations.
That sounds like the best path, but the problem is it seems
that virtually every major mining company struggles to
simultaneously be both a cutting-edge, growth-focused innovator
and a cost-driven dividend play.
Disclosure: At the time of publication, Clyde Russell owned
shares in BHP as an investor in a fund.
(Editing by Richard Pullin)