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Published 27 February 2013 11:11, Updated 27 February 2013 11:21
New BHP boss Andrew Mackenzie was instrumental in kick-starting the Olympic Dam project – and killing it. Photo: Louie Douvis
Few people were as pleased to hear of Andrew Mackenzie’s appointment to BHP Billiton’s top job last week as South Australian Premier Jay Weatherill.
Mackenzie, who will take over from Marius Kloppers as chief executive in May, has intimate knowledge of the state’s stalled Olympic Dam expansion. As BHP’s head of non-ferrous assets it fell under him, and Weatherill saw new signs of hope for the $20 billion project the company put on ice in August.
“I’m very pleased that Andrew Mackenzie is now the new chief executive officer of BHP,” the Premier said on Wednesday, after the incoming CEO was named. “Mr Mackenzie has a very strong commitment to the Olympic Dam project. I wish Mr Kloppers well but we are delighted that BHP has new leadership.”
Weatherill’s optimism is understandable, but it’s unlikely that the 56-year-old Mackenzie will wave a magic wand and approve the $80 billion capital spend that Kloppers shelved last year following shareholder protests. If anything, the incoming Scot is more likely to live out his parsimonious national stereotype and make his mark by cutting costs and saving money. Mackenzie’s priority is not Olympic Dam.
“His key objective for this year is to supervise and keep on track the $10 billion or $15 billion worth of asset sales and make a dent in the debt,” says Investec analyst Tim Gerrard.
Slumping iron ore and coal revenues were major reasons BHP reported a near-halving of underlying net profit last week to $US5.7 billion in the six months to December. The company reported short- and long-term debt of $US35.5 billion, or $US30.5 billion net of cash. Gearing of 31 per cent is too high for the current environment, and it is the job of Mackenzie, who came to BHP in 2008 after four years at rival Rio Tinto and 22 before that at BP, to get it down as quickly as possible.
“Two years ago, this company and the market thought they’d be earning $25 billion a year,” Gerrard says. “Gearing was not really an issue and the market instead was focused on buybacks or dividend hikes. Everyone thought they had a lot of room to handle the debt. But clearly that is no longer the case now that [net profit after tax] expectations of $25 billion of a year or two ago have turned into $12 billion.”
It’s not that Mackenzie will take over the helm of a company in crisis. BHP’s crunch time came last year, when Kloppers, who forewent his annual bonus in a sign that all was not well, scaled back lofty ambitions, which included expanding the Outer Harbour iron ore shipping terminal in the Pilbara in Western Australia and expansion at Olympic Dam, and made a $US2.8 billion write-down on the value of the US Fayetteville shale gas operation it had acquired a year earlier. The new chief executive faces the task of continuing to steer the ship in a direction that has already been set, as he readily recognises.
“We have a very good strategy,” Mackenzie said after the announcement on Wednesday. “If you want to look for something on me, it’s an even more laser-like focus on execution of that strategy.”
Part of that strategy will be to continue a sale of assets which includes the Yeelirrie uranium deposit in WA, the company’s stake in Richards Bay Minerals in South Africa and the Canadian Ekati diamond mine and marketing operations. It’s a simplification of BHP’s business, forced by the necessities of a tight economic environment.
“It’s more a matter of where they believe capital allocation should go,” says Fat Prophets resource analyst David Lennox. “They will put capital to use where they get the best margin. Let’s not forget iron ore is where they get the best margin. Petroleum is where they get the second-best margin. You won’t get the margin in base metals at the moment. That’s why they’ve slowed development of Olympic Dam.”
Even though the operating margin on base metals – which the company defines as copper, silver, lead, zinc, molybdenum, uranium and gold – ticked up slightly to 32.1 per cent in the half-year to December from 31.3 per cent a year earlier, it remains well below that of BHP’s star performers. For the period, iron ore was 52.5 per cent (down from 65 per cent), while petroleum was 47.5 per cent (down from 60.7 per cent). The margin on thermal (energy) coal dropped to 9.5 per cent from 25.1 per cent, while metallurgical coal posted an operating loss.
Mackenzie will also continue cutting costs. Last week BHP said it had cut $1.9 billion of cash costs on an annualised basis, leading analysts to expect cuts worth about $950 million in the second half. The coal business may face more cuts on top of the closures it made at its Mitsubishi joint-venture mines Norwich Park in April and Gregory in October. Revenue from metallurgical coal slumped 36 per cent to $2.8 billion in the half-year period, while thermal coal revenue fell 18 per cent to $2.6 billion.
“The road they are about to embark on in terms of cost-cutting is the most difficult of experiences for a company to pursue,” Lennox says. “I guess if [Mackenzie’s] really trying to remove a significant amount of cash costs out of the system, there will be more of that happening.”
Much was made last week of Mackenzie’s affable nature He stoked that image himself, playing right into the heart of the perennial Sydney-vs-Melbourne debate.Still, Mackenzie’s affable nature is going fade from view as he wields the knife in the second half of the year. In contrast to the more freewheeling Pilbara operations in WA, the east coast coal businesses are highly unionised and any further closures will put Mackenzie’s diplomacy skills to the test.
“I am from Glasgow, and my wife is from Edinburgh, and Glasgow is sort of to Sydney as Edinburgh is to Melbourne,” he said. “So although we will be celebrating our great new lifestyle in Melbourne, I will have a soft spot for Sydney.”
I am from Glasgow, and my wife is from Edinburgh, and Glasgow is sort of to Sydney as Edinburgh is to Melbourne.
His predecessor Kloppers has never been known to make a similar joke about the same rivalry between Cape Town, where he was born, and Johannesburg, where he grew up. Nor would anyone expect the chief executive who banned his staff from eating hot soup in the office and policed a tidy desk regime to do so.
“I don’t know his ability to communicate on that level,” Lennox says. “He hasn’t had any trouble on that level. When he was at Rio Tinto, I can’t really think of any concerns of a staffing nature that cropped up.”
With BHP’s new boss likely to spend his first six months focusing mainly on costs and developing the more profitable businesses, Weatherill will have to temper his excitement. Analysts say Olympic Dam may have a future, particularly if new processes such as more efficient processing of rough material make it cheaper, but that it will only be in years to come, if at all.
“It’s temporarily in the too hard basket,” Gerrard says.
But the person who knows most about it is at least now in the driving seat, he says.
“He was instrumental in kick-starting the project – and killing it.”