BHP Billiton – The Big Australian
Fueling the growth of developing economies
BHP Billiton – the Big Australian
Company Overview
BHP Billiton (BHPB), nicknamed “the Big Australian”, is Australia’s largest company and the world’s largest diversified natural resources company. Since being formed in 2001 by the merger of BHP (an Australian mining company) and Billiton (a South African mining company), the company has experienced a tremendous period of growth on the back of sky-rocketing commodity prices driven by China’s rapid growth and urbanization. Though it has come down from historical highs, to put into perspective the scale of the company and its degree of leverage to commodity prices, in 2011 it was world’s 3rd largest company behind only Petrochina and Apple.
Business Model
BHPB’s mission is to “create long-term shareholder value through the discovery, acquisition, development and marketing of natural resources”. In order to achieve this BHPB business model is focused on owning and operating large, long-life, low-cost, expandable, upstream assets which are diversified by commodity, geography and market. For the purposes of this report, such assets will be referred to as ‘Tier 1’.
Operating Model
BHPB is organised into as four operational pillars (Businesses) – Iron Ore, Petroleum, Copper and Coal – supported by overarching and centralised corporate (Group Functions) and marketing divisions (Marketing). Each of the Businesses has its own executive management team and the CEO of each Business sits on the Group Management Committee, BHPB’s most senior management committee.
The operating model is designed to enable each of the Business to focus on the core operating objectives of ensuring the safety of its people, maximising production and minimising costs. It also ensures that each Business has autonomy and is empowered to make decisions quickly and effectively. Furthermore, by separating the sales, marketing and corporate support activities from the Businesses, each Business is able to take advantage of standardized company-wide practices and is less influenced by broader macroeconomic concerns. It also promotes alignment of the Businesses and enables broader portfolio and strategic decision making to take place at the overall company level.
The core principles of BHPB’s operating model are simplicity and standardisation. This includes mandatory performance requirements, common organisational design, common systems and processes, and common planning and reporting. Despite operating and selling products in different many geographies and markets, given the relative similarity of extractive operations and the scale of Tier 1 assets, there are significant benefits in standardizing operating procedures, supplier contracts and equipment across the organisation.
In the natural resources and commodities business, unlike many other industries, companies have very limited ability to control the price they receive for their products. Prices are determined by global supply and demand and set by the market. Mining companies must therefore focus on minimising costs to drive profitability. BHPB’s strategy of owning only Tier 1 businesses enables it to apply its world-class operating principles to achieve some of the lowest costs in the industry.
Mining is also a very long term business and unlike manufacturing and other industrial businesses, organisational design is not enough to being a low cost operator. A significant driver of cost structure is the inherent attributes of the resource body, i.e. whether or not it is Tier 1. The development timeframe for such assets from discovery to first production ranges from 10 to 20 years. BHPB’s operating model and centralised decision making enables it to make long term, value creating decisions with respect to such assets (whether through exploration or new acquisitions) while also maximising value from operating its existing assets.
As example of BHPB’s commitment to only operating Tier 1 assets was highlighted on 25 May 2015 when it implemented the demerger of its smaller, non-core assets into a new public entity called South32. Since the merger of BHP and Billiton in 2001, assets across the company’s portfolio had grown at vastly different rates in response to global market conditions and subsequent exploration. As a result, BHPB had assets at both ends of the scale spectrum. The smaller, non-core assets could not support their share of corporate and marketing costs, and therefore it was decided that they would be more fairly valued by the market under a separate entity.
Conclusion
As China’s growth slows and its economy matures, commodities are expected to fall and mean revert towards historical levels. It will be interesting to see how BHPB and its major competitors (Rio Tinto, Vale and Anglo American) respond and further develop there operating models to drive productivity and efficiencies in such an environment. One hypothesis is that, though mining has traditionally been a slow adopter of technology, technologies such as big data, drones, robotics and smart sensors will become increasingly important. In meantime however, due to its disciplined operating approach and strong performance in light of highly volatile commodity market conditions, BHP Billiton is a winner.
Sources
https://en.wikipedia.org/wiki/BHP_Billiton
http://www.bhpbilliton.com/investors/news/south32-demerger-implemented
https://au.news.yahoo.com/thewest/wa/a/24651745/rio-keeps-tech-options-open/
Interesting stuff, with lots of parallels to the oil supermajors. Two considerations from oil to apply to BHPB, the first being new production techniques for commodity production and the second leveraging size as a competitive advantage. The supermajors have struggled to capitalize on hydraulic fracturing to unleash significant natural gas value, whereas smaller competitors have made tons of money by cost effectively applying the new technology. I agree with your conclusion that technology adaption will become more important in the mining industry and would bet against BHPB and other large competitors being the beneficiaries of the results in existing resource plays with low barriers to entry. The supermajors do however do well to achieve competitive advantage from tackling projects of greater complexity than their smaller competition can handle. A prime example being capital intensive offshore deepwater production. In those situations, the supermajors apply new technology with great returns capturing resources others cannot. If commodity prices remain high, thereby driving production to more technically complex basins, I think BHPB will prosper.
I see a really strong competition in this industry on how to secure Tier 1 assets in the long run. Because performances of companies in this industry are very cyclical due to fluctuation of commodity prices, strategy of each firm matters significantly over time. At the same time, many of these companies are tied to its “mother country”, so the amount of Tier 1 assets from their mother countries seem to matter as well.
Under this condition, BHP’s strategy to envision long term success by designing an optimized model including decision making process, organizational structure, etc. is very insightful. However, my question here is how you would define “success” in this industry, assuming each firm has different situation and elasticity to commodity price. Especially, I am very interested how each CEO is evaluated over the history of this industry, when life of mines are sometimes longer than period of one’s career.
Very interesting. I am curious about (1) technology innovation in mining: which could significantly decrease exploration/production cost and (2) what the driver for next commodity super cycle could be.