Mackenzie’s balancing act

ANDREW Mackenzie’s ever-increasing targets might appear to be a relatively simple strategy.

ANDREW Mackenzie’s ever-increasing targets for operational and capital productivity improvements within BHP Billiton might appear to be a relatively simple strategy. However, that understates the complexity of the balancing act he is trying to manage.

The drive for simplification, operational productivity and capital efficiency is by itself straightforward in concept, if not quite as straightforward in execution, and in tune with what the big end of the resources sector is pursuing.

Since Mackenzie became chief executive, that relentless focus on cutting costs and reducing investment has produced very substantial gains and changes to BHP’s financial profile.

In the two years to June 30, BHP has delivered $US6.6 billion ($7.6bn) of what it terms “productivity” gains, which are a combination of cost reductions and volume increases. Over the same period it cut capital investment from $US21.7bn to $US15.2bn.

At yesterday’s investor briefing, Mackenzie outlined his new goals. He is now targeting another $US4bn of productivity improvements, including a reduction in cash costs of at least $US2.6bn, by the end of the 2017 financial year (following last year’s $US1.9bn reduction) and plans to cut its capital investment from $US14.8bn last financial year to $US14.2bn this year and to $US13bn in 2015-16.

The planned demerger will help, given that the spinning off of those non-core assets will leave BHP with a smaller portfolio of high-quality assets and enable a far simpler operational structure.

Complicating assessment of the strategy are BHP’s commitment to maintaining its progressive dividend policy and its ambition of returning capital to shareholders while preserving its investment-grade credit rating.

Those goals are, of course, being pursued against the backdrop of steep falls in the prices of BHP’s key commodities. The balancing item within the strategy is BHP’s increased productivity.