BHP Billiton doubles down on its mining strategy

As commodities prices rise, the giant miner is ramping up production. Is that the right strategy, asks Alex Williams.

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BHP Billiton is digging deep

At a huge coal mine in Australia owned by BHP Billiton, mine managers have introduced pitstops, copied from Formula One, to refuel dump trucks fractionally faster. It is one of several new initiatives that BHP, the world's largest mining company, is taking to increase production and force down costs. This week, BHP reported record production levels in iron ore and coking coal, its two mainstay commodities. Copper and oil output is also due to rise next year, bolstering BHP's position as the most diversified giant in mining.

Higher production, however, is not feeding through into profits. BHP also reported a massive $6.4bn loss, the biggest corporate loss in Australian history, according to The Australian. It was largely the result of nearly $8bn of write-downs, impairments and provisions, after a fatal dam burst at an iron-ore mine in Brazil last year. The total loss "is horrific", said analysts at investment bank Jefferies. BHP has slashed its dividend and its net debt has risen to $26bn.

Andrew Mackenzie, the company's Scottish chief executive, said he was "clearly very disappointed", but rising production means that BHP is "strong and getting stronger". Last year, he decided to hive-off smaller, non-core mines, forming a new company, South32, allowing him to focus fully on squeezing the most out of BHP's biggest operations.

Some analysts question BHP's strategy. The mining industry is famous for over-producing when prices are rising, flooding the market and lowering prices, destroying future returns. Metal prices have more than doubled this year, thanks to stimulus measures in China, but supply "needs to be reduced," says Lewis Grant, a fund manager at Hermes, before market fundamentals can improve. "This could easily take three years." Embarrassingly, South32 has also outperformed its parent company since the two groups parted ways.

Investment bankers say that other chief executives in the mining industry are "livid" about Mackenzie's strategy of upping production at all costs. While BHP is cranking-up its coal production, its smaller rival Glencore, the Swiss metal trading giant, has chosen to cut production to help boost the market. Glencore's chief executive says he would rather keep ore in the ground than sell it at the bottom of the market. "There's no reason to keep digging stuff out of the ground when you're not making decent margins."

Mining bosses routinely attack one another's strategies, but BHP is doing the right thing, says Marcus Leroux at The Times. The industry is essentially "a punt on China", but Mackenzie can rightly boast about the firms's low costs. Alongside Rio Tinto, it is the safest and most defensive bet in the sector.

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