BHP Billiton Ltd Is an Efficiency Machine

A secular downturn in growth has hurt the profitability of miners over the last couple years. One company, however, reacted early to this new reality and has remained consistently profitable by efficiently managing costs.

Apr 23, 2014 at 9:24AM

Since 2012, most investors should have known there was "trouble in the mines." Global growth was slowing, and was doing so on a secular scale. Leading the way was a marked deceleration of growth in China. The result was declining prices in all sorts of minerals and metals needed for increased economic activity: Iron ore, copper, manganese, aluminum, and metallurgical coal.

Each of these is levered to global growth. In other words, just a deceleration in global growth can cause demand for these minerals and metals to decline absolutely. Subsequently, this led to declining profits for miners in 2012 and 2013. 

For big mining names, this was business as usual. In fact, big miners are used to this cycle and understand that in times of robust growth, demand for the aforementioned minerals and metals is seemingly insatiable and on the flip side, when those good times are over, demand drops sharply. 

Unfortunately in 2012, many miners had huge expansion projects in the works and faced some tough choices. Australian-Dutch mining giant BHP Billiton (NYSE:BHP), perhaps the largest of mining names, reacted to this new reality in a sober, open-handed way.

Instead of getting caught "swimming naked" like the company's two peers Rio Tinto (NYSE:RIO) and Vale (NYSE:VALE), BHP began preparations early on. Readily acknowledging that in leaner times miners do well only by reducing costs (both fixed and variable) and by getting the same output from less capital employed, BHP Billiton made it a priority to execute those plans. Over the past couple of years, BHP has set itself apart from its competitors.

Bhp Efficiencies

Source: BHP Billiton Investor Relations

This chart shows BHP's results in reducing operating costs, increasing productivity, and increasing selectivity in development and exploration in a newer, leaner business climate. As you can see, BHP has saved almost $5 billion since fiscal 2012. The company has done so without decreasing volumes.

Bhp Ebit Variance

Source: BHP Billiton investor relations

Here is another good "big picture" view of things. Notice the $1 billion in savings from controllable cash costs and another $500 million in productivity-based volume increases. 

Bhp Roce

Source: BHP Billiton Investor Relations

In the first half of fiscal 2014, BHP extended its lead in return on capital. Rio Tinto's last reported return on invested capital was a mediocre 7.9%. Vale recently reported a negative return on invested capital. BHP's return on invested capital over its most recent period was a solid 10.41%. The chart above excludes the effect of existing projects in the works, but it also shows the effect of increased efficiency from productivity gains.

BHP's sober analysis and willingness to accept a few "home truths" has allowed the company to transition into a tougher reality, while the company's competition has floundered.

Bottoming out

Bhp Margins Have Stabilized

Source: BHP Billiton Investor Relations

Since the latter part of 2013, it looks like margins in most minerals have bottomed out and stabilized. In fact, a few are even recovering. As a company that reduced capex, managed costs, and stayed profitable in tough times, BHP will be first to the punch when the situation turns around. Right now, the overall metals picture doesn't look so bad. 

Closing thoughts
If you want exposure to mining, BHP is easily the best-managed, most shareholder-friendly company of the group. That's not to say the company is issue-free: I believe BHP paid way too much for its dry gas assets in the U.S. I also believe the gung-ho start-up of Olympic Dam (at the tail end of the last global boom) was overambitious -- the project has since been put on hold.

Finally, the company's potash exploits in Canada have not gone well thus far. However, BHP is easily the most profitable of all miners, and it should reward shareholders with solid dividends and buybacks in the years to come.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

Casey Hoerth has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

Compare Brokers