Rio Tinto’s result on Thursday highlighted the increasing focus of miners on FCF generation and capital returns for shareholders. BHP has followed a similar path under Andrew McKenzie and we expect a substantial increase in FCF going forward. Note, they report next Tuesday.
12 months ago McKenzie mentioned his focus was on costs, improving margins and increasing returns irrespective of commodity prices, saying the prize for productivity improvements “is significant…. at BHP Billiton, half our operating costs are labour and contractors. For us, every 1% improvement in productivity translates to a $170m saving. We do not yet know where the limits of productivity lie but we can be sure that we are not close to them”
It is quite obvious that both BHP and RIO have left a lot of fat in their operations over the last decade. RIO 1H result delivered a $2bn additional drop in CAPEX and $3.2bn cost reduction with further $1bn expected by FY15. Given BHP have had a similar FCF focus over the last 12mths we expect to see a material improvement in FCF and ability to significantly increase capital returns to shareholders.
As such we remain a buyer.