BHP to extend investment and cost cuts

BHP Billiton is to extend cuts in capital spending and operating costs as the world's largest mining company by market capitalisation follows a big spin-off of non-core assets with more efforts to weather a commodities slump.

Andrew Mackenzie, chief executive, said BHP had all but ended its investments in iron ore and coal output, commodities where supply growth has outpaced demand and led to a big slump in prices. BHP would instead invest in copper and oil, Mr Mackenzie said.

"The iron ore and metallurgical coal markets are currently well supplied and we do not expect to invest significantly more in these businesses at this time. Instead our capital will be focused on the commodities we believe will have attractive supply fundamentals," he said.

Mr Mackenzie said BHP was "well prepared for the possibility of an extended period of lower prices in several commodities". But he clashed with Ivan Glasenberg, chief executive of rival Glencore, who told a mining investment conference on Tuesday that miners were "damaging the credibility of the industry" by oversupplying markets regardless of demand.

The divergence of views over the correct supply strategy in the current mining downturn has been most apparent in iron ore, with slowing Chinese demand for the steelmaking commodity. BHP and its largest rivals, including Rio Tinto and Vale, have ignored calls from rivals to restrict output and instead concentrated on cutting the cost of supply to try to protect margins and market share.

"Earnings outperformance through the cycle depends on being the most efficient supplier, not supply restraint," Mr Mackenzie told the Bank of America Merrill Lynch conference in Barcelona. "Any attempt to curtail low-cost supply in open markets only encourages the continuation - or entry - of more costly production."

Mr Mackenzie said BHP believed it could mine iron ore in Australia next year at a cost of $16 a tonne, down 21 per cent from this year. Last year the cost was about $26 a tonne. The miner was also making double-digit cost cuts at its largest copper mine and in shale well drilling costs in Texas, Mr Mackenzie said.

BHP would also cut capital spending further to $9bn in 2016, Mr Mackenzie said, compared with a previous estimate of $10.8bn.

"This is sufficient to continue funding our most attractive growth projects," he said. In 2013 BHP spent more than $20bn in capex and this year it will spend close to $13bn.

BHP investors this week voted to accept a spin-off of many of the group's smaller businesses into South32, a separate company whose shares will start trading next week. Mr Mackenzie has depicted the spin-off as a way for BHP to become more productive by concentrating on its largest businesses.

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