Disaster or Prudence?

BHP Billiton (BHP:NYSE) is a leading miner in nearly every metal and mineral in the world, with global operations stretching from Mozambique to Peru… Just look at these statistics:

• 3rd largest copper producer
• 6th largest aluminum producer
• 3rd largest nickel producer
• 4th largest gold producer
• 2nd largest uranium producer
• 2nd largest zinc producer
• 4th largest coal producer

That’s a pretty stacked resume…

So what happens when a miner of this magnitude starts cutting its workforce? Does it spell disaster, or prudence? Here’s the skinny…

Latest Casualties in the Global Economic Crisis

Three mines in Chile, the Cerro Colorado, Escondida and Spence mines, are the latest casualties in the global economic crisis. Demand for base metals like copper and molybdenum has been dropping as industrial growth around the world has stalled.

That means prices for these metals have also plummeted.

It makes for some very hard decisions. BHP Billiton has decided to cut its workforce at these three mines by 2,000, of which 84% were outsourced workers and 16% were directly hired.

But what does 2,000 people out of work do for BHP? It allows these three mines to stay in the green… for the time being.

These cuts, which the company says will be the last reductions it makes for the next year to year and a half, will give the mines positive cash flow.

But that’s not where the pain ends…

Current Mining Activities

Also on the chopping block was the construction of a moly mine, a 21% production cut of manganese at its Samancor subsidiary, and the indefinite suspension of nickel production at its Ravensthorpe Nickel Operation in Australia.

Makes things sound pretty bad, doesn’t it? Let’s not sugarcoat things…

The most recent production report for BHP – the second half of 2008 – shows a drop of 8% in aluminium production versus last year. Copper production was down 6%, lead down 7%, silver down 5%, uranium down 7%, nickel down 6%, and diamonds down a whopping 27%.

Not good at all, but there are some signs of life in this mining major. The same production report showed record production of iron ore and copper cathode, and record production at Western Australia Iron Ore, Saraji, Poitrel and Hunter Valley Coal (all Australia), Samarco (Brazil) and Cerrejon Coal (Colombia).

The company also increased its zinc production by 22%, its crude oil and natural gas liquids by 26%, its iron ore by 10%, and its manganese ore production by 6%. Coal production was also up slightly.

2009 Outlook for Mining Sector

In all, BHP calls the first half of its FY 2009 robust, and this in the midst of strong global economic declines.

These declines have ultimately forced BHP to make those tough decisions of cutting production and workforces, but these changes seem prudent and measured. In all, I expect these cuts to keep the company rather healthy over the next six months, and keep it well positioned for the second half of the year when most analysts predict an upswing in demand for base metals.

This also creates an interesting situation with Rio Tinto (RTP:NYSE).

Just last Tuesday, Rio Tinto – a major competitor of BHP – announced it was considering issuing more shares in an effort to raise cash. The company already has some of its assets on the bidding table, and sold an aluminum smelting venture to its Chinese partner for $125 million.

That’s only a drop in the bucket for what Rio Tinto needs to raise, though. It’s got $8.9 billion due in October 2009, and $10 billion due in October 2010 from its buyout of Alcan back in 2007.

But it can’t seem to raise cash fast enough, and is also considering slashing its workforce by 14,000 and its capital expenditures by $1 billion.

That makes BHP’s 2,000 cut seem paltry, doesn’t it?

Now, you may also remember that BHP put in a $66 billion bid for Rio Tinto last year, but walked away because of the high debt the company has. Now, BHP might have an opportunity to pick up a huge chunk of shares if Rio Tinto does go through with an issuance.

I’m sure BHP would rather pick up some iron ore assets, or maybe some coal assets, but Rio Tinto is keeping those “gold mines” for itself.

So BHP finds itself in an opportunistic position… Heading into the second half of 2009, BHP could have an edge over its competitor, Rio Tinto, and that might allow for some leverage in a takeover situation.

It will indeed be an eventful year for mining companies…

Originally published February 03, 2009.

Other Related Topics: Emerging Markets , Mining Industry , Sara Nunnally , South America Investments

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