COLUMN-Investors may be buying BHP, Rio cost-cutting story – by Clyde Russell (Reuters India – December 11, 2013)

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Dec 11 (Reuters) – It’s taken some time but there are signs that the cost-cutting efforts by major commodity producers such as BHP Billiton and Rio Tinto are starting to convince investors.

“My principle aim is to create value and free cash flow,” Andrew Mackenzie, the chief executive of BHP , said at an investor briefing on Dec. 10.

To this end he confirmed that capital expenditure at the world’s largest mining company has been too high in recent years, with the $23.3 billion spent last year poised to shrink by 25 percent in the 2013 fiscal year, and again in subsequent years. The presentation slides anticipate capital expenditure for major projects being a quarter of the 2013 level by 2016.

Rio Tinto , the world’s second-biggest miner, is also slashing spending, announcing plans to halve capital expenditure and slash debt.

Rio Tinto said on Dec. 3 that it will cut spending to $11 billion in 2014 from just under $14 billion this year, and sees capital spending at $8 billion in 2015, which would be less than half what it was in 2012.

The cuts are more than that of its bigger iron ore rival Vale of Brazil, which unveiled on Dec. 2 a 9 percent capital spending reduction to $14.8 billion for 2014.

While it’s too simplistic to say the savings in capital expenditure will flow directly to net income, the aim of the chief executives of the mining giants is definitely to improve profits, and thereby share prices.

Assuming BHP does manage to cut capital expenditure to somewhere closer to $6 billion by 2016, it could potentially double the $17.87 billion in net income before taxes recorded for the 2013 fiscal year.

Of course, this assumes that all other parameters, such as operating expenses and commodity prices, remain constant, which they likely won’t.

But it does serve to illustrate just how big an impact the capital expenditure savings could have on profits, especially if BHP can do what Mackenzie promises, namely continue to deliver output growth in addition to the cost savings.

Mackenzie said he isn’t focused on boosting volumes, but nonetheless expects output growth of 16 percent in 2013-14.

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