LONDON/MELBOURNE, Oct 6 (Reuters) – BHP Billiton aims to cut its iron ore production costs by more than 25 percent and squeeze more tonnes from its mines as it aims to overtake rival Rio Tinto as the world’s cheapest producer, the world’s largest miner said on Monday.
BHP, the No. 3 iron ore producer behind Brazil’s Vale and Rio Tinto, outlined the cost-cutting and expansion plan even as iron ore prices have slumped 42 percent this year, as it sees demand picking up over the medium term.
“We will continue to squeeze the lemon because at the end of the day it’s just so value accretive,” Jimmy Wilson, the head of BHP’s iron ore division, told reporters in a video conference ahead of an analyst tour of its West Australian mines.
Miners’ focus has shifted to cost cutting as iron ore prices have dropped from about $190 a tonne in 2011 to less than $80 now, sinking to five-year lows as supply growth from the mega producers has exceeded demand growth by more than two to one.
BHP said it aims to cut production costs, excluding freight and royalties, to less than $20 a tonne in the medium term, from $27.50 for financial year 2014. That compares with Rio Tinto’s cash cost of $20.40 a tonne in the first half of 2014.
“The name of the game in the past was volume above and before everything else. Now cost is much more important and we are finding a lot more opportunities,” Wilson said.
While scale is helping BHP cut production costs, it has at the same time managed to slash its expansion costs, thanks to debottlenecking its harbour at Port Hedland and getting more out of its equipment rather than building new infrastructure.
It now expects to boost its output capacity by 65 million tonnes to 290 million tonnes a year by June 2017 for 40 percent less than previously flagged, at a cost of about $1.95 billion.
UBS analysts said BHP’s cost guidance and expansion cost estimate were well below market expectations and would increase UBS’s valuation on BHP by about $7 billion, or $1.30 a share.
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