Chris Lynch, ex-CFO now group president Carbon Steel, BHP Billiton

Everything about BHP Billiton is big. It’s the biggest mining company in the world and has a majority holding in the world’s biggest open-pit copper mine. It has a market capitalisation of around $125bn (£68bn) and employs 37,000 people in 25 countries.

This is a good job, because one of its main clients is China, the growth of which goes some way to explain why in 2005 BHP Billiton delivered revenues of $31bn (up 32% on the previous year) and net attributable profit of $6.0bn (up almost 77%). And with China enjoying an industrial production growth rate of 28%, this stellar performance shows little sign of going away. In fact, the company’s year-end was 30 June and analysts expect profits to be around $10bn.

Financial Director spoke to Chris Lynch, group president of Carbon Steel Materials at BHP Billiton, just a couple of weeks prior to the company’s closed period. Until March this year, Lynch was chief financial officer of BHP – a position he had held since 2001. For most of his time as CFO, however, Lynch did not occupy a seat on the board. He was only handed this in January, two months before being promoted to his current role. Lynch’s successor as CFO, Alex Vanselow, won’t be handed a key to the boardroom, either.

It’s a rather strange concept – especially for a FTSE-100-listed company. Instead, Lynch was a member of the ‘office of the chief executive’ while he was CFO (effectively a senior management panel). “All of the office of the chief executive attend all of the board meetings,” says Lynch. “So there’s never been an issue about my voice [not being] heard or anything like that.”

It does, however, beg the question of why bother having both a board and an office of the chief executive. “I think the number of executive directors is always an issue – how many you’re going to have and so on,” he says. “And we’ve currently got four. That’s probably about as many as this company would be comfortable with. Others might have a different mix.”

Robust board

At first, the idea of a board of such a huge company having just four executive directors may seem a little Spartan, to say the least. However, when you add the 10 non-executive directors on top of this it starts to look far more robust. And when you then consider that all of the members of the office of the chief executive attend board meetings, the average attendance must top 20.

Despite the logic that may lie behind such a structure, there is no doubt that it adds a layer of complexity to something that should be very simple. But then there is nothing particularly simple about the structure of the company, so perhaps this should be of little surprise.

BHP Billiton is a dual-listed, Anglo-Australian mining group, which was created from the merger of Australia’s BHP Limited (now known as BHP Billiton Limited, and listed in Australia) and the UK’s Billiton plc (now known as BHP Billiton plc, and listed in London). The BHP Billiton that lies 16th in the FTSE-100 index by market cap is less than 40% of the overall group. If the entire group were listed in London, it would climb above the likes of Royal Bank of Scotland, AstraZeneca and Lloyds TSB to challenge Vodafone for fourth position.

Lynch says there is “no need or desire” to rationalise the listing of the group. “We go through a full board meeting depending on which jurisdiction we’re in,” he says. “We’re meeting here (London) and it’s a plc meeting and then we go through and complete the formalities for the Limited meeting immediately after.”

Regulatory pressures

There is no doubt that its structure adds to the regulatory pressures the group operates under (BHP Billiton is bound by US GAAP, UK GAAP, Australian GAAP and the ‘idiosyncrasies’ of IFRS). “IFRS is a good breakthrough in terms of giving some sort of simplification,” he says, although Lynch points to joint venture accounting under IFRS as being particularly problematic to his sector. “If you’re reporting under European IFRS you can do partial consolidation for joint ventures, if you’re in Australia you can’t,” he says. “The industry is characterised by joint ventures, so that’s just a bit of a wrinkle.”

There is also no getting away from Sarbanes- Oxley, although, in this respect, Lynch says that it’s an issue of how the group can “extract value” from compliance. “You’ve got an opportunity with that data you gather, because you have to gather it,” he says.

The fact is that BHP Billiton is truly a global company – regardless of its structure, it has mines all over the world. And the commodities boom of recent years, driven by the explosive growth of China, lies behind much of BHP Billiton’s success. Copper prices remain 80% up on this time last year, for example. But the threat of the boom coming to an end has led to a few nervous twitches among fund managers of late. A recent article published in The Times claimed that leading FTSE-100 mining directors had “expressed concern about the level of speculative investment that has fuelled the copper price’s bull run”. In fact, analysts expect this year to be the first for some time when copper supply outstrips global demand.

There is no doubt that BHP Billiton is exposed to this risk – its share price has dropped recently as some investors pulled out of mining stock because of the price of commodities falling off. But despite this, Lynch doesn’t see the need to hedge against the commodities boom.

“We don’t hedge as such,” he says. “With the commodities that are more what I’d call screen trader commodities (like oil, aluminium, nickel or copper) they obviously vary far more, there’s much more volatility in the pricing based on the terminal market aspect of them.” Lynch explains the company’s portfolio diversification as “a pretty good natural hedge”.

Stable prices

In fact, Lynch’s division, Carbon Steel Materials (with 2005 revenues of $7.4bn and profit before tax of $2.4bn it is BHP Billiton’s largest), offers the group with one of those natural hedges. “There’s a bit of a difference between various commodities. If you go to my businesses they’re what we call the bulks – they have an annual price negotiation process. So it’s very much tied to particular customers, long-term contractual customers and priced annually. So you get a bit more stability of price. And that’s probably one of the things that we look at Carbon Steel Group – to provide that sort of stability of earnings.”

The only thing that the group will hedge is when it has capital expenditures approved in domestic currencies, he says. “We run the company in US dollars and if there’s capital expenditure that’s got a domestic currency exposure, once that’s committed we’ll lock it into US dollars just to take that out of the equation for the people running the projects, so they’re not trying to speculate on those project costs with currency fluctuations.”

In June, the company settled a high-profile iron ore price battle with a number of Chinese steel mills. While BHP agreed a 19% price increase on 2005 with its European, Japanese and South Korean customers in May, it took a further month for the Chinese to come on board. As Lynch says, getting the price agreed up front for a year provides the group with some much needed stability and offers some of what he describes as a “natural hedge”.

But it also highlights the increasing exposure to and reliance on the Chinese economy. It is something that BHP Billiton itself has recognised as a potential issue in its 2005 annual report where “increased reliance upon the Chinese market in the event of a slowdown in consumption” is listed as a potential business risk. It is, however, just one of many in the global mining industry (see box, below).

“China’s been very significant in terms of the growth of most of commodities, certainly iron ore is absolutely Chinese growth, as steel making in China has been very big,” he explains. “One of the big things that’s happening in China is urbanisation – somewhere around 4.5% of the population is moving from the rural areas to the cities per annum, with a big infrastructure build ahead of that. That’s the equivalent of somewhere between Australia and Spain every year has to be built, in terms of population.”

Continued growth

It has helped BHP more than quadruple in size since the merger in 2001 when its total market capitalisation was just $28bn. This, in turn, has helped the company return around $8.3bn to shareholders over the past four years in the form of buy-backs, spin-offs and dividends. And shareholders will be eagerly awaiting the company’s 2006 results announcement, which take place on 23 August. But they would be wise not to expect a repeat of February’s interim results when a $2bn windfall payment to shareholders was announced. (It took the form of an immediate $1.5bn offmarket buy-back in Australia, followed by subsequent on-market purchases in the UK.)

“There’s probably three things that we do with cash flow. First, to invest in further value added growth and we’re doing that this year – we’ll spend about $6bn in that regard. The second is to make sure the balance sheets are in good shape. Then the third is returns to shareholders. We announced at the half-year result a $2bn capital management programme. We’ve completed that now. We said we’d do that over 18 months, but we’ve done it in three,” he says.

The speculation is that BHP Billiton chief executive Charles ‘Chip’ Goodyear is set to return to the US, relinquishing his role. It has led to speculation that Lynch, along with Marius Kloppers, previously chief commercial officer of the group before being promoted to group president of non-ferrous metals in January, and perhaps one or two others, are all involved in a highly visible, extended interview for the top job.

Did we mention that Goodyear used to be CFO?