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.”
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
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.”
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”.
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
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.”
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?
“Despite our efforts, three of our colleagues lost their lives at work during
Lynch is keen to emphasise the importance of safety and good social practice
“Why should anybody come to work and go home in a worse condition than when