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BHP, RIO – Less diversified, more intensified

Woodside Petroleum may have layered on the dividend lipstick for now, but BHP Billiton and Rio Tinto have stuck with the simple moisturiser treatment of progressive dividend policies supplemented by share buy backs when appropriate.

A simple strategy for investors who have a belly full of bank shares and are becoming nervous about over-valuation, a gentle program of taking some bank profits and reinvesting into BHP and RIO would be a sensible long term move.

Background

BHP Billiton and Rio Rinto now have new chief executives, which can often signal a change in strategy, but in both cases we see an intensification of the same strategy occurring.

If anything, BHP will become a little less diversified as it reviews its portfolio and focuses on its 4 “pillars”:

  • Western Australia iron ore (resource life 200+ years)
  • Queensland coal (100+)
  • Escondida copper (100+) in Latin America
  • Onshore US petroleum (100+)

At a conference in Barcelona this week new chief executive Andrew Mackenzie said: “Our enduring strategy has worked well for the company and its shareholders. In fact, strict adherence to this strategy is what has differentiated us and I intend to give it an even sharper focus.” (our emphasis).

BHP is on the cusp of adding the Saskatchewan Potash business as its 5th pillar, but Andrew Mackenzie did not seem to mention the giant Olympic Dam project in South Australia.

Asset sales have significantly increased in FY13 including the Yeerlirie uranium deposit, Richards Bay Minerals, the diamond business, Pinto Valley and the Browse gas stake. Proceeds over US$5 billion will boost the coffers.

The existing total project platform is getting close to completion and no new major projects have been approved meaning the pipeline is narrowing in terms of the number of projects underway.

Capital expenditure will peak in FY13 at US$22bn and will decline to US$15bn by FY15.

The combination of fewer but larger projects (tier 1, high return, long life, low cost) and a capital program that is concentrated on these assets will certainly result in higher free cash flow for BHP in the coming years.

Mackenzie specifically used this to point towards greater returns for shareholders.

For shareholders who can see the value in this equation, the rewards should be worthwhile. For gold diggers who simply want to milk a larger dividend from the company immediately, there was no joy in Mr Mackenzie’s first major presentation as the new boss.

RIO is doing the same thing by reviewing its capital expenditure program, contemplating further asset sales and removing cost from its business with a view to strengthening its balance sheet.

The swing away from the diversified mining tag towards a more concentrated or intensified portfolio is not a new idea, but under the stewardship of new leadership with Sam Walsh, the focus on tier one, world class assets will be even greater.

RIO is making placatory noises about stretching out the Western Australian plan to reach 360mtpa of iron ore. Given the size of the project, it would have a positive impact on RIO’s free cash flow.

Again, this is aimed at increasing shareholder returns but we get the feeling RIO is a reluctant participant.

But ironically, a slower pace of expansion might support the iron ore price if there is a moderation of seaborne iron ore capacity entering the market in the next few years.

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