Opinionista • Tim Cohen • 22 August 2021
South Africa, and the world for that matter, is such a tumultuous place, it’s easy to lose track of important changes taking place outside the Covid-19, Afghanistan, global miasma axis. One of those changes has been at the world’s largest mining company, BHP.
Tim Cohen is editor of Business Maverick. He is a business and political journalist and commentator of more years than he likes to admit. His freelance work has included contributions to the Wall Street Journal and the Financial Times, but he spent most of his life working for Business Day. After a mid-life crisis that didn’t include the traditional fast car, Cohen now lives in the middle of nowhere in the Karoo.
First published in the Daily Maverick 168 weekly newspaper.
BHP still has a secondary listing on the JSE, but it’s something of a historical relic, because the company doesn’t have a single major asset in the country. Yet its history is tied up with SA in an odd way.
This week BHP announced that it was selling its oil and coal assets to another Australian company, Woodside Petroleum, under its new chief executive, Mike Henry. Simultaneously, it has decided to pull its London listing and return to having a single primary listing in Sydney, along with a clump of secondary listings, including in London. This is quite a decision: BHP is the second-largest company on the London Stock Exchange and the largest on the Australian exchange.
What does this all mean? First, it means BHP returns to its original status as “the Big Australian”; a Melbourne-based, Australia-focused business – it returns to being the company it was prior to the intervention of Brian Gilbertson and his merry men.
In 2001, Gilbertson, then the CEO of London listed Billiton, proposed a merger with BHP in which the split between the companies would effectively be a 60/40 divide in BHP’s favour. But Gilbertson would be the CEO of the new joint company, and an odd Australian/South Africa mining giant was created. In retrospect, it was a fabulous arrangement for the Billiton side of the deal; it’s probable that an 85/15 divide would have been more appropriate. But BHP, which has recently emerged from a string of poor investments got something too; it was revitalised by new management and a set of new investments, notably a set of South American copper mines.
Everything was going swimmingly until suddenly Gilbertson was ousted in a boardroom coup, the details of which were never fully revealed. Later, the Australian Financial Review speculated it was because Gilbertson was investigating the sale of BHP’s oil assets to British oil giant BP. The result would have been a reduction in the size of BHP, and the externalisation of some politically sensitive Australian oil assets.
There was also some speculation that it would have resulted in the head office moving from Melbourne to London.
In fact, the true story is quite different. Gilbertson was discussing a joint venture with Australia’s second-largest mining company, Rio Tinto, to combine the company’s iron ore assets. The joint venture would have had all kinds of synergies and cost savings. Crucially, it would have given the two companies more leverage in negotiating contracts with the Chinese.
Gilbertson was booted for moving ahead with these discussions without involving the BHP board, an act of pig-headedness by the BHP board if ever there was one. When his protégé, Marius Kloppers, became CEO in 2007, he (Kloppers) pushed ahead with the idea, sensibly involving the board this time, proposing a full-blown takeover of Rio by BHP. Eventually, the idea, and Kloppers, were dropped.
In some ways, it didn’t really matter because the Chinese demand for iron ore was so intense, the price zoomed up of its own accord. Iron ore became BHP’s ace in the hole, and all the other minerals it mined around the world became comparative byproducts. The all-in cost of production of iron ore from the Pilbara region in Australia is probably around $20/tonne. BHP and Rio between them run a 2,500km rail network with five terminals, and the region produces about 800 million tonnes of iron ore a year. Compare that with the current price of iron ore of $160/tonne and it becomes clear just how the companies are rolling in boodle.
SA produces 70 million tonnes of iron ore a year, a number that has been static for a decade. In that time, iron ore production from the Pilbara has doubled. The effect has been to increase the dominance of the metal on BHP’s balance sheet, and its enormous profitability has made the rest of its global portfolio pale by comparison.
Now, with the global climate emergency looming, BHP risks having a whole range of stranded assets on its books, which had led to the dual decision to jettison its London listing and its oil assets. The vast majority of its SA assets were hived off into South32 in 2014. At the time, BHP promised it wasn’t leaving SA. It did.
And so we are left wondering what might have been. For BHP, its reliance on iron ore is a risk, particularly because the price has been sliding as Chinese growth prospects diminish. And I would argue, so is its parochialism.
And for SA? It’s more complicated and now, with all the water under the bridge, and it’s a bit of an adjunct question. But, to me, the demise of the idea of a great global mining company rooted in Australia and SA is really sad, and the fault lies principally with us. DM168