In addition to the measures announced last month, BHP Billiton Limited (ASX: BHP) yesterday revealed plans to further cost savings and productivity initiatives in a series of announcements to the market.
Capital expenditure will be reduced by $600 million in FY15 and an additional $1.2 billion in FY16, with no changes in production output thanks to more efficient spending.
BHP now expects to benefit from a total of $4 billion in productivity gains (up from $3.5bn previously), including a minimum of $2.6 billion achieved through reductions in cash costs.
The company's coal assets have been set the target of reducing costs by 10-15% which they will achieve through closure of high-cost capacity, while the copper division could be producing an extra 50,000 tonnes per annum thanks to low-cost de-bottlenecking projects.
Although the grades at BHP's copper assets are in decline, management predicts that productivity initiatives combined with de-bottlenecking projects will support output over the medium term.
Copper mines all over the world are facing higher strip ratios and declining grades, and BHP believes that supply challenges will make the copper market a bright spot among commodities over the next few years.
Rosy forecast notwithstanding, BHP has achieved a 30% reduction in costs at its Escondida mine over the past three years, while coking coal and thermal coal have reduced costs by 37% and 21% over the past two years respectively.
As readers can see, BHP has vigorously set about solidifying its cost advantages over competitors, and this is in addition to massive expansions at the company's Pilbara iron ore operations announced back in October.
The biggest question on the horizon is: 'What is BHP going to do with all that extra cash?' But that's a tough one to answer.
Commentators are doing a rain dance over the prospect of increased returns to shareholders, but I'm not so sure substantial 'special dividends' or massive dividend increases are on the cards.
Given the scope of the savings to be achieved I think investors can expect meaningful rises in their dividends over the next few years – however BHP already pays a healthy 4% fully franked, and I don't really believe that's going to turn into 6% at today's prices.
Instead I prefer to think that BHP can find more effective ways to use the money, such as on the major copper expansion at Olympic Dam and other projects within the portfolio.
However since BHP has spent so much time and money simplifying and consolidating the company in recent years, I also think it would be paradoxical for there to be a sudden increase in acquisitions of new projects – and so significant uncertainty remains about where the cash will be spent.
Uncertainty and weaker commodity markets notwithstanding, BHP looks set for a strong few years and it could even become an unlikely dividend hero for investors who buy at today's prices.
