The Big Australian financial disaster: BHP

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BHP is a perfect example of a MNC trading an investing. It has activities in more than 50 countries with about 65000 employees worldwide. BHP started its international trading activities in the middle of the past century by exporting steel-making materials. BHP imports and exports in Australian and in its overseas subsidiaries. A clear example of its trading activities is its Canadian mine which produces diamonds, BHP Billitons Ekati mine (Werniuk, 00). After taking the stones out of the mine, BHP sells them accompanied by a BHP Billiton certificate that guarantees that the stone came from the Ekati mine to different cutters worldwide like the famous Tiffany brand.

About investing, BHP owns mines and production plants in the 5 continents. As examples are the Canadian diamonds mine mentioned before and more recently the Typhoon project, which launched BHP Petroleum Pty. Ltd.s first commercial deepwater oil and gas development in the Gulf of Mexico in a joint venture with operator Chevron Corp. with a total capital expenditure for the project of AU$1 million, the Hartley Platinum Mine situated in Zimbabwe, the Newcastle Steel works or the oil prospects in Vietnam (Mahoney, Trigg, Griffin & Pustay, nd ed) and more recently in Trinidad (Oil and Gas Journal, 00) in association with partners TotalFinaElf S. A. and Talisman Energy Inc.

Even when bad investment decisions appoint to be the most probable cause, in the opinion of the author the two main factors were

1) The natural resources price fall. Even when the company had a geographically diversified portfolio, most of BHP’s activities belonged to the commodities industry like oil, gas, steel, diamonds, coal or copper. This strategy made the company vulnerable. In the author’s own experience, an economy based on minerals is always risky; for instance, the Mexican economy is almost totally based on the sale of oil, so when prices fall the whole country suffers the reduction of government’s national budget because most of its income is product of oil sales. This is not a healthy for the country because lots of projects for the good (yo pondria benefit) of the people are stoped (se escribe stopped), new investments in education and sports sponsorships are reduced, etc. When profits are sustained by this kind of activities further modifications had to be taken to raise the prices and avoid a collapse; eg major production cutbacks announced by Asarco, Phelps Dodge, BHP Copper, and Highland Valley Copper in October 1 to support the upward movement of copper cathode prices worldwide and avoid a worst situation (Anonymous, 1).




) The global environment. When a company has operations in so many branches and countries, the globalization is a big issue talking about opportunities and threats. If a company has activities in different countries, the menace of an abrupt currency rate change in one of them is a latent benefit or danger. As an example, The Wall Street Journal published on February 5th, 00 that BHP not only posted a 4% decline in 00 fiscal first-half net profit because of the lower thermal-coal prices but by adverse currency movements.

A commodities related company like BHP has to look for new sources of minerals everyday. The resource availability is a key issue for BHP making access to natural resources critical for its operations. Oil reserves are allocated in South Arabia, Venezuela, Mexico, Iraq, Kuwait, Vietnam, Texas, Alaska and so many other places. Diamonds can be found in Africa or Canada. Mexico is the perfect place to exploit silver. Resources availability makes BHP invest in all continents looking for them. By the hand of this factor, logistics show up as critical too. The development of facilities in the close area to the resource allocation allows the company to exploit and transport the resources more effectively. The Canadian mine is again a good example; all the stones are sent to a subsidiary to get sorted and graded and then returned to the Yellowknife plant to be sold. Logistics play a major role in this activity.

BHP has also to look for places were it has access to the technology required to operate. In the absence of them, the technology infrastructure has to be developed to let the company run as good as possible. Access to technology allows corporations to reduce costs and times of response whilst increases efficiency and effectiveness. Meanwhile, BHP can always take advantage or the risk of the fourth factor, the production costs. Investments can be made in certain countries that offer tax exemptions or with cheap labour costs but always currency rate can be a tool or a self-destructive weapon making the company save or loose a lot of money.

No, decline the acquisition of Telstra could have been a huge mistake but the risk would be bigger than the opportunity and wasting the opportunity of taking over Telstra was not the reason of BHP’s poor performance. Any corporation has to know its boundaries. Several companies had gotten into trouble because they went into a value trap business (Wheelen & Hunger, 00, pp 158). The potential for a possible gain can misfit whit the know-how of the company and make it lose the business opportunity and maybe more.

As an example is the case of Singapore Telecom which after joining the European market retrenched and disposed if all its significant investments in less than 5 years with a huge economical lost just because lack of expertise (Wheelen & Hunger, 00, pp 5-8). Another example was provided by Yeo Hiap Seng Ltd. which by acquiring the Chinese-styled canned food producer Chun King was sent into the red in 11 with losses for more than $5 million only in years of operation (Montagu-Pollock, 1). If that was not enough, in 187 Yeo Hiap Seng also bought a high technology prawn farm in Loyang, Singapore without having any experience in aquaculture leading the new business to a US$10 million lost (Ng, 18).

This posture is also supported by BHP’s sale of West Coast steel businesses to a Mexican company as part of BHPs portfolio management activities to position the company as a natural resources company with a regional steel focus in Australia and Asia (Metal Center News, 000).

• Heracleous, L. (1). Privatisation Global trends and implications of the Singapore experience. The International Journal of Public Sector Management, 1, 4-444.

• Metal Center News, ‘BHP sells West Coast assets to IMSA’, July 00.

• Montagu-Pollock, M. 1, ‘Hard school of takeovers’, Asian Business, 8, , 46.

• Ng, L. 18, ‘Yeo takes a bite of American market’, Asian Business, 5, 1, 60.

• Purchasing Boston, ‘Cooper Smelting cutbacks are coming’, Oct 7, 1,vol 17, iss 5 pp 54-56.

• Wall Street Journal, ‘Energy brief - BHP Billiton Ltd. Net Profit Declines by 4%, hurt by exchange-rate moves’, February 5th, 00.

• Werniuk, M. 00, So you want to buy a Canadian diamond? Canadian Mining Journal, 10, 5.

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