BHP Billiton Limited (ASX: BHP) is doing all it can to shed costs and improve productivity, but further falls may be inevitable as the commodities downturn accelerates into a new gear.
The miner is undertaking heavy cost-cutting programs in an attempt to improve its performance and arrest the slide of its share price. Redundancies and restructures are on the cards with the Fairfax press reporting the miner is looking to shed another 100 jobs at its Melbourne headquarters as part of CEO Andrew Mackenzie's aim to simplify the business as a whole.
This simplification strategy was exemplified by the recent demerger of its non-core assets into South32 Ltd (ASX: S32). This was to improve the focus on its core markets, while the miner is also reducing its capital expenditures considerably to improve free-cash flows.
Not enough…
Although they have certainly improved its global standing and its ability to weather the commodities storm, the initiatives undertaken by management mightn't be enough to stop the miner from plunging further.
For the better part of a decade, China acted as the engine room for the global economy in what may have been the greatest infrastructure and economic boom witnessed by mankind. The resources required to build the empire were enormous and Australia, which is considered one of the world's most resource-rich countries, was one of the main beneficiaries.
Although China's economy is still growing at an impressive 7 per cent per annum, its building expansion is petering out with the hope that China's middle class can initiate the next growth phase – turning China into more of a consumer economy.
Indeed, China's infrastructural expansion was never going to last forever and a slowdown in growth was inevitable. The only thing is, while demand for resources is now in decline, the world's largest producers are still fixated on maximising their production output in order to lower their average costs. Any eighth-grade economics student would be able to tell you that lower demand and higher supply is a recipe for falling prices.
BHP Billiton's high level of diversification has played in its favour in recent years and helped it avoid reliance on any one market for its long-term success. While rivals such as Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) are predominantly focused on iron ore; BHP has four "pillars" being iron ore, copper, coal and petroleum.
The problem is each of those four commodities have come under enormous strain recently and are all hovering at or around lows not seen since the Global Financial Crisis. To make matters even worse, all four are expected to continue falling for the foreseeable future, adding further strain to the miner's margins and overall profitability. A diversification strategy helps to reduce concentration risk but when all core markets are in decline, it has little effect.
The miner's shares have fallen a whopping 30.8% over the last 12 months and are now hovering near a six-year low at just $25.37.
More pain to come
Indeed, the headwinds facing the mining industry should not be underestimated by investors – some of whom believe BHP can walk away unscathed thanks to its size and diversification. Right now however, it seems like one of the biggest factors supporting the miner is its progressive dividend policy whereby it aims to increase its dividends per share each half-year period (measured in US dollars).
At its current price, it yields roughly 6.6% fully franked which is enough to attract many investors looking to bolster their income streams. Grossed up, that's a yield of 9.5%.
However, the dividend policy also doesn't allow BHP's management much breathing room, forcing it to pay out billions of dollars in cash each year at a time where it should arguably be shoring up its balance sheet.
Without the dividend policy, the shares would likely come under further selling pressure making now a dangerous time to invest in BHP's shares. After all, investors should never rely solely on a dividend when making their investment decisions.
