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BHP opens new coal mine

Despite the significant headwinds facing the mining sector, BHP Billiton (ASX: BHP) yesterday opened up its new Daunia coking coal mine in Queensland – the seventh mine to run under the BHP and Mitsubishi partnership – with the partnership aiming to reduce costs and improve profitability across the section.

Faced with heavy volatility and falling commodity prices, BHP – like most other mining companies such as Rio Tinto (ASX: RIO) – have been under significant shareholder pressure to reduce costs and unnecessary capital spending to instead focus on improving shareholder returns and ensuring long-term sustainability.

In opening the new mine, BHP’s new coal chief Dean Dalla Valle promised that further cost cutting and increased productivity would be the group’s key priorities, even despite recent improvements in this area. Dalla Valle said “We’ve got more to go. We have to reset the cost base of this business to remain competitive for the long term.”

Already, it has cut costs by closing high-cost mines, reduced contractor use and heavily reduced worker numbers from roughly 12,000 to 10,000, according to The Australian.

Furthermore, Queensland’s Premier Campbell Newman promised that the coal sector would not face another royalty hike, stating that it had been implemented in the first place with a “heavy heart” and would not be repeated. This decision should further assist BHP to find operating cost savings.

Whilst Daunia, and the nearby Caval Ridge mine, are expected to be the last approved by BHP in Queensland (unless an enormous turnaround in the market is experienced), Dalla Valle believes that there is still enormous potential in the sector. Although the near-term has its challenges, he believes that there is still a long-term demand growth trend for coking coal.

Foolish takeaway

Of the big miners, BHP is the most diversified and is making the right moves in cutting costs and focusing on the long-term. However, based on the volatility still facing the industry, it is not currently an attractive prospect. Should commodity prices start to fall, it is very likely we will see significant falls in the miner’s share price too and, as such, poses as a heavy risk.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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