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BHP to focus on reducing capital expenditure further

Following an impressive production result for its September quarter of operations, BHP Billiton’s (ASX: BHP) chief executive Andrew Mackenzie has promised to further scrutinise capital expenditure and costs, whilst also vowing to improve shareholder returns.

Major resources companies, including Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG), have been pushed by shareholders to increase their focus on cutting costs and increasing productivity, whilst also ramping up shareholder returns.

BHP’s share price received a 2.3% boost yesterday following the report’s release, as the company increased its full year guidance for iron ore production by 5 million tonnes to 212 million tonnes, reflecting a significant increase in productivity. This was aided by the first production from its Jimblebar mine, which arrived 6 months ahead of schedule.

In relation to costs and decreasing unnecessary capital spending, Mackenzie stated that the company is continuing to “build on the substantial $2.7 billion reduction in controllable cash costs delivered in the 2013 financial year, with strong momentum maintained in the first quarter.”

Meanwhile, internal competition for capital continues to heighten, with the 25% reduction in capital and exploration expenditure in the 2014 financial year to US$16 billion. That rate will decline further again next year. Mackenzie said “If our investment criteria cannot be met in any one project, product or geography, we will redirect our capital elsewhere or we will not invest.”

As the company continues to focus on reducing capital spending at the same time as increasing production, the company will be in a better position to increase shareholder returns.

The Australian Financial Review quoted UBS analyst Glyn Lawcock in describing it as a “cracking quarter” that showed the “BHP mantra of sweating the assets is clear, particularly evident by the success at Jimblebar.”

Foolish Takeaway

BHP remains the most diversified Australian miner and, given the level of volatility still facing the sector, is therefore the most attractive option to add to your portfolio. As the company continues to increase productivity and becomes more selective with how they spend their capital, there could be gains to be made in the long-term. However, investors must still ask themselves whether it is worth exposing their portfolio to the risks associated with the mining sector.

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

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