Does BHP Billiton Limited’s production report mean the end for our smaller miners?

Australia’s smaller miners will be trembling at the knees after BHP Billiton Limited (ASX: BHP) released its first quarter operational review today.

Following on from impressive reports by Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) over the last week, BHP Billiton announced a 9% increase in group production, while eight operations and four commodities broke records in the quarter.

While full-year production guidance was maintained across all of BHP’s operations and businesses, the company said it was still on track to achieve production growth of 16% by the end of FY15.

With the miner’s attention now focused solely on maximising the value of existing infrastructure, BHP will continue to aggressively reduce costs and improve productivity.

This will hopefully see iron ore production reach 290 million tonnes (Mt) by the end of FY17, while the miner is also striving to reduce iron ore production costs by more than 25% to less than US$20 per tonne – an initiative that would see it become the world’s cheapest producer.

When combined with other initiatives across the group, total costs could be reduced by US$2.3 billion.

Here are some of the highlights from today’s report:

–          Metallurgical coal production up 25% to 13Mt

–          Thermal coal production decreased by 9%, as anticipated

–          Western Australia Iron Ore (WAIO) production up 15% to 62Mt (100% basis)

–          Petroleum production up 7% to 67.4MMboe (million barrels of oil equivalent)

–          Copper production down by 1%

Weakness was experienced in BHP’s copper division as a result of industrial action and a power outage through Northern Chile, as well as an anticipated decline in ore grades. Despite this setback, total copper production is still forecast to increase by 5% for the year, which is in line with prior forecasts. Meanwhile, BHP’s 62Mt production of iron ore puts it ahead of schedule to achieve its 245Mt forecast for FY14.

Of course, this report isn’t what the nation’s higher cost miners were hoping for. In light of falling demand growth from China, the heavy expansion projects being undertaken by miners like BHP are applying additional pressure to commodity prices and squeezing the margins of Australia’s smaller miners.

Buy, Sell, or Hold?

I was impressed by BHP’s report and the market seemed to share my thoughts with the stock trading 46 cents or 1.4% higher in today’s session. However, I still remain cautious of tumbling commodity prices and forecasts of stagnant global growth over the coming years.

BHP Billiton certainly remains the safest bet for exposure to the sector. It maintains a high level of diversification and has reiterated that it is well and truly prepared for a lower price environment. However, tumbling prices could  continue to act as a drag on the miner’s shares in the coming weeks and months, and investors who remain patient could be presented with an even more attractive entry point.

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

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