A changing of the guard at BHP Billiton

CHARLES "CHIP' GOODYEAR, the 49-year old CEO of US$140bn mining group BHP Billiton, concedes he's unlikely to find another job like the one he has. Yet he contends he's happy resigning the post this year. "It's one of the best jobs in the world. And it'll be hard to find the same visibility. But change is always good. I'm a big believer in that." Goodyear will be succeeded in October by Marius Kloppers (44), a chemical engineer by training who has eased through the ranks at BHP Billiton after being brought in by Brian Gilbertson at Gencor. Speaking to Bloomberg, Gilbertson said of Kloppers: "He was an inspired appointment for me and for BHP. He's a man of formidable intellect; he's a very good decision maker. He can be tough and ruthless when he needs to be and he can be absolutely charming – which is what he is most of the time." Kloppers will certainly be richer after taking up the top position at BHP Billiton. Last year he earned $1,7m but that's expected to increase to around $6,5m, according to Australian newspaper The Age. Kloppers also holds BHP Billiton shares worth $13,8m, plus rights and options over a further 765,071 shares equal to $24,12m fully exercised. As for Goodyear, exhaustion may have played its part in his decision to resign – which is interesting, because in 2003 he advised a London newspaper that getting used to sleep was inadvisable in his job. But running BHP Billiton is his 20-hour/day effort and the past four years have moved at breakneck pace. There are no specific plans about what to do next, although Goodyear suggests something more "low key". The market has its own ideas. One intriguing notion before the latest bout of speculation involving BHP Billiton was Goodyear would be approached to chair the board of Alcoa, the US aluminium miner. That's ironic, because more recently Goodyear's group has been linked with a bid for Alcan, the integrated Canadian producer that would trump Alcoa's $27bn offer. There's also talk Goodyear will quietly glide into a private equity position, where his deal-picking skills would be put to use. "I've got a background in geology, geophysics and finance," says Goodyear. "It'll be something different," he says of the future. However, for now he has his hands full seeing out the remainder of his tenure in a hyperactive mining industry. Apart from the stresses of running BHP Billiton – which sells metals worth around $100m to various customers every day – there's a raft of merger and acquisition stories afloat, perhaps worryingly symptomatic of a careering cash-rich industry. "M&A is suggesting anything is possible," said UBS analyst Peter Hickson in a recent report. "The liquidity of the market, the heightened competition for assets amid aggressive and pre-emptive positions, the emergence of new entrants from China, Russia and the emerging world suggest activity could continue." In the first six months of 2007, Alcoa has bid $27bn for Alcan, Anglo American has paid $1,5bn for Peruvian Michiquillay Copper and Brazilian Minas Rio iron ore and there's been additional talk of a $1bn bid by Coeur d'Alene for certain targets. In addition, LionOre Mining has been taken over in a $6.8bn bid from Norilsk Nickel, while earlier this year there was speculation that BHP Billiton would bid for Rio Tinto and a private equity group offering $200bn for Billiton itself. Goodyear's take on the activity, and the apparent extravagance of the corporate manoeuvres, is that large premiums will inevitably get paid for assets, particularly while optimism is so high in mining. "Beauty is in the eye of the beholder," he says. "We paid more than anyone else for WMC (about $9,2bn, trumping London rival Xstrata) because we believed we could add the value." Predictably, Goodyear won't comment on speculation linking BHP Billiton to various quarry, suffice to say he makes analysis of all the deals going down – that's what he's paid to do. However, very few of them are taken up. Amid the volatility contained in the M&A market, BHP Billiton's model is to be a stable cash flow generator. "We're not about being the flavour of the day. You know: ‘Do I feel lucky in nickel today?' We're not that." Analysts agree. "We view BHP Billiton favourably as a bottom drawer stock: hold it and forget it through volatility to educate your children," said Vicky Binns and Duncan Hay, writing in a Merrill Lynch report that – with consummate irony – also suggested BHP Billiton could become a private equity takeover target. Instead, Goodyear talks about long, low-cost mines that are expandable, diversity and global reach, snappy terms which in Goodyear's Texan drawl makes you momentarily wonder why you'd be interested in any other mining company. "We're actually quite stable." "It's a company competitors envy," agree the authors of the Merrill Lynch report. But there are some issues concerning BHP Billiton. Given its dominance in nearly all the commodities it produces the group's diamond division looks short of punch. Goodyear raises the prospect the group could one day exit the diamond sector. Says Goodyear: "Primarily, it's been focused on Ekati (Canadian diamond producer). The objective is to turn a great asset into a great business." Additional diamond assets have been identified. "If we couldn't do it we'd have to look again at the business." There's also a raft of capital projects the company has either to put to bed or decide whether it wants to be involved, with some in new locations as demanded by the growing supply and growing cost of mining. One is the $140m investment in Guinea's bauxite industry. A feasibility study is under way to assess whether it can be mined economically. "It's the best bauxite in the world," says Goodyear. The move into Guinea proves the point that mining companies will go almost anywhere if the ore-body is good enough. Goodyear comments that BHP Billiton's experience in Mozambique was a great calling card into the country. And there are other calculated risks under way, including the group's investment in the Congo. Goodyear says the Congo is a small investment relative to annual exploration budget, which totalled $326m in its 2005/2006 financial year. But he's surely understating the excitement there. BHP Billiton is the Congo's largest landholder. But key to the country's development will be the expansion of the Inga hydroelectric facility. "We can manage the technical risks and relations with government. But will the Congo represent a big bang investment? Probably unlikely," Goodyear says. "But more expansions of Inga's power would be a major factor in investing there and the region." Developing Inga meets with BHP Billiton's plan to invest in so-called "stranded power" – sources of energy that don't have consumers near them and which therefore support scaleable investment. It's a big issue. BHP Billiton recently confirmed it had suffered the effects of load shedding, where electricity to its aluminium facilities in South Africa and Mozambique were tapped off so that the power grid could continue supplying power elsewhere. The problem is clearly linked to South African power utility Eskom's capacity problems, which are likely to continue for the next five years. Vincent Maphai, chairman of BHP Billiton's SA company, says load shedding is inevitability and is built into the company's contracts with Eskom. "We always made provision for controlled interruptions." Maphai says the power problems are medium term. "We'll be lucky if Eskom provides substantial capacity by 2011, as promised." Maphai also doubts there'll be a major expansion of its aluminium facilities, including Mozal, where a feasibility study for installation of a third potline has been completed. "The project is feasible – but for the power." Commenting on Inga, Maphai says negotiations are under way with the government in the Democratic Republic of Congo. "We have a memorandum of understanding on Inga-related projects. One of the best guarantees to the Inga project is to provide off-take," he says. Goodyear says BHP Billiton is also considering seeking gas power in the Middle East and hydroelectric power in Asia. One of Goodyear's highlights was the creation of BHP Billiton itself following the merger pushed through by Brian Gilberston. But it's questionable whether the group can make other quantum leaps of that order. In 2003, BHP Billiton was, as Goodyear describes it, "a wonderful launching pad" or an international business. Earlier this year the market tittle-tattle was that BHP Billiton would attempt a blockbuster merger with British rival Rio Tinto. But it's thought such a deal would be ill-advised. Says Paul Galloway, an analyst at UBS: "A merged Rio Tinto and BHP Billiton would be a $250bn behemoth that would probably have some financial gearing but little operational gearing and – in our opinion – could continue to underperform in a rising commodity market." According to Investec, BHP Billiton would have been precluded from any of the bid frenzy until it had found a successor to Goodyear. With that in place, the company may join the fray. "We'd expect Kloppers to have a more aggressive view on acquisitions than [Chris] Lynch [chief financial officer and rival for Goodyear's post]," says Nick Hatch, an analyst at Investec. Apart from the $17bn worth of mining and oil projects that become his responsibility, it's thought Kloppers may take BHP Billiton into the running for Alcan, the Canadian integrated aluminium producer. That's according to The Age, which reported that Kloppers' background in BHP Billiton's aluminium business would have him interested in Alcan. "Marius is an achievement-drive individual," says Don Argus, BHP Billiton chairman. "Kloppers has been focused on building the revenue end of the company and he's very good at it," Peter Chilton, of the $1,4bn Constellation Capital Management in Sydney, told Bloomberg News. "They were ahead of the market buying WMC and it remains to be seen what's next." In addition to his aluminium experience, Kloppers more recently was chief marketing officer and then chief commercial officer. He's credited with the $9,2bn takeover of WMC in 2005 and its integration into the BHP Billiton empire. It's thought that background could serve him well. BHP Billiton hasn't made another acquisition since WMC, according to Bloomberg News. By contrast, Xstrata and Cia Vale do Rio Doce spent $34,4bn between them buying Falconbridge and Inco respectively, the newswire said. "Other companies have been aggressive in the market place in trying to build their overall positions," Tim Barker, of BT Financial Group in Sydney, told Bloomberg News. "That's an area BHP needs to focus on."