BRIEFING NOTE: SHAREHOLDER RISK AND BHP BILLITON - An assessment for institutional investors of the risks in the BMA Bowen Basin dispute
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BRIEFING NOTE:
SHAREHOLDER RISK
AND BHP BILLITON
June An assessment for institutional investors of the risks in
2012 the BMA Bowen Basin disputeBriefing Note: Shareholder Risk and BHP Billiton
Briefing Note:
Shareholder Risk and BHP Billiton
AN ASSESSMENT FOR INSTITUTIONAL INVESTORS OF THE RISKS IN
THE BMA BOWEN BASIN DISPUTE
INTRODUCTION
The current lengthy dispute between BHP Billiton Mitsubishi Alliance (BMA), and the Construction, Forestry,
Mining and Energy Union - Mining and Energy Division (CFMEU Mining & Energy), the Australian
Manufacturing Workers Unions (AMWU) and the Electrical Trades Union (ETU) is an example of where a
company management is pursuing an inflexible and politically-motivated agenda against their unionised
workforce to the detriment of the company’s owners and the returns they expect.
This brief is intended to give a high level overview of the situation and outline steps that can be taken by
trustees to work with Industry Superannuation Funds to ensure that companies that are the beneficiaries of
investments from workers savings behave in an appropriate manner towards their workforce and the
communities in which they operate and make decisions that give safer and better returns on investors’
funds.
OVERVIEW OF THE OPERATIONS
The BHP Billiton Mitsubishi Alliance owns and operates seven Bowen Basin coal mines – Goonyella
Riverside, Broadmeadow, Peak Downs, Saraji, Norwich Park, Gregory Crinum, and Blackwater – and the
Hay Point coal export terminal near Mackay. The mines are a 50/50 joint venture between BHP Billiton
Ltd and Mitsubishi Development Pty Ltd. BHP Billiton is the day to day manager of the mines and the
employer of mine labour.
These mines have an output capacity of more than 58 million tonnes a year. This represents
approximately a fifth of annual global trade in metallurgical coal for steel-making1 and, together with
the output from other BHP Billiton mines in Queensland and NSW, makes BHP Billiton the largest
metallurgical coal exporter in the world.
The BMA joint venture produced 8.45 million tonnes of coal in the March quarter – a decline of over 14%
on the previous quarter.2 For the December half year for which BHP Billiton has produced financial results,
total Queensland coal revenue attributable to BHP Billiton was US$3.5 billion.3
1 http://www.reuters.com/article/2012/05/18/bhp-union-idUSL4E8GI53120120518
2 BHP Billiton production report for the nine months ended 31 March 2012. Released 18 April 2012
3 BHP Billiton report for the half year ended 31 December 2011– Supplementary Information. Released 8 February 2012
Page 1Briefing Note: Shareholder Risk and BHP Billiton
HISTORY OF THE DISPUTE
In November 2010 CFMEU Mining and Energy, the AMWU and the ETU commenced negotiations to
replace the BHP Coal Pty Ltd Workplace Agreement 2007, which had a nominal expiry date of 16 May
2011. The Agreement covers workers at the Goonyella Riverside, Blackwater, Gregory, Crinum, Peak
Downs, Saraji and Norwich Park Mines.
The matters which remain in dispute are not unusual matters in industrial relations. The central matters in
dispute relate to:
the continuance of an established role for workers in safety management, including coverage of
safety-critical roles in the enterprise agreement;
equal pay for work of equal value performed by contractors and labour-hire employees;
access to promotion and training for permanent workers;
consultation on changes in rosters and working hours;
disciplinary procedures; and
matters relating to basic entitlements including superannuation and annual leave entitlements.
These matters are the subject of collective bargaining in most other nations and in most other Australian
industry. They are entirely normal matters of concern to workers and over which any socially-responsible
and pragmatic employer should bargain.
Workers have been taking protected industrial action on and off since June 2011. BHP Billiton adopted a
strategy of refusing to negotiate on matters which are of central importance to workers, and is unable to
indicate when the dispute may end.
In April 2012 BHP Billiton announced that it would close the Norwich Park mine, relocating or terminating
up to 1,300 workers4. While the company has been careful not to attribute the closure decision to the
dispute, there is an implication that the company is shutting down production to collectively punish
employees for their industrial action.
RISKS TO THE COMPANY AND SHAREHOLDERS
General Risks
The global economic situation is still a major contextual consideration for BHP Billiton and its investment
value. According to Bureau of Resources and Energy Economics (BREE):
Commodity prices which increased substantially in 2010 have moderated since mid-2011 as a result
of the slowing in the global economy in the second half of 2011. Commodity prices were lower in the
December quarter 2011 compared with the previous quarter… In 2012, commodity prices are expected to
continue to ease given the current lower than expected growth in the global economy.5
Recently the BHP Billiton Chief Executive is on record saying that that any development opportunities for
the company would be under close scrutiny especially given capital and operating cost inflation. This
4 http://afr.com/p/national/bhp_shuts_mine_in_union_brawl_Z6Y1BAd6yEuCTKIeQSV85L
5 http://bree.gov.au/documents/publications/resources/REQ-Mar-2012.pdf
Page 2Briefing Note: Shareholder Risk and BHP Billiton
statement has led to speculation that BHP will delay a range of ‘mega projects’ it has under
development6. This position is a reflection of growing uncertainty in the global economy and also a
reflection on the easing of commodity prices in recent months. There is a present risk that the value of BHP
Billiton as an investment is softening.
The overall share price of BHP has been on the decline in recent months. In an environment where
commodity prices are softening, BHP should be taking steps to mitigate risk, rather than adopting
strategies that will cause loss of sales, profitability and returns to investors.
Shor t term risks
The immediate short term risks of the dispute to the company are clear. If the company chooses to lock
workers out, which has been foreshadowed in recent days, it will result in a major decrease or complete
loss of production of metallurgical coal in the Bowen Basin. In its March 2012 production report, BHP
reported a 14% reduction in the production of metallurgical coal attributing this to recent rains in the
area and also to industrial action.
While the company has been reluctant to release details on the impact on production, sales and unit costs
that a prolonged shut down might have, the Queensland Government has indicated that it has lost an
estimated $50 million dollars in State Royalties. From this it can be estimated that the reduction in export
volume so far is in the vicinity of 2.7 million tonnes and possibly A$575m of sales, based on the current
reported export price of around $213 AUD per metric tonne.
It is understood that BMA’s coal stockpiles are already depleted, so further loss of production or a lock-
out will reduce revenues more rapidly. BHP Billiton may be hoping that a shutdown or even a lock-out
strategy will drive up demand for limited coal supplies and so prices will increase. This is an inherently
risky strategy as the company is not a monopoly supplier of metallurgical coal and customers may seek
alternative short term suppliers.
Long term risks
Over the longer term the declaring by BMA of a force majeure (a legal manoeuvre releasing companies
from immediate contractual supply obligations due to circumstances beyond their control) across their
longer term Queensland coal mine supply contracts from April 2012 could result in ramifications for the
company7. While heavy rainfall and related flooding can be considered an “act of god”, an industrial
dispute is not and the company has been a participant in the negotiation process. This raises the question
of the appropriate use of the force majeure and consideration of whether BHP Billiton has left itself open
to disputes or actions from customers for not meeting supply contracts and resolving the industrial matters
swiftly.
The other major long term risk is that purchasers will find other sources of metallurgical coal, as one
article outlined:
6 http://afr.com/p/business/companies/bhp_board_may_delay_mega_projects_tR6KYAc02sOLI9Fn8d76yM
7 BHP Billiton production report for the nine months ended 31 March 2012. Released 18 April 2012
Page 3Briefing Note: Shareholder Risk and BHP Billiton
The disruptions in Australia have led some buyers, like Indian coking-coal exporter JSW Steel Ltd.
(BOM:500228), to look to Africa and Rio Tinto’s (LSE:RIO,NYSE:RIO) Mozambique mine to supply its
15 per cent planned increase in steel production over the coming fiscal year.8
From an investment perspective it is important that Australian mines and companies continue to attract and
secure contracts and buyers for their products. Otherwise, there are significant ramifications for the
companies, the workers, for the overall value of the company and its stock and for investments held by
Superannuation Funds.
Secondary Risks
There are a number of secondary risks posed by the actions of BMA in prolonging the dispute. Firstly
there is the impact on the Queensland economy. Queensland Premier Campbell Newman has publically
stated that the dispute has already cost the Queensland Treasury $50 million and is damaging the state’s
reputation9. At the current price of $213 AUD m/t (or $210 USD)10 that equates to a reduction in export
volume of approximately 2.7 million tonnes of coal. If the dispute continues or intensifies this figure could
double or triple.
Given the major role of BMA operations in the Bowen Basin there are numerous substantial flow-on
effects for any halting of operations. Rail and shipping, as well as the other complementary industries
such as construction, maintenance and machinery supplies will be negatively affected by any prolonged
dispute. There will be negative impacts on mining services and other mining-related investments, as well
as clear adverse impacts on mining communities. These secondary risks are also risks for superannuation
funds as their diverse investment portfolios may encounter a series of ramifications.
OTHER FACTORS
Without further details from the company it is difficult to make an assessment on the exact value that
could be lost and the potential damage to profitability of BHP Billiton overall. However as the share
market is increasingly skittish and following the decline of the ASX Metals and Mining index the
perception that BHP Billiton might have to revise profit forecasts or production totals down and not honour
some of its coal contracts could be extremely harmful to the overall value of the stock and its value as an
investment for industry superannuation funds.
It is in the interests of the workforce and investors that a quick resolution is found to the dispute and that
Superannuation Funds use their role as an institutional investor to encourage BHP back to negotiations and
to discuss issues they have been refusing to consider up until this point.
RECOMMENDATIONS
Other groups that have an interest in BMA have already sought briefings with the company about the
dispute and its actions11. It is also appropriate that investors seek to have similar discussions.
8 http://resourceinvestingnews.com/36972-coal-slides-but-long-term-remains-bright.html
9 http://www.couriermail.com.au/news/premier-campbell-newman-urges-striking-bhp-miners-to-put-aside-dispute-for-sake-
of-queensland/story-e6freon6-1226365893412
10 http://www.smh.com.au/business/old-king-coal-gets-knocked-off-its-throne-20120427-1xpzf.html
11 http://www.theaustralian.com.au/business/mining-energy/bhp-closes-strike-hit-norwich-park-mine/story-e6frg9df-
1226324347909
Page 4Briefing Note: Shareholder Risk and BHP Billiton
There are a number of actions that can be taken by funds:
Contact investment managers to seek advice about the extent to which risks associated with the
dispute are being considered in investment decisions. Below are some suggested questions that be
asked of funds/investment managers:
o What is your understanding of the situation in the BMA dispute and how have you arrived
at that understanding?
o Has there been an assessment of the risk to investment returns of the actions currently
being undertaken by BHP Billiton. Seek views on losses to date, the scale of near-term
future losses and the potential long term impact/risks of the dispute on BHP Billiton's
performance in Queensland coal.
Request that investment managers meet with the CFMEU to seek a briefing about the issues. The
appropriate person to contact to facilitate this is Peter Colley, National Research Director at
CFMEU Mining & Energy (pcolley@cfmeu.com.au or 02 9267 1035).
Request that investment manager’s report back on steps taken, the information and responses
received and, where appropriate, the investment manager's proposed further action.
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