After Going All In During Mining Boom, BHP Cuts Its Ambitions BHP Billiton, the world's largest mining company, was willing to spend big in early 2012. It was building new mines and upgrading old ones, at a cost of $18 billion. It considered a potential expansion of its copper and uranium mine, Olympic Dam, which could have cost as much as $20 billion. It proposed a deepwater extension of Port Hedland, its iron ore port, an estimated $10 billion or more. But BHP has significantly scaled back its ambitions in the last year, replacing its multibillion-dollar spending spree with an austere program of cost cuts and efficiency drives. It shelved the plans for Port Hedland and Olympic Dam, both in Australia, noting the need to find "a less capital-intensive design." The mergers and acquisitions department is now referred to as the "D department" internally, to signify its focus on disposals, according to a person close to BHP who spoke on the condition of anonymity. The U-turn from expansionary spending to aggressive pullback has swept the global mining industry with brutal speed and force. With fixed costs rising, commodities prices slumping and profit shrinking, the chief executives of four of the biggest multinationals - BHP, Rio Tinto, Anglo American and Barrick Gold - have all been replaced. And pinched companies are scrambling to sell off assets and raise money, with mixed results. On Thursday, Rio Tinto shelved plans to sells some aluminum assets, citing the tough environment. In short, the commodities boom has ended. BHP now sits atop a sector that is deeply out of favor with investors. Their central complaint is that the big companies, during a period of high metals prices and strong profit from 2009 to 2011, spent too much money building mines instead of returning money to shareholders. In the current environment, these expensive new mines look ill advised, perhaps dangerously so, given that the new capacity could drive down prices further. "Investors are more than entitled to be concerned about the productivity of the capital they have invested in our business," said Andrew Mackenzie, the new chief executive of BHP. They are more than entitled to ask us to think long and hard about every piece of new investment we make, relative to whether we make cash returns to them. "If there is a new wind blowing through my part of the sector," he said, "it is the emphasis now - given that we invested quite a lot during a period of slightly higher prices - on maximizing the returns from the investments we have already made." Mr. Mackenzie, a Scotsman who speaks five languages, is the new, somber voice of the industry. He speaks in the BHP style of academic understatement, referring to the boom as "a period of slightly higher prices." For a decade, the company's top ranks have been filled with doctorate-holding economists, management consultants and former academics who become animated when discussing long-term Chinese consumption trends or pricing structures for iron ore. Given that atmosphere, BHP executives see the rise and fall of commodity prices as part of the typical economic cycle, stressing that the downward pressure should not prompt panic. A longtime industry executive who has experienced the previous ups and downs, Mr. Mackenzie says his job is not to change the company's strategy but rather to mold it to today's market realities. BHP can afford to take the long view. Despite the industry volatility, the company has maintained stable profits, thanks to an unusually diverse variety of commodities. BHP produces oil and gas in addition to iron ore, copper, coal, nickel, aluminum, uranium, diamonds and manganese. In their zeal for economic data, executives constantly highlight a chart that they call "the spaghetti chart" or "the Jackson Pollock chart," a mess of squiggly lines showing the volatile earnings for each commodity BHP produces, and a smooth line through the middle representing the company's relatively stable profit. The diversification has helped BHP weather the harsh downturn better than peers like Rio Tinto, Anglo American and Vale. BHP never cut its dividend during the financial crisis. And the company's $5.5 billion in write-downs over the last two years have proven manageable given its earnings. BHP, which will report its annual results later this month, is expected to make $12.5 billion in profits for the latest fiscal year that ended in June. By comparison, Rio Tinto took a $14 billion write-down this year on two bad investments in Canadian aluminum and African coal. On Thursday, the miner reported a 18 percent drop in profit for the first half of the year, reflecting the weakness in the prices of metals. Although BHP is holding up better than many rivals, its stock is still suffering. Shares of BHP, which have recovered modestly in recent weeks are still off more than 15 percent this year, closing on Thursday at $65.96. "What investors are upset about is how these mining companies burned billions of dollars through write-downs," said Rob Clifford, a mining analyst at Deutsche Bank. It's this idea of the companies having too much money and then squandering it. With their stocks down, Mr. Mackenzie and other mining chiefs are trying to be highly attuned to investors. In recent months, Mr. Mackenzie has talked to his universe of shareholders, from global institutions to pensioners. The common theme is increasing their cash returns. When he started in his new role in May, he set the tone by taking a base salary 20 percent lower than that of his predecessor, Marius Kloppers. "I felt that was in keeping with the expectations of the marketplace right now," he said. I have a lot to do to move the company forward in terms of productivity and value for money. He spent his first day on the job visiting BHP's complex of iron ore mines, railways and ports in the badlands of Western Australia. As he toured the vast industrial complex, he quizzed managers about how efficiently the haul trucks were moving ore, he said, because "trucks are a big part of our $36 billion cost base." New projects have also been frozen indefinitely. The company has announced $1.9 billion in cost savings since July 2012. Within two or three years, Mr. Mackenzie said, he wants capital expenditures to fall to $15 billion or less, compared with $18 billion today. "His reign should be marked by nothing radical," said Mr. Clifford of Deutsche Bank. It should be marked by bludgeoning, boring, good old cost-cutting. But BHP and other big mining companies can't rein in spending overnight. Capital expenditures in the mining business mushroomed from $20 billion in 2003 to $120 billion in 2012, according to Goldman Sachs. Much of the money is tied up in incomplete projects. So the spending can only roll off gradually, as mining projects approved in the heady days are finished in 2014 or 2015. Then there is always the possibility that some projects will take more money and more time. "BHP is in a pincer for the time being," said Jeff Largey, a mining analyst at Macquarie. He estimated that BHP's capital expenditures would drop to $17 billion during its fiscal year starting in July, roughly in line with its cash flows. So there is not much left over for shareholders. "All that said, I think BHP will be the first to emerge," he added.