14 September 1997 Source: Harcopy of The New York Times ------------------------------------------------------------- The New York Times, September 13, 1997, pp. 35, 36. Down but Not Out, Clearly Down Under Lean times at an Australian Mainstay By Clyde H. Farnsworth Perth, Australia, Sept. 12 -- Write-offs of more than $1 billion over the last two years. Sagging earnings and stockholder equity. Huge cost overruns at a much heralded iron ore processing plant here in mineral-rich Western Australia and a troubled copper investment in the United States. Three resignations of senior executives. And a chairman who acknowledges he is "ashamed" and "a bit flabbergasted" by it all. For the Broken Hill Proprietary Company, the sprawling mining empire known for much of its 112 years as the "Big Australian," it has been a time of big disappointment -- and of an equally broad reassessment. As an icon of an Australian economy in transition, not to mention the country's biggest company, Broken Hill has come under intense fire from the financial press, analysts and academics. "Companies of the size of B.H.P. should be able to avoid such large mistakes," said Andre Morkel, a professor of management at the University of Western Australia. "We in Australia have to learn to be more professional in our management, up our game." All commodity producers have taken their lumps adjusting to a period of low inflation, Plentiful supplies and lackluster demand. But B.H.P., based in Melbourne, has been battered more than most by its delayed reaction to the arrival of the global economy. "Globalization has put pressure on everybody," said Neil Goodwill, an analyst at J. B. Were & Company, a Melbourne investment house. "At B.H.P., they realize they have to get leaner and meaner, but have been a little slower to act than most." One reason may be that the company's icon status in Australia has made Broken Hill less ruthless than its competitors. Its labor contracts, for example, are generally seen as the most generous in the industry. But a bigger reason is that B.H.P., long sheltered by the barrier reefs of high tariffs, used to have little to worry about. Because of its protected home market and strong asset base -- in addition to iron, it produces oil, coal, copper, manganese and other commodities -- B.H.P. had become complacent, in the view of some, particularly when compared with the aggressiveness of many other Australian companies, notably those in media, information technology and medical research. Julian Stock, chairman of the Melbourne branch of the Australian Shareholders Association, faults a "highly centralized bureaucratic management, no flexibility and cradle-to-grave jobs." Now, however, the Big Australian, which also makes steel and is moving into a variety of business services, is feeling the gales of competition like everyone else -- and is starting to take the harsh actions that have long gone against its grain. Rising imports due to lower steel tariffs, for example, were a factor behind a B.H.P. decision last April to shut down primary steel production in the east coast town of Newcastle, provoking an outcry from labor and community leaders. "It is no longer business as usual at B.H.P.," said John B. Prescott, the company's managing director and chief executive. There is little choice, what with all the harsh new realities. Indeed, given the new low inflation environment, "no longer is it possible to simply produce commodities and collect an inflation windfall," said Frank Harman, senior lecturer in economics at Perth's Murdoch University. Then, too, there is increased competition from rival suppliers, such as Indonesia, which is emerging as a major coal exporter and is closer to Asian customers than Australia. "Even though some markets, especially in Asia, have been expanding," Mr. Harman said, "you have to work harder to participate and maintain market share." But B.H.P. has to work harder as well because of declining prices. Thanks to new supplies and weak demand, world prices of coal and iron ore are half the levels of the early 1980's. Copper is more volatile. Since June, prices have fallen about 20 cents a pound. B.H.P. says every cent per pound affects its annual after-tax profit by $13 million. So if the 20-cent reduction remains for the full fiscal year, which ends next May 31, the company would give up $260 million in earnings, an amount that would represent 85 percent of last year's net profits of $313 million. For all its difficulties, some observers think the company is learning from its mistakes and will rebound in the not-too-distant future. "We believe management is very serious about changing its approach," said Elaine Prior, an analyst at Merrill Lynch in Sydney. "The path ahead may not be smooth. The new B.H.P. may be a less comfortable place to work than in the past. New skills will be required." Indeed, she expects the share price to rise 20 percent over the next 12 months, and has just termed the stock a "long-term buy." The Big Australian started as a miner of silver, lead and zinc at Broken Hill, New South Wales. Today, it is one of the globe's corporate behemoths, with 61,000 employees in 90-odd business units in 70 countries. With sales last year of $16 billion and total assets of $28 billion, it ranks as the world's second-biggest producer of iron ore (behind Brazil's recently privatized Companhia Vale do Rio Doce) and copper (behind Chile's state-owned Codelco). It is the 3d-biggest producer of manganese, 7th of coal, 14th of steel and 18th of oil and gas. But to maintain that size, the company has had to look farther and farther afield. In January 1996, it bought Magma Copper of Tucson, Ariz. It already owned the big Escondida copper mine in northern Chile. It mines coal in New Mexico and Indonesia, pumps oil from the Gulf of Mexico, extracts titanium from Mozambique. Next year, it will begin production from Canada's first diamond mine, in the Northwest Territories near Yellowknife. Forty percent of what B.H.P. sells is produced overseas and sold overseas, 30 percent produced in Australia and sold overseas and 30 percent produced and sold in Australia. Despite all the growth overseas, return on equity has slipped to half the rate of the early 1990's. Profits and gross profit margins are at the lowest levels in a decade. The huge write-downs of B.H.P.'s asset portfolio, including $420 million on the $2.4 billion purchase of Magma Copper, suggest that all those years as the great icon of Australian business may have led the company to drop its guard. In the case of Magma, Australia's biggest international takeover, B.H.P. acknowledged with embarrassment the breakdown of the "due diligence" process under which proposed acquisitions are appraised within the company. B.H.P. executives insist they have taken remedial action, including the hiring of a former Union Bank of Switzerland executive in New York, Anna Lou Fletcher, as manager of financial planning and analysis, to vet such decisions in the future. The write-down followed what B.H.P.'s chairman, Jeremy K. Ellis, called a "misunderstanding of the resources at one of the mines," in Nevada. "Magma was a public company and there is only so much due diligence you can do," he said, "and most of it is bookwork and paperwork behind closed doors." He defended the purchase for broadening the company's base in copper and giving it "the best smelter in the world." Mr. Ellis, who was elevated to chairman earlier this year, had been chief executive of the B.H.P. minerals group and was chiefly responsible for the acquisition. "Of course, it's not a great joy to see us having to do these write-offs," he recently told a group of shareholders. "I didn't choose an easy life obviously." But even as the business community was evaluating the depressing effects of the Magma write-down and others on the fiscal year ended last May 31, B.H.P. faced new troubles: delays and large cost overruns at the iron ore processing plant under construction at Port Hedland, about 1,000 miles north of Perth. That plant, in the heart of Western Australia's iron ore country, is to produce 2.5 million tons a year of hot briquetted iron for use by electric arc steel mills around the world. Initially it was to cost $1 billion. Now the company concedes the cost will be closer to $1.5 billion. Analysts are critical of a breakdown in communications that apparently left headquarters in Melbourne unaware of the magnitude of the overrun until early last month. The new head of the minerals division, Richard J. Carter, and the head of the division's iron ore unit, Geoffrey L. W. Wedlock, were suddenly forced to resign. They have declined all comment. "Why wasn't the information forthcoming to the managing director, to the internal auditors, to other parts of the management team who were obviously looking at this?" asked Ross Greenwood, editor of Business Review Weekly, the Australian equivalent of Business Week. The managing director, Mr. Prescott, tried to explain: "We were given all sorts of assurances. There's not time in these sorts of affairs to go into all of that, but we had detailed arrangements. We put great focus on monitoring this particular project and what we've seen is a breakdown in those arrangements." Engineering difficulties, problems with some of the components built overseas and high labor costs are among the factors blamed. Adding to the sense of disarray was the resignation of a third senior executive, John J. O'Connor, executive general manager of the petroleum group. He argued that stockholders would be better served if the much better performing petroleum assets were turned into a separate company, much as stockholder benefits have accrued in the United States from the splitting off of Lucent and NCR from AT&T. The board thought otherwise. "It is quite clear to us that the company as a whole has more value than the sum of its parts," Mr. Prescott declared. The asset write-downs, cost overruns and public disagreements in the executive suite suggest to many outsiders a management in chaos. Stockholders are "bloody furious" over recent events, said Mr. Stock of the Australian Shareholders Association. The company's share price now fluctuates around a dollar above its low for the year and is at the same level as at the start of 1994. Both Mr. Prescott and Mr. Ellis insist they have taken the steps for rehabilitation, including commitments for greater accountability and improved returns on capital. The company's performance, for example, is to be measured against that of other companies in the same sector. And a greater share of compensation at the top is going to be tied to that of performance. "We have put more of our senior managers' salary at risk," Mr. Prescott said. [Photos of Magma mine and BHP plant and 5 performance charts omitted.] [End] This article archived at: http://jya.com/bhp.txt