BHP Billiton Ltd/Plc will cut some 6 percent of its workforce, and close its giant Ravensthorpe nickel mine in Australia with a $1.6 billion writedown, its biggest in nine years, hit by a global recession.
Joining smaller rivals in downsizing to combat sinking metals prices in the economic downturn, the world's largest miner also flagged it was reducing activity at its nearby Mount Keith nickel mine.
Clearly their balance sheet is in a respectable position. But they are not immune from the commodity price environment that we're seeing, and earnings are going to suffer, said Neil Boyd-Clark, managing partner at Fortis Investment Partners.
BHP Chief Financial Officer Alex Vanselow warned on Wednesday more mines could be closed given uncertainty in commodity markets, with the Australian metallurgical coal mines already slated to reduce output 10 to 15 percent.
Until now BHP has set itself apart from other miners by maintaining production and just last month said sales volumes were holding up despite the global downturn.
BHP said it was cutting some 6,000 jobs in total.
These are very serious types of decisions and we don't take them lightly, but at the end they are necessary and they are the correct decisions, Vanselow told a news conference.
Rival Rio Tinto is in the process of eliminating 14,000 workers, Brazil's Vale has cut 1,300 jobs and put 5,500 workers on paid leave and other miners have also warned jobs were at risk.
Fund managers said brokers were likely to cut their earnings forecasts for BHP, which had been expected to report a net profit around $14 billion for the year to June 2009.
Clearly the pressure on forecasts is on the downside as the market comes to grips with commodity prices that are lower than were expected as recently as a couple of months ago, said Boyd-Clark.
BHP shares fell 1.8 percent to A$28.42, while Rio Tinto fell 3 percent after announcing further aluminium production cuts on Tuesday.
NOT ENOUGH TO BOOST NICKEL PRICES
Vanselow conceded the company got it wrong on Ravensthorpe, but analysts said it was doing the right thing to shut it down in face of weak nickel prices.
Ravensthorpe was always going to be relatively high cost, and it has been a difficult operation from day one, said Tim Schroeders, a portfolio manager at Pengana Capital.
Besides some 2,100 jobs cuts in Australian nickel mining another 4,000 jobs out of BHP's 101,000-strong global workforce will go, Vanselow said.
Vanselow estimated the total job cuts will cost $500 million.
With industrial activity worldwide slowing, analysts doubted the cuts to nickel output would be enough to turn prices around.
The decision to suspend Ravensthorpe really reflects the weakness in the nickel market, which is probably one of the weakest in all commodities, said Gerard Burg, commodities analyst at National Australia Bank.
I don't think the cuts will be enough to bring a rebound in nickel prices.
Nickel a key ingredient in stainless steel, has seen its prices plunge about 80 percent to $11,200 a tonne from $51,650 in May 2007.
RIVALS CUT BACK
Rio Tinto Ltd last week reported an 18 percent decline in iron ore production for its fourth quarter and said earnings from its aluminium division would be hurt by falling prices.
Rio has since said it will cut another 6 percent of aluminium output.
For now, BHP had no intention to curtail iron ore production in Australia, Vanselow said.
Ravensthorpe, which started production in 2007 about nine months behind schedule, cost $2.2 billion to build and is one of the largest nickel-making facilities in the world.
Since starting, world nickel prices have plummeted, pressuring BHP and other miners on costs and prompting predictions that mines will decrease rather than increase output.
Previous bad investments by the company resulted in a total write off of $1.6 billion by 2000 on its Boodarie hot briquetted iron plant in Australia and a $2 billion writeoff on its Magma Copper Co acquisition in Arizona in the late 1990s.
That debacle, which coincided with tanking world copper prices, triggered closures across the U.S. copper belt.
For the second quarter, BHP's production of iron ore rose 5 percent over the same quarter a year earlier, while oil output rose 30 percent.
Output of aluminium fell 8 percent and copper 11 percent. (For more stories on the bleak outlook for the global economy and the impact on companies, click on (Additional reporting by Sonali Paul; Editing by Anshuman Daga)© Thomson Reuters 2009 All rights reserved