Monthly Archives: June 2019

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Engaging Scot ready to confront future head on

Andrew Mackenzie says BHP has a ‘critical role to play in ensuring the supply of the basic commodities that the world needs to grow’.IF YOU want an insight to Andrew Mackenzie’s mind, the third floor of London’s Magdalen House is a good place to start.

Here in the humble offices of British think tank Demos, the future chief executive of BHP Billiton laid out some of his boldest ideas for society, more than a decade before he would become one of its best paid and most influential citizens.

A flick through ambitious papers like Ethics and the Multinational Corporation reveal a version of Mackenzie that many in the mining industry would recognise today.

There’s a striving for social progress, a demand for companies to think beyond their bottom lines, and a clear belief that open markets are the only way to ensure the world’s population get the food and energy they need. There’s even a wish for business to occasionally win a place in peoples’ hearts: ”We love successful sports teams and entertainers; maybe we could learn to love successful companies too.”

Twelve years on, Mackenzie is about to take control of the world’s most valuable mining company, and with profits beginning to slide, you sense he will soon discover just how compatible ethics and multinationals can be.

There was no coverage of the BHP leadership transition in the Kirkintilloch local newspaper, despite the Scottish town having bragging rights as the childhood home of the world’s newest captain of industry. The 56-year-old Doctor of Chemistry was raised here amid a climate of coalmine closures – an experience that may prepare him for dealing with tough decisions facing BHP’s coal mines in Australia’s eastern states.

While his Scottish roots were paraded proudly this week, Mackenzie has often referred to himself as an ”internationalist”, in a mark of respect to the six nations he has lived in during a career in oil and gas, chemicals and, more recently, mining and resources.

Judging by the thoughts shared in Ethics and the Multinational Corp-oration – a manifesto jointly authored with then colleague David Rice for Demos in 2001 – the notion of an international community sits comfortably with Mackenzie. ”The world, we feel, would benefit from a more international political leadership to complement strong business leadership, creating a more plural society which increases the wellbeing of all the world’s citizens,” they wrote.

The article investigates the decline of nation states and the unplanned rise of corporations as ”the main vehicles for delivering social, environmental and economic progress”.

”Employment, social policy and the environment used to be regarded as the concern of government. Now as a result of globalisation, society appears to be taking some of this power from government and giving it to business.”

If those comments set a high bar for his tenure at BHP, consider these thoughts from the same publication, in the context of BHP being one of the world’s biggest producers of carbon intensive energy through coal, oil and gas. ”Multinational corporations should be happy to be seen as powerful advocates and exemplars for human rights and the environment,” wrote Mackenzie and Rice.

”The only hope for massive reductions in future greenhouse gas emissions to slow climate change may be unilateral action from companies on behalf of their customers, employees and other stakeholders.”

While opinions can change over the years, Mackenzie is known to still believe that companies like BHP are doing more for the world than merely making shareholders wealthy.

Mackenzie is known to believe the mining industry plays a significant role in maintaining peace and stability in the world’s developing nations, by ensuring the raw materials needed to improve living standards are made available in sufficient quantities to prevent tensions spilling over.

Those views were hinted at during this week’s press conference to announce his appointment.

”We have an absolute critical role to play in ensuring the supply of the basic commodities that the world needs to grow, both in population and in wealth,” said Mackenzie in his address to the Australian media.

”You can count on me to continue Marius’s success of using the best management techniques possible and the appropriate technology to develop those ore bodies sustainably for the world and for the shareholders, so that the world gets the resources that it needs to grow in a sort of harmonious way.”

The comments can be seen as a polite challenge to sections of the public – and perhaps the Chinese government – to reconsider the antipathy they hold toward big resource companies like BHP and Rio Tinto.

Mackenzie has spent the past five years at BHP after being poached by Kloppers from Rio. His CV also contains a PhD on the behaviour of hydrocarbon deposits underground and a 22-year stint at BP.

The latter was considered a crucial factor in him beating rivals to the top job, given BHP’s increasing focus on oil and gas. Those who have worked beneath Mackenzie in his role as chief executive of BHP’s non-ferrous division say his moral perspective is one of his nicer aspects.

While profits are the focus for any businessman, they report that Mackenzie has a prevailing desire for his work to achieve something good for the world. This principle comes through in much of his earlier writing with Demos. He was thanked for his role as a sounding board to Paul Miller and Paul Skidmore in their 2004 publication Why future organisations must loosen up, which explored the growing trend for people to want ”their work to be more aligned with their human values”.

Mackenzie explored the topic himself in Ethics and the Multinational Corporation, where he and Rice wrote: ”It is preferable for employees to be able to project their personal values through work rather than leave them at the door. Talented people may not work for companies whose ethics clash with their personal values: money is not everything.”

The softer side of Mackenzie may cheer BHP’s rank-and-file staff, who under Kloppers worked under a rigid set of rules governing office conduct, including bans on pungent food and a strict ”clean desk” policy.

”Compared to Marius, whose IQ is sky high but his EQ [emotional quotient] is not, Andrew has a much higher EQ,” said one source close to the leadership transition.

”He is very good with people, he has got a softer side to him than Marius. Really, these days you want in business someone who has got a good IQ and a good EQ, so they are good with people.”

Mackenzie and his wife Liz move to Melbourne at a time when BHP appears to be coming back to earth after the heady peaks of the mining boom. While Kloppers’ time as chief was punctuated by large acquisition attempts on Rio Tinto, Canada’s Potash Corp and a desire to build greenfield ”mega-projects”, Mackenzie’s era looks set to be more modest thanks to the recent cooling of commodity prices.

He has indicated that divestments are more likely than acquisitions. Growth will be incremental and typically generated through expansions and improvements at existing assets.

Mackenzie has promised a ”lazer-like focus” on keeping costs down and he has vowed to create synergies between BHP’s petroleum and mining divisions. The initial reaction suggests the investment community are willing to give him a fair go.

”In our view, the new appointment is positive as we view Mackenzie as highly capable, he appears to be more willing to listen to the market, and it removes the uncertainty around the succession plan,” wrote JPMorgan’s Lyndon Fagan this week.

Judging from his work with Demos, Mackenzie would expect nothing less: ”Public lynching of business leaders attempting to learn from honest failure, or trying to forge pathways into an unclear future, makes us all risk averse. A constructive outlook would allow us all to be much more optimistic about an ethical future by creating more space for politicians but also for industrialists, to lead.”

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Market recovers to end week higher

THE sharemarket reversed some of Thursday’s substantial losses, the biggest one-day fall since May, closing above 5000 points to end the week on a positive note.

The S&P/ASX 200 Index rose 0.8 per cent on Friday, up 38 points to 5018.1, and the broader All Ords rose 38.1 points, 0.8 per cent, to 5036.7.

On the ASX 24, the March share price index futures contract reached 4996, 29 points higher with 39,902 contracts traded.

”Overall it [Thursday’s loss] seemed to be a slight hiccup,” CommSec analyst Steven Daghlian said. ”The market is back up and both the ASX and the All Ords have crept back up above the 5000-point mark and that is a good sign.”

Deutsche Bank’s head of research sales, Glenn Morgan, said Thursday’s heavy losses were an overreaction to what was said in the US Federal Reserve minutes about bond purchases.

”The outlook was probably more balanced than people thought on reflection,” Mr Morgan said.

A fairly optimistic tone set by Reserve Bank governor Glenn Stevens in a statement to the House of Representatives standing committee on economics on Friday also lifted sentiment, with some economists speculating that the interest rate easing cycle could be coming to an end.

Mr Stevens said the high Australian dollar had helped offset the surge in investment in the mining industry, which otherwise would have led to higher interest rates.

All sectors ended higher on Friday. Gold rose 3.5 per cent, financials 0.8 per cent and materials 0.2 per cent. The big four banks all had gains, with Westpac and NAB each closing 1.3 per cent higher.

Miners BHP Billiton and Rio Tinto finished 0.8 per cent and 0.9 per cent lower respectively but Newcrest Mining rose 1.55 per cent.

Mr Morgan said the reporting season had turned the mood on the markets more positive, after fears at the start of the year that the rally would not have been backed up by companies’ earnings.

”There have been a few disappointments but our analysts have been upgrading forecasts for the next two years during reporting season, something we haven’t seen for quite a while,” he said. ”There’s still be a bit of [price-earnings] expansion, but I think we’ve found a floor in earnings, companies have done a terrific job on costs and if we get a better macro-economic backdrop, the leverage to the upside could be quite large.”

Telstra added 6¢ on Friday to $4.56 and Woolworths jumped 42¢, 1.24 per cent, to $34.27.

Billabong shares tumbled 5¢, 5.5 per cent, to 86¢ after the troubled surfwear retailer announced a half-year loss of $536.6 million and downgraded its underlying earnings.

Oil and gas producer Santos impressed investors enough with a positive outlook for cash flow from new liquefied natural gas projects to overshadow a fall in net profit, closing up 15¢ at $12.05.

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Heavy claims, but profits still surge

After years of disappointment for investors, there are growing signs insurance companies are turning the corner. Despite 2013 beginning with more damage claims from ex-Tropical Cyclone Oswald and bushfires in many of the eastern states, share prices have shot out of the blocks, rising as much as 20 per cent this year after bumper profit results.

Two of the biggest players this week underlined the rapidly improving conditions.

Suncorp shareholders, who have endured a wild ride in recent years after the Queensland firm was pummeled by claims for flooding, saw net profits jump by almost a half to $574 million.

Its arch rival, IAG, said profits had more than tripled to $461 million in the half, with dividends doubling.

The bumper results raised hopes among some analysts that the industry may be entering a sweet spot for profit growth, which should also benefit QBE’s when it hands down its results next week.

But with Suncorp and IAG each delivering total shareholder returns in excess of 50 per cent in the past year, the question on many minds is whether the growth is sustainable.

The rapid expansion in profit margins at IAG – the nation’s biggest car and home insurer – illustrated just how much money the sector is making.

Helped by its dominant position in what is essentially an oligopoly, its insurance margin surged from 7.7 per cent to 19.19 per cent, which brokers said was the highest in living memory.

”Profitability simply does not get any better than this, at least not sustainably,” an analyst at Bank of America Merrill Lynch, Andrew Kearnan, wrote in a note.

Kearnan argues IAG’s prospects look ”solid” for the next year or so, but it could be entering a period of ”peak earnings” and at current share price it is already priced at 2.5 times its book value.

RBS Morgans made a similar argument, saying that although IAG had hit a ”sweet spot,” much of the good news has been factored into its share price, its highest in more than five years.

Instead, RBS and Kearnan both have Suncorp as a preferred pick. For one, Suncorp has built up substantial excess capital from the profit rebound and is tipped by some to reward shareholders with a special dividend, as it did last year.

Deutsche Bank’s Kieren Chidgey said the company was unlikely to keep all its surplus capital and he expected a 31¢ final dividend plus a special dividend of 15¢ at the end of the year, compared with its interim dividend of 25¢.

Despite the rebound, things have not always been as positive for insurance firms. In recent years a horror run of natural disasters here and overseas has pushed up costs through billions in claims and global increases in the cost of reinsurance. At the same time, investment returns have been crimped by skittish sharemarkets.

Suncorp endured a double-whammy during the global financial crisis when its banking arm had a near-death experience after funding markets froze.

This year, however, recent flooding and bushfires are within insurance industry allowances, and profits are being bolstered by a buoyant sharemarket and hefty rises in premiums. IAG said home and car premiums could rise 5 to 10 per cent this year .

But just as some question how banks can continue to prop up profits by re-pricing mortgages, there are also doubts over how much insurance companies can continue to boost earnings through higher premiums.

An analyst at Nomura, Toby Langley, cautioned that if wage growth were to slow it could result in increased ”consumer activism” with individuals becoming more discerning about their insurance policy purchases.

Insurance chief executives are also keen to present an image of caution. And as always, it seems mother nature is the wildcard.

Asked if the industry was seeing the light at the end of the tunnel this week, IAG’s Mike Wilkins said he was pleased with the company’s results, but added: ”We are still open to the volatility and the vagaries of mother nature as well as investment markets and other extraneous factors.”

Or as Suncorp’s Patrick Snowball put it when asked by JP Morgan analyst Siddharth Parameswaran to update his view on the company’s allowances for natural disasters: ”Sid, would you like to tell me what’s going to happen with the rains for the next six weeks?”

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Expansion plans put Santos in the box seat

Santos chief executive David Knox.CONNECTING the east coast to overseas energy markets, and pushing up domestic gas prices, has transformed Santos by increasing the value of its oil and gas assets, its chief executive, David Knox, says.

Santos reported a 31 per cent fall in its full-year net profit to $519 million on Friday. The 2011 result was boosted by $408 million in gains from the sale of assets, including the Evans Shoal offshore field in the Bonaparte Basin, and a stake in the Gladstone LNG project.

Almost everything else was up. Production rose 10 per cent last year to 52 million barrels of oil equivalent, and sales rose 18 per cent to $3.2 billion. Excluding one-offs, Santos’s underlying profit rose 34 per cent to $606 million. The shares rose 15¢ to close at $12.05.

Mr Knox said Santos was three years into its transformation from an Australian to a regional energy player, underpinned by its investment in the $US18.5 billion GLNG project, fuelled from Queensland’s coal seam gas fields.

Along with two other approved CSG-LNG projects in Queensland – Origin Energy’s APLNG and BG’s QCLNG – the effect would be to increase gas prices to between $6 and $9 per gigajoule or higher.

”Our strategy in getting involved [in Gladstone LNG] was to unlock the domestic gas market,” Mr Knox said, and the resulting increase in east coast gas prices had ”completely rebased Santos’s gas portfolio”.

Santos said the GLNG project was on budget and on schedule. Both Mr Knox and the chief financial officer, Andrew Seaton, stated unequivocally that the company would not need to raise equity – whether to fund the GLNG project, or to maintain the company’s credit rating – under any currency or oil price scenario. While construction activity would peak this year at GLNG, cash flow would soon kick in from the Fletcher Finucane and PNG LNG projects.

Mr Knox talked up the prospects for Santos’s exploration for shale gas in the Cooper Basin, saying ”we are optimising our [drilling] program to maximise the potential for unlocking this basin” and reiterating that if recent successful flows at its Moomba and Gaschnitz wells were replicated, ”the play could be multiple TCF [trillion cubic feet of gas]”.

The Santos remuneration report noted Mr Knox received total pay of $5.9 million last year, up 18 per cent from $5 million in 2011.

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Pick of the purple patch

ATTENTION all novelists, published and unpublished: you are creatures of fragile ego, notoriously plagued by self-doubt. There might be dark moments when you convince yourself you are so bad you might be the worst novelist ever.

Cheer up. You aren’t. Apart from those who lived and died in obscurity, that honour goes to Amanda McKittrick Ros, an Irish school teacher born in 1860 who wrote several novels (one, Irene Iddesleigh, was a bestseller) and a number of poems, all of staggering awfulness.

Photographs of Ros show a woman who looks a bit like Margaret Dumont, the perennial society matron and butt of jokes in the Marx brothers films, who never quite understood they were meant to be funny. Perhaps Dumont and Ros had something in common there.

Ros had a bit of trouble starting her brilliant career when no one would publish her work. But her first husband, Andrew, came to the rescue and put up the money for Irene Iddesleigh to be published. From then on, there was no stopping her.

It was not the plots of her novels that were so bad: they were romantic melodramas of the kind popular then, though much harder to follow than most. It was her prose that defied belief. Here’s a typical speech from Irene’s outraged husband: ”Speak! Irene! Wife! Woman! Do not sit in silence and allow the blood that now boils in my veins to ooze through cavities of unrestrained passion and trickle down to drench me with its crimson hue!”

As Mark O’Connell explains in his book Epic Fail, Ros knew enough to make ”a lunge in the general direction of the literary” but not enough to understand how such things as metaphor and syntax work. Nothing gets called by its name. Eyes are ”globes of glare”, trousers are ”the southern necessary”. O’Connell suspects ”she may have inadvertently invented postmodernism”.

After a critic brought her work to wider attention, Ros acquired what every writer craves: a wildly enthusiastic cult following that persists to this day. She became the subject of a biography, and a literary festival was held in her honour. Mark Twain praised her and Aldous Huxley analysed her. The Inklings, the club of Oxford dons that included Tolkien and C. S. Lewis, held regular Ros readings at their local pub (they gave prizes to the readers who could last the longest without laughing).

Ros appreciated her fans, but she never grew to love her critics. Even though she was blessed with a complete lack of humour, she seemed to detect some mockery at work in the review that declared Irene Iddesleigh ”titanic, gigantic, awe-inspiring … I shrank before it in tears and terror”. She never lost an opportunity to attack her critics, even devoting two pages of her novel Delina Delaney to an entirely irrelevant diatribe against such ”hogwashing hooligans”.

Did she never come to understand that her whole fan base was ironic? Apparently not. She sincerely believed her work was up there with Defoe, Dickens et al, and once wrote to her publisher about the Nobel prize in literature: ”What think you of this prize? Do you think I should make a ‘dart’ for it?”

There’s something weirdly admirable about Ros: maybe it’s the serene courage of her artistic conviction. She should be celebrated in the same way we celebrate Ed Wood, the eccentric creator of Plan Nine from Outer Space, generally seen as the worst film made. She once said, ”I expect that I will be talked about at the end of 1000 years”, and I’m not at all convinced that she’s wrong.


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