INTRODUCTION
Miners are gamblers; it is the nature of the beast. And there have been no greater gamblers in Australia’s history than the men of the Broken Hill Proprietary Company Limited and its latest incarnation, the dual-listed colossus BHP Billiton. From ‘The Proprietary’ to ‘The Big Australian’ to ‘The Big Fella’, the company has become the biggest diversified miner the world has ever seen.
A spirit of adventure and risk-taking (coupled with a ruthless edge) characterised the men who ran the separate companies until they collided and merged in one of the seminal mining events of the new century. And it was within this same spirit that the brash, young, South African-born chief executive officer, Marius Kloppers, ignoring the ancient lessons of Icarus, aimed at world domination in mineral resources with the launch of his hostile takeover bid for Rio Tinto in November 2007.
On a winter’s day in 2008, just a few weeks before his 46th birthday, he sits tieless in the Copper Room on the 28th floor of the company’s global headquarters in the QV building at 180 Lonsdale Street, Melbourne, in the middle of the contest he has codenamed Project de Bello – from the Latin ‘to do battle and vanquish’. ‘This would be a wonderful thing if we can get it done,’ he says. 1
Forces have been deployed on every front to identify the cost-cutting synergies and arrange the finance. BHP Billiton is set to press home its offensive with the announcement of a record annual profit for the seventh successive year: a phenomenal US$15.4 billion to the end of 30 June, a rise of 22 per cent, helped by a jump in commodity prices, higher production and an ability to pass on higher costs.
In terms of market capitalisation at that time, a combined BHP and Rio Tinto would have challenged Exxon, General Electric (GE), Microsoft and Citigroup at the top of the world league. ‘The companies really do overlap in a way that is very, very significant and different from the overlaps between any two other mining companies in the industry,’ Kloppers says. ‘That applies in terms of operating jurisdictions, in terms of operating philosophies and also in terms of where we operate and share assets like Escondida, the Pilbara, the Hunter Valley and the Bowen Basin.’
Sir Robert Wilson, the former chairman of Rio Tinto who was involved in at least two earlier attempts to merge his company with BHP Billiton, was not so sure. Such a behemoth, he said, could well be too big to manage. And he added, ‘What both companies would lose is actually the incentive to improve because it would be daft to deny that for decades BHP and Rio Tinto have been sharpened by rivalry. Take that away and what have you got? You’ve got, potentially, a big stodgy vegetable.’ 2
Wilson’s theory remains to be tested. On 25 November 2008, the bid foundered against a backdrop of European Union opposition and a global credit collapse that saw capital and commodity markets plunge by up to 50 per cent. ‘Marius’s strategy was correct but he isn’t clairvoyant so he couldn’t factor in the worldwide crash,’ says Ian Fraser, a former colleague who was closely associated with Kloppers’ rise to the top. 3
Kloppers himself was outwardly sanguine about his failure to pull off the deal. ‘As you get to know me, I am the supreme realist in things,’ he told the Australian Financial Review. ‘We felt that, as a team, we did what we could in order to try and unlock those synergies. We couldn’t do it. Admit defeat.’ 4
Within a matter of months, however, Rio Tinto’s major assets were up for grabs after a plan to inject US$19.5 billion in Chinese capital into Rio faced collapse. Kloppers reactivated his team and in June 2009 BHP Billiton and Rio announced the biggest joint venture in the history of mining with a merger of their iron-ore operations in the Pilbara.
The ‘supreme realist’ knows that much of BHP Billiton’s prosperity – and Australia’s economic stability – depends on his company’s increasing ability to satisfy the demands of the so-called Asian-commodity ‘supercycle’ 5 over the next two decades, a relationship that ensures BHP Billiton’s preeminence in the national prospectus.
‘The Big Fella’, as chairman Don Argus christened the company in 2001, is one of the first great corporations to realise that, in the twenty-first century, globalisation is no longer a one-way street; that the developed world now depends on the rising stars of the so-called newly acquisitive nations (NAN) of China, India, Brazil, Mexico and Venezuela for its continued economic health.
Indeed, no less than two-thirds of global growth in 2007 came from emerging countries, whose economies expanded 6.7 per cent in that year compared with 3.9 per cent in Australia and 1.3 per cent for the United States, Japan and Europe. It seemed that within five years China – easily the biggest driver of global-resource demand – would account for 55 per cent of iron-ore consumption, 31.6 per cent of nickel and 42 per cent of aluminium. India was following a similarly powerful path of economic expansion, with the others close behind.
‘The United States’ GDP is US$13.5 trillion, China is about US$3.5 trillion, India, Russia and Brazil have got about the same sized economy at about US$1.4 trillion or so,’ Marius Kloppers says. ‘So India is 30 per cent the size of the Chinese economy at the moment, growing at a slightly lower rate but clearly a big step up over the past five years. It really is a question of how it develops over the next ten or 15 years, together with Brazil and Russia.’
Despite the economic downturn that began in the latter half of 2008, these irresistible forces are still reshaping the mining industry through a process of ‘consolidation’ – a polite euphemism for market dominance – into a handful of massive entities. And it is this dynamic that makes the saga of BHP Billiton so timely, so dramatic and so compelling.
The story behind the rise of BHP from the humblest beginnings in the Australian outback to starry heights on the great bourses of the world is as engrossing as it is unlikely. It has never been told before. Until now, readers and investors seeking the real story of BHP have had to content themselves with the daily spot news and views of journalists on the run, or a stream of officially authorised glossy publications designed with an eye to ‘corporate image’ and the share price of the day.
The Billiton story is even more elusive. We have had to chart new pathways through company archives and historical documents from the dark days of Dutch colonialism and South African apartheid to reveal Billiton’s beginnings as a modest tin-mining company on the island of Belitung in Indonesia (at the time pronounced ‘Billiton’) and in the Netherlands East Indies. From there, it developed into an international miner via Royal Dutch Shell before being passed to the South African group Gencor, where it found itself leading the breakout from the collapsing apartheid barriers to stake its future in the world’s financial markets.
The inside story of the courtship and marriage between BHP and Billiton comes direct from the courtiers with a frankness rarely revealed in the secretive world of corporate gamesmanship. However, The Big Fella owes nothing to company patronage: the access sought and received was without condition. Both strands of the story – the Australian and the South African – are told in the words of dozens of past and present BHP Billiton staffers, including three BHP chairmen and six chief executives, eyewitnesses to the drama, who were willing to speak without constraint, together with an extraordinary cast of academics, research scientists, politicians, lobbyists, miners, public servants and intelligence operatives with special insights into various aspects of the subject.
Indeed, our researches revealed BHP and its successor in the corporate world, BHP Billiton, to have such a network of linkages that it resembles a state within a nation. Few of Australia’s 21 million people have remained untouched by its activities, whether through their employment in primary or secondary industry, their direct share ownership, or their superannuation-fund dividends.
Part I of this book describes the history of BHP as it forged its wildly unpredictable path to national corporate supremacy. Since that baking-hot day in 1883 when the mysterious Charles Rasp pegged his claim on the broken-backed hill near the New South Wales–South Australia border, the company has operated within an ambience of palpable excitement. Geology can provide a rough guide, but beneath its surface the earth twists and contorts and conceals its treasures in the most unexpected ways. More often than not, it confounds the prospector. Development costs are unpredictable. All that can be said with confidence is that they will be greater than the original estimate. And when the minerals have been garnered from their deep redoubts, the miner is at the mercy of the market – and markets, by their nature, are merciless. BHP learned that lesson many times, never more painfully than in the late 1990s when collapsing copper prices brought the company to its knees.
Even when the planets of good fortune are all aligned, the miner still cannot relax, since success on the share market brings its own perils. Here, too, BHP found itself more than once on the knife-edge of disaster, most dramatically in the 1980s when the buccaneers of the bourse led by Robert Holmes à Court made repeated raids on an undervalued flagship.
But it is this very sense of unremitting excitement that has attracted the big, bold personalities to the helm, almost from the beginning of BHP’s unlikely journey – men such as George McCulloch, who organised the group of seven pioneers to sink the first shaft at Broken Hill that hit the line of lode that created BHP’s famous ‘Big Mine’; Guillaume Delprat, the Dutch polymath who transformed the rough miner into a steelmaker; Essington Lewis, who, through sheer force of personality and dedication, made it the foundation of the nation’s secondary industry; 6 and Ian McLennan, a martinet who oversaw its discovery of massive oil, gas and iron-ore deposits. And along the way we reveal for the first time the crucial role played by the Australian geologist Professor Sam Carey in unlocking the great petroleum province in Bass Strait.
Part II of the book describes how BHP’s new chief executive, Brian Loton, while under share-raider attack from Robert Holmes à Court, pursued an international expansion program unrivalled in his nation’s corporate history. His acquisition of Utah International from GE in 1984 brought the coal mines of the Bowen Basin and the great Escondida copper deposits into the BHP portfolio – and seeded the corporate ranks, so long dominated by steel men, with a cadre of highly experienced coal and copper miners.
However, while the company has been driven by men (exclusively) from heady triumph to imminent collapse and back again, over time it developed an internal ethos that defied the idiosyncrasies of leadership. BHP saw itself as a bastion of quality and respectability, even if on several well-documented occasions BHP executives failed to measure up.
The US$2.5 billion purchase of the Magma copper mines in Arizona almost on the eve of the collapse of the world copper price and the failure of the hot-briquetted iron (HBI) plant at Port Hedland, Western Australia, after crippling cost overruns blasted the biggest hole ever seen in the company’s balance sheet, while the environmental disaster at Ok Tedi in Papua New Guinea grew from a mindset that placed profit over the human rights of the powerless and the needy. The scandal of the $5 million shipment of wheat to Saddam Hussein – also examined here – plumbed the depths of corporate morality. And its architects compounded the situation when they sought its return – with interest – from that unconscionable regime. The ‘gift’ was patently a cold-blooded ploy to secure favoured treatment in the development of Iraqi oilfields.
Part III covers the history of Billiton, which began life as a purely Dutch company using immigrant Chinese miners to dig a huge open-cut tin mine on Belitung Island. At the same time, the antecedents of Billiton’s one-time owner, Gencor, were exploiting cheap black labour to extract the mineral wealth of the gold, platinum and coal fields of South Africa.
Gencor thrived under the country’s inhuman apartheid laws until Derek Keys, a newcomer to the mining industry, took over as chairman and chief executive and redefined the company’s objectives for a world beyond apartheid. His successor, Brian Gilbertson, a gifted mathematician and former rocket scientist, then bought Billiton from Royal Dutch Shell in 1994 as a vehicle for transporting Gencor’s principal mineral assets to the world’s financial markets.
By the time Billiton merged with BHP in 2001, both companies had learned the hard way that commodity-price bonanzas are apt to end suddenly and dramatically. BHP’s Magma copper mines in Arizona and Nevada cost it US$2.5 billion in write-offs when metal prices plummeted in the 1997– 98 Asian financial crisis. Chief executive John Prescott and his chairman Jerry Ellis paid with their careers in BHP.
In desperation, Don Argus, the new chairman, turned to a tall, burly, motorbike-riding American with ideas to match his size and temperament. An engineer who had risen to president and chief executive officer of Duke Energy, Paul Anderson applied a nerveless resolve to BHP’s problems. Indeed, according to Don Argus, ‘That guy was the architect of the modern BHP Billiton. No doubt other people will lay claims to it, but this guy had a vision; he set the platform up beautifully.’ 7 Anderson joined forces with Charles ‘Chip’ Goodyear, his chief financial officer, and within two years profits were soaring again.
Meanwhile, Billiton had suffered a similar, though less humiliating, deflation during the same period when its share price – and its reputation – plunged on the London Stock Exchange. The engrossing story of the way Brian Gilbertson and his chief financial officer, the bearded sage Mick Davis, revitalised Billiton for its marriage to BHP and how BHP’s directors had to choose between merging with Billiton and acquiring another candidate, Western Mining, is told for the first time.
The Billiton merger, however, proved irresistible and the merged company took its place in the big league. In fact, two companies were created: BHP Billiton Limited (based in Melbourne) and BHP Billiton plc (based in London), both listed separately but operating as one business, with identical boards of directors and a single management structure. One casualty was Mick Davis, who discloses for the first time the real reason why he declined to join BHP Billiton and instead became a thorn in its side as the driving force behind the aggressive Anglo-Swiss miner Xstrata.
Part IV describes the working relationship between Paul Anderson and Brian Gilbertson to plot a new strategic framework for the merged conglomerate and then, with the course charted in 2002, how Anderson quietly returned to the United States, where he remains a director on the BHP Billiton board.
One of Gilbertson’s first moves as chief executive was to approach Sir Robert Wilson at Rio Tinto about a possible merger between the two mining giants. Don Argus, however, became furious about being excluded from the talks and, after Gilbertson threw down the gauntlet for a test of strength, summoned a board meeting.
On 4 January 2003, Gilbertson was told to wait in his office while the board deliberated on his fate. In the event, he lost the power struggle – and his job – on a day of high drama that remains one of the most controversial incidents in Australia’s corporate history. The behind-the-scenes story is revealed in full here.
Gilbertson’s successor, Chip Goodyear, guided BHP Billiton through the shifting economic sands of the new century, in which sharp rises in the prices of energy, metals and minerals were accompanied by a revolution in world markets following the emergence of China and India as increasingly industrialised nations.
Goodyear and his successor in 2007, Marius Kloppers, have followed a strategy to develop only large, low-cost, long-life mines such as the Escondida copper deposit in Chile, where BHP Billiton owns a majority stake, its vast Australian iron-ore venture in the Pilbara and the world’s biggest uranium mine at Roxby Downs.
‘An awful lot of drivel is said about size not mattering,’ says Mike Salamon, a Hungarian-born South African who followed the trail from Gencor to Billiton to the boardroom of BHP Billiton. ‘BHPB is now up there with the oil supermajors in terms of scale. There is no mining company that has ever been anywhere near there before. And it’s not an Australian company any more – it’s a global business. Just look at the guys who run BHP Billiton and where they come from: CFO Alex Vanselow – Brazilian; CEO Marius Kloppers – South African; Alberto Calderon, chief commercial officer – Colombian; Ian Ashby, the guy running the iron-ore business – Australian; Marcus Randolph, the guy running the steelmaking stuff – American. There’s nothing like it.’ 8
The twenty-first century had produced a new-found and very public dedication to ‘ethical behaviour’, ‘corporate integrity’, ‘a social licence to operate’ and above all ‘sustainability’. These objectives may have been partly initiated by rival miner Sir Robert Wilson 9 but were introduced to BHP by Paul Anderson in his March 1999 handwritten charter entitled ‘Moving into the 21st Century’, and then fulsomely embraced by his successors in the merged entity, most notably Chip Goodyear.
In a world of global warming and heightened environmental concern, ‘sustainability’ has since become a catchphrase within the organisation and is regarded by the company as a vital element of its public presentation. Whether it is practicable in an industry that is engaged in extracting a finite resource before folding its tent and moving on to new exploits is another matter. Some might well find it problematic, while others will, with some justification, label it little more than a public-relations facade.
Unquestionably, the company gives high priority to its image. Perception plays a role in the share price, in international relations, industrial harmony and, most importantly, in dealings with government. Political influence has always had its place on the company’s boardroom agenda. Indeed, as will be seen, it is the historic association with conservative politics – both in Australia and South Africa – that draws BHP Billiton into the great issues of climate change and energy sustainability now confronting the planet. ‘Our aim,’ says Don Argus, in answer to the company’s environmental critics, ‘is to make a positive impact wherever we operate.’ 10
From the beginning, BHP aligned itself with the capitalist viewpoint. It led the campaigns against miners’ rights. It crushed the industrial activists within its ranks. It flirted with right-wing radical causes. One of its chairmen helped to write the industrial policy of the nascent Liberal Party of Robert Menzies and supported it with generous funding thereafter. And the association between BHP and the Menzies family will no doubt provide one of the more engaging sidelights of this work.
But whichever side of politics has been in power, the company has been proactive in seeking to influence policy and to gain special concessions for its operations. According to the BHP Billiton code, all government subsidies are a wasteful, egregious interference with the marketplace ... except all those that benefit the mining industry and BHP Billiton itself. And in this endeavour it has been extraordinarily successful. Federal-and state-government tax concessions, exploration subsidies, infrastructure developments and other contributions defy calculation. Former Labor prime minister Paul Keating says, ‘The Commonwealth Government’s considerations for BHP have been myriad.’ And paradoxically this applied in particular to the Labor governments in which he was either treasurer or prime minister. ‘Labor governments,’ he says proudly, ‘have always been kinder to BHP than conservative governments.’ 11
While BHP was ‘The Big Australian’ of the twentieth century, the effects of its influence were largely confined to the ancient continent that bred it. Many of these were benign. The company provided a vast treasure of export income that contributed to government programs of defence, development and social welfare. It created jobs. Its steelmaking added a new dimension to the Australian economy. Its mining ventures helped to develop regional and remote areas.
For Aboriginal people, this latter was a decidedly mixed blessing. In the early decades, they were ignored. Then they were exploited, their lives disrupted and debilitated by cashed-up miners and unlimited alcohol. BHP operated within the prevailing ethos of the day. When the wider community embraced notions of Aboriginal land rights, compensation and partnership, BHP responded – grudgingly, perhaps, but with an increasing sense of commitment.
In the twenty-first century, a new paradigm applies. The company has the power to exert its influence for good or ill in the world economy. Its top executives have ready access to presidents and prime ministers from more than a score of the countries in which it operates. And they take full advantage of the opportunities to influence the decision-makers. Whether they use that power for a greater good than the company’s short-term profitability is a moot point.
‘We are in long-life assets because only then can we build a really meaningful influence on the community that we’re operating in; we contribute positively and get them to be on the side of further development,’ Marius Kloppers says. 12
By highlighting both the personal and historic aspects of the universal mining drama, this book will provide investors, bankers, financial analysts, journalists, environmentalists and the wider public – as well as many thousands of BHP Billiton employees – with a challenging view of The Big Fella’s pursuit of its corporate goals and its ‘licence to operate’. But even more enthralling to the authors has been the journey through the centuries, the twists and turns of serendipity, the brilliant insights of the executive officers on the bridge, the dedication of the miners themselves, the appalling errors, the battles won and lost – and through it all the gambler’s spirit that forever rides the waves of fortune.