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

