BHP Billiton Aims to Overtake Rio Tinto as Cheapest Supplier of Iron Ore

Iron ore prices may be diminishing but that’s not stopping BHP Billiton’s (ASX:BHP) (NYSE:BHP) desire to be the world’s cheapest supplier.

The Australian-based company, which is currently the third-biggest producer of iron ore, is looking to cut its production costs by more than 25 percent and squeeze more tons from its iron ore mines as it seeks to overtake rival Rio Tinto (LSE:RIO) (NYSE:RIO) as cheapest supplier.

On Monday, BHP outlined an aggressive three-year expansion and cost-cutting plan to increase exports by 65 million tons over the next three years. If the plan works, it would see BHP exporting 290 million tons of iron ore by June 2017, up from the 225 million tons exported in 2014. It would also see the company producing at cheaper levels than Rio Tinto.

"We aim to be the lowest-cost supplier to China on an all-in cash basis," Jimmy Wilson, the head of BHP’s iron ore division, said in a video conference.

"The name of the game in the past was volume above and before everything else. Now cost is much more important and we are finding a lot more opportunities.”

Although BHP did not reveal a cost for the project, the company disclosed the expansion could be completed with a “capital intensity” of $30 per ton, implying a cost of about $1.95 billion.

When asked how his objective to be the lowest-cost supplier in China compare with Rio’s growth plans, Wilson said only time will tell.

"We are acutely aware that Rio is not going to stand still either, they are a great organization and they have opportunities," he said. "Rio is going to improve their business, we are going to improve our business, we believe that we have some sustainable advantages, and our aspiration is to be down the bottom end of that cost curve. I'm sure they have the same aspiration ... time will tell." 

According to UBS analyst Glyn Lawcock, BHP Billiton’s cost guidance and expansion cost estimate were well below market expectation and would increase the company’s valuation by about $7 billion, or $1.30 a share.

"However, we suspect today’s announcement may see the market focus on long-run iron ore price downside risks given falling capex/costs.”

As the battle for supremacy rages on between Rio Tinto and BHP, the company said it would continue to accelerate production even if iron ore prices keep falling, which analysts expect to happen.

"We continue to see healthy demand growth for iron ore in the mid-term as Chinese steel production is expected to increase by approximately 25% to between 1-billion and 1.1-billion tons in the early to mid-2020s," said Wilson.

"We will continue to squeeze the lemon because at the end of the day it’s just so value accretive."