BHP Billiton leads miners’ retreat from supersizing – by James Wilson (Financial Times – October 19, 2014)

 http://www.ft.com/intl/companies/mining

More trucks, more shovels, bigger holes in the ground: the mining sector has been supersizing itself for years, convinced that going large was also the way to earn outsized profits.

But the conviction that size alone matters may no longer hold true, with “diseconomies of scale” a significant factor in mining’s waning productivity, according to a report based on interviews with industry leaders.

The problems caused by growing corporate complexity were among the factors that BHP Billiton, the world’s most valuable mining group by market capitalisation, pointed to when it decided on a big company break-up this year.

Andrew Mackenzie, chief executive, said he was worried by diseconomies of scale at BHP, which is to spin off about $15bn of non-core assets into a separate company. BHP will subsequently run just seven mining projects and five petroleum fields.

However, it is not just unwieldy companies that are a concern, according to the report by EY, the consultancy. It finds that individual mining operations are sometimes getting too large to manage as effectively as companies would like, thereby contributing to the productivity problems plaguing the sector.

“The industry thought bigger was going to be better and it has not always worked out that way,” said Paul Mitchell, global mining and metals advisory leader at EY. “It is bad enough [managing a mine] with 100 people on site – with 1,000 it becomes much more complex.”

Encouraged by strong demand that pushed up commodity prices, many miners ramped up operations as quickly as possible during the past decade, at the expense of a decline in productivity. Costs for scarce labour and materials rose sharply.

For the rest of this article, click here: http://www.ft.com/intl/cms/s/0/93241830-55e2-11e4-a3c9-00144feab7de.html#axzz3GdFHdFCm