![BHP Billiton Mitsubishi Alliance asset president Rag Udd: "If you had told me midway through July we were going to see ...](/content/dam/images/g/t/u/i/g/6/image.related.afrArticleLead.620x350.gtuibx.png/1484879709863.jpg)
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This is a rags to riches story, not least because its central character is named Rag.
When AFR Weekend first interviewed Rag Udd in May 2016, the asset president of BHP Billiton's coking coal division was facing many tough decisions.
The coal division had just lost $US342 million ($452 million) before interest and tax in the space of six months, and a cost-reduction drive had already plucked the division's low-hanging fruit.
In a sign of its creative desperation, BHP had just negotiated with Qantas to stop fly-in fly-out (FIFO) workers in the coal division from earning frequent-flyer points, in a move designed to save $12 every time a FIFO worker flew between Brisbane and Moranbah.
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"We are looking at all options in terms of ways to reduce costs and become more productive as an organisation ... out of respect for our people we will do everything we can to understand ways of saving costs in the organisation that actually return us back to profitability," explained Udd in May 2016.
But by the time he was flying to his native Canada for Christmas last month, the world had changed dramatically.
Higher profits than boomtimes
A surprise rally in coal prices had filled BHP's sails, and the division's pared-back production costs ensured the company was at one stage making more than $US230 profit on each tonne of coking coal sold; a bigger margin than it was making at the peak of the mining boom in 2011.
"If you had told me midway through July we were going to see prices north of $US100 per tonne or even north of $US200 per tonne you could have blown me down with a feather," says Udd, a 19-year veteran of BHP.
!["We are looking at all options in terms of ways to reduce costs," Rag Udd says of cutting back on FIFO workers' ...](/content/dam/images/g/q/l/5/g/0/image.imgtype.afrArticleInline.620x0.png/1484678392096.jpg)
That's not to say BHP had missed the policy changes that largely drove the price rally; the Chinese government's decision to place production limits on its domestic coal mines in a bid to accelerate reform of the sector.
"Going back about a year ago they had restricted supply from 360 days per year down to about 330 days, and we hadn't seen a huge change in the market pricing, so when we dropped from 330 to 276 days we understood the point behind it and how it could potentially impact the market, but we just didn't expect that it would have such an instantaneous effect in terms of price and supply and demand at that point," he says.
Back from peak, but still filling coffers
Having started 2016 at $US75 per tonne, prices for the premium hard coking coal BHP and its partner Mitsubishi produce in Queensland peaked at $US308.80 on November 30.
![The Chinese government's decision to place production limits on its domestic coal mines in a bid to accelerate reform ...](/content/dam/images/g/t/u/i/p/u/image.imgtype.afrArticleInline.620x0.png/1484794054728.jpg)
The price has since fallen 43 per cent after China partially relaxed its production limits, but most analysts expect China to reinstate the limits to some degree within weeks.
Regardless, the rally has already lasted long enough and risen high enough to make a significant contribution to BHP's cashflows and the Queensland government budget.
Analysts expect the coal division will deliver about $US3.9 billion of earnings before interest and tax in fiscal 2017, representing about 27 per cent of BHP's total earnings.
Deals complicated by price surge
![The coal division represents about 27 per cent of BHP's total earnings.](/content/dam/images/g/n/j/n/e/g/image.imgtype.afrArticleInline.620x0.png/1471494208400.jpg)
While the surprise rally has delivered massive wealth to BHP and other miners, it also complicated and slowed acquisition processes in the coal sector.
BHP and Mitsubishi's long-standing alliance looked to be the logical buyer of two Anglo American coking coal mines, Moranbah North and Grosvenor, given the Anglo mines are located adjacent to the partners' Goonyella Riverside mine in Queensland.
Combining adjacent assets is arguably the best way to create value in the resources sector, and an acquisition by BHP and Mitsubishi would have expanded and enhanced a coking coal business that is already the world's biggest and best.
But soaring coal prices challenged perceptions of the mines' value, and Anglo has yet to strike a sale agreement almost a year after putting the mines on the market.
Udd says BHP and Mitsubishi are willing to look at coking coal acquisitions, but he stresses the partners don't need to buy assets to maintain current production levels.
"We have invested really well in terms of getting premier tier-one assets that we can operate at low costs ... we have 200 kilometres of strike length of open pit that we can mine pretty well for decades to come without much concern," he said.
"Don't get me wrong, if there is a good asset that comes along that is worthwhile taking a look at ... absolutely we will take a look at it, but it's at the right price. We just don't need to overpay for assets because we have enough good ones."
Caval Ridge an option
One of those internal growth options is the Caval Ridge southern circuit, which was among the "latent growth" options that BHP chief executive Andrew Mackenzie spruiked in May 2016 when he fronted investors in Miami, Florida.
Caval Ridge is one of BHP and Mitsubishi's newest coking coal mines in Queensland, and was built with excess capacity in the facility where the raw coal is washed and prepared for export.
If approved, the southern circuit project will build an 11-kilometre conveyor between the preparation facility and another BHP mine called Peak Downs, which will supply coal into the preparation facility, allowing more to be washed and an extra four million tonnes to be exported each year.
BHP hasn't revealed the project's estimated rates of return, but they are believed to be between 30 and 40 per cent, and Udd said it would likely go before the BHP investment committee for approval sometime this calendar year.
"We will provide an option for the organisation for whether they would like to see it move forward or not, but I think it's fair to say it is a pretty darn compelling option," he says, with an accent that fuses his Ontario roots with his Australian home.
Far from the $US150 per tonne unit costs seen during the boom years, BHP and Mitsubishi are targeting unit costs in the coking coal division of $US52 per tonne in fiscal 2017, assuming the Australian currency averages US71¢ over the year.
Controlling costs
But where there's high commodity prices and potential growth spending, rising costs usually follow, and Udd concedes that equipment and labour costs are rising in the coal sector.
"It is a bit more challenging than it was say six months ago to get those things at the same sort of input cost we saw in the past," he says.
"We are seeing more turnover now ... a number of mines have flagged up in recent months saying 'we are thinking about starting up a mine and we are willing to pay a few extra dollars or have slightly different conditions.
"You will see a more volatile workforce in terms of turnover than what we have seen over the last couple of years, but it is nowhere near where we were compared to say 2009 through 2011."
Udd says keeping a lid on the coal division's cost base will be one of his major focuses in 2017.
"It's pleasing for us to be back in the black again, and solidly back in the black, but I'm also really cognisant that the majority of what is driving that has to do with policy changes that we have seen in China. There is absolutely not a second to rest on our laurels," he says.
Making coal 'evergreen'
But Udd also stresses that under his "evergreen" strategy, keeping costs low will be a permanent focus.
Udd wants the coal division to find some level of strategic consistency within the wild swings of the coal cycle, which tempts miners into periods of profligate expansion followed by humbling austerity.
"I want to create an evergreen strategy for this organisation, we really want to be into a spot where it doesn't matter what the price of coal is, we are profitable, and if we are profitable that is great for jobs, that is great for security, that is great for shareholders," he says.
"Staying safe as an organisation, becoming more productive as an organisation and driving costs out of the organisation, we want to be doing that regardless of what the price looks like."
As for BHP's 16-year-old coking coal "alliance" with Mitsubishi (which is even older under a different corporate structure), Udd says it's likely here to stay.
"It is probably one of the best joint-venture relationships I have been around for the simple fact you have two very longstanding organisations that are deeply committed to the commodity, who see long-term value and are long-term investors, but they also bring different perspectives and different cultures together," he says.
"It's stable and I really don't see it changing."
BHP will reveal its quarterly production results on January 25, and its half-year financial results on February 21.