BHP: from Broken Hill to the Big Australian

Broken Hill, 1883–1885

In 1883, a boundary rider and station hand named Charles Rasp pegged a claim on a low, rocky outcrop in far western New South Wales. He believed the outcrop contained tin. What the ground actually held was one of the richest deposits of silver, lead and zinc ever discovered in the world — a fact that took some years and considerable expense to establish.

The Broken Hill Proprietary Company Limited was registered in 1885 to work the claim. The word "Proprietary" in the name is a clue to how the venture was regarded at the time: a proprietary company is a private one, and the founders were a small syndicate of men from the surrounding district rather than a public offering to investors. The company was, in its first years, a gamble on an unproven ore body, financed by people of modest means.

The gamble paid. Broken Hill became one of the great mining fields of the nineteenth century, and the company that worked it became extraordinarily profitable — profitable enough that its shares were among the most actively traded in Australia, and profitable enough that the company had to decide what to do with capital it could not spend on the original mine.

The move into steel

The decision that changed the company's identity came in the second decade of the twentieth century. Australia was importing most of its steel, and the company's directors concluded that a domestic industry was viable. In 1915, BHP opened a steelworks at Newcastle, north of Sydney.

The choice to move from mining into manufacturing was not obvious and it was not quick — the planning ran for years and required the company to acquire knowledge and technology it did not have. But it established the structure the company would carry for most of a century: mines supplying raw material to its own steelworks, which supplied a domestic market protected from imports by distance and by policy.

That relationship between mining and manufacturing is the key to understanding BHP's twentieth-century accounts. The company was not simply a miner. It was an integrated industrial group whose profitability depended on both the cost of its ore and the price it could obtain for steel, and the two could move in opposite directions.

Becoming the Big Australian

Through the middle decades of the twentieth century the company expanded its mining operations and became, by most measures, the largest company in Australia. The nickname "the Big Australian" was not a marketing invention — it was a description of the company's position in the domestic economy and in the national imagination.

The post-war decades brought a series of large resource developments, including iron ore operations in the Pilbara region of Western Australia. The Pilbara developments are worth noting for a reason beyond their scale: they required the company to build infrastructure — ports, railways, towns — because none of it existed. In remote resource projects, the capital cost is not only the mine. It is everything needed to get the product to a ship.

That characteristic recurs in every large mining project, and it explains a feature of mining company accounts that surprises readers new to the sector: the sheer size of the property, plant and equipment balance relative to revenue, and the length of the periods over which those assets are depreciated.

Diversification, and its cost

By the 1970s and 1980s BHP had diversified well beyond mining and steel. It held interests in oil and gas, in shipping, in research and manufacturing businesses, and in a number of ventures unrelated to its original business.

The logic was that diversification smooths earnings — when one commodity is weak, another may be strong. The difficulty is that a diversified group concentrates capital allocation in a single board, and the board must judge businesses with very different economics. It also makes the reported result harder to interpret, because a strong year for one division can conceal weakness in another.

The company began to reverse the process in the 1990s, separating or selling businesses that did not fit a narrower definition of itself. This is a common arc in the history of large companies: expansion into unrelated fields, followed by a return to the core. The pattern appears in the accounts as a sequence of disposals and demergers, each with its own disclosure note explaining what left the group and what it was worth.

The Billiton merger

In 2001, BHP merged with Billiton, a mining company with a long history of its own — its name traced to a tin mining operation on the Indonesian island of Belitung, and it had been built into an international resources group under South African ownership during the twentieth century.

The merger produced BHP Billiton, at the time one of the largest resources companies in the world, with operations across iron ore, copper, coal, aluminium, manganese, nickel, diamonds, oil and gas. Structurally it was a dual-listed company: two parent entities, one in Australia and one in the United Kingdom, operated as a single economic group. That arrangement is unusual and has real consequences for shareholders, which the transaction documents explain in detail.

From an archival perspective the merger is interesting because it changed the company's centre of gravity. A business that had been described as the Big Australian — a phrase about its place in one national economy — became a company whose assets, customers and capital were predominantly international. Its reported results became a function of global commodity prices rather than Australian industrial conditions.

The South32 demerger

In 2015 the group demerged a collection of assets — including aluminium, manganese, nickel, silver and some coal operations — into a separate listed company named South32.

A demerger is a particular kind of corporate event and it is worth understanding what it does, because it is frequently misunderstood. Existing shareholders of the parent receive shares in the new company in proportion to their existing holding. No money changes hands. The parent becomes smaller and more focused; the demerged entity becomes an independent company with its own board, its own accounts and its own listing.

The disclosure documents for a demerger are among the most informative documents a company ever publishes, because they are obliged to explain the assets being separated in detail — often in more detail than the parent's own annual report provided, since the assets had previously been reported only in aggregate.

What a mining company's accounts must show

A reader approaching a resources company's financial statements for the first time will find them unlike those of a retailer or a bank. Four features are worth knowing about in advance.

Each of these is a management estimate. Each is disclosed. Reading a resources company well means reading those estimates and the assumptions behind them, rather than accepting the headline profit as a fact about the business.

What the archive takes from this

BHP is the longest-running case in this archive, and its length is the point. A reader looking at a single year of the company's accounts sees a snapshot; the story only becomes legible across decades.

Three things emerge from that longer view. First, a company's identity can change completely while its name stays the same — from a private silver syndicate to an integrated steelmaker to a global resources group to a narrower diversified miner. Second, most of the structural decisions that determine a company's later results — entering steel, building the Pilbara, diversifying, merging, demerging — were made decades before the results they produced. Third, and most usefully for a reader: every one of those decisions is documented, because at each point the company was required to tell the market what it was doing and why.

Sources

1. BHP Billiton Limited and BHP Billiton Plc, annual reports and financial statements, various years, published in each company's investor centre.
2. BHP Billiton, Demerger of South32 — explanatory memorandum and scheme booklet, 2015.
3. BHP Limited and Billiton Plc, merger documentation and dual-listed company structure documents, 2001.
4. Judgment of the High Court of Australia and records of the New South Wales Supreme Court concerning the early history of the Broken Hill Proprietary Company (used strictly for the 1885 registration and claim history).
5. Annual reports of the Broken Hill Proprietary Company Limited, held in Australian public and state library archives.