BHP Billiton Ltd is the result of the 2001 merger between BHP (a global natural resources company) and Billiton (one of the world’s premier mining companies). BHP Billiton Limited is headquartered in Melbourne while the other part of the conglomerate BHP Billiton Plc, is listed and based in the UK. Despite two separate listings the companies are managed as a single entity and have the same management team and board of directors. Today, the merged firm is a diversified resources group with seven business units. The company explores, produces, processes petroleum and markets hydrocarbons, including oil, gas and liquefied natural gas. It is a world leading explorer and producer of Aluminium and bauxite. BHP Billiton is also the world’s fourth largest producer of uranium, a leading supplier of core steelmaking raw materials and a world’s third largest copper producer. The company also exports energy coal, explores, mines and produces of nickel metal.
CEO: Marius Kloppers (From October 07)
CFO: Alex Vanselow
Number of employees: (2006) 38,000 employees in approximately 25 countries
Listing: LSE, ASX, JSE and NYSE (via ADR)
Sales: 2006 Sales (mil.) $35,891.0
Back in December 4, 2000, BHP Billiton conducted a comprehensive review of its strategy in relation to market price risks, including commodity price risk, foreign exchange risk, interest rate risk and freight risk. The company then developed a new market risk strategy based on extensive quantitative analysis of the risks and opportunities in the BHP portfolio natural resource assets. The Board approved the new market risk management strategy, Portfolio Risk Management.
The strategy entailed managing risk at the portfolio level through the adoption of a "self insurance" model. This meant using the "natural hedges" provided through the scale, diversity and flexibility of the portfolio as the principal means for managing risk. Further, BHP was going to bear the residual market risk (that risk net of the natural diversification) rather than engage in hedging of this risk. Hedging programs was going to be effectively discontinued and existing hedge positions allowed to "run off". Market Risk was going to be managed within a quantitative "Cashflow at Risk" (CFaR) framework. As part of this development, a new corporate function was established – Market Risk Management – and was tasked with conducting a comprehensive review of BHP’s historic approach of smoothing earnings using financial derivatives.
The strategy did not imply that BHP would never hedge its market risk. The company stressed that there may be circumstances, such as following a major acquisition or price shock, when it becomes appropriate to mitigate risk in order to support the Company’s broader strategic objectives. In such circumstances, BHP reserved the option of executing hedge transactions. BHP may infrequently and to a limited extent enter into strategic financial transactions when there is perceived to be a significant under or over valuation of a commodity market represented within the BHP portfolio. Such transactions would be treated separately from any hedging transactions. They would be strictly controlled under a separate Stop–Loss and Value at Risk limit framework.
Historically, BHP has undertaken hedging of its main commodity exposures (oil, copper), while also having a major currency hedging program in place. The market risk review was dictated by a desire to determine the necessity and efficacy of hedging activities in the context of total portfolio risk, rather than a business unit–based perspective of risks to cash flows or budgetary outcomes.
Most companies would have natural hedges, but very few would elect it as a prominent part of a company’s risk management policy. Depending on line of business/sector and the composition of a firm’s portfolio, it is more common to see companies managing their market risk proactively by taking a position in a derivatives contract, insurance, and so on. Not entering into such contracts actually increases overall risk.
However, since 2005, IAS 39 make it easier to recognized and account for "natural hedges" but such accounting must follow a more rigorous and strutured process. IFRS standard have become compulsary in Europe forcing BHP Billiton Plc in the UK to make some adjustments. Since 2006, all derivatives instruments must be recognized and measured in the balance sheet at fair value. Application of hedge accounting is only available where specific designation and effectiveness criateria are satisfied. The company maintained that the new IAS 39 and related standards does not change their "hedge policy". However, it seeks to apply hedge accounting for qualifying interest rates swaps, and foreing exchange contracts used to hedge capital commitments. Changes in fair value of derivatives commodities contracts will be take directly to the income statement.