‘Latent capacity’ has become part of BHP’s vernacular for good reason. In a nutshell, it refers to all the production not yet realised within our existing operations.
While this might not sound like a big deal, latent capacity projects are important because they often provide a simple way to increase production at lower capital cost than larger development projects. They also come with a reduced risk profile, and anything we can do to reduce risk is worth its weight in gold...or copper, or coal, or iron ore.
These initiatives often piggy-back off the larger, growth investments we’ve made in the past which increases our certainty around:
• What is there;
• How to get to it;
• What it will cost; and
• When we can do it.
The Caval Ridge Southern Circuit (CRSC) project in Central Queensland’s Bowen Basin is a good example of a latent capacity project that is starting to take shape. The project links the Peak Downs mine to the Coal Handling Preparation Plant (CHPP) at the nearby Caval Ridge mine and in doing so, takes advantage of unused capacity.
Rod Walsh, who leads the commissioning activities for this project thinks it makes perfect sense because of the way the plant was set-up in the first place.
“The coal handling plant was built with the latest technology so it runs really efficiently. We just needed a smart way to feed it more coal. When we looked at options there was nowhere else we could get that much extra production for such a low capital outlay.
“The solution was pretty straight forward – to build a new conveyor to tie in to the plant, with the right sized fleet and stockpile yards to service it.
“The beauty is, we’re doing all this without taking any big risks as we’ve been able to draw on existing knowledge around coal and other BHP assets in designing the conveyor system and then building it.
“The level of detailed planning we did early on, and the great interaction between site resources and the project team, means that things are running smoothly and safely.”
To secure the investment funding required, the team needed to pit it against other projects at BHP, through what we call the Capital Allocation Framework (CAF).
The CAF considers the risk and return of a wide variety of initiatives, including returns to shareholders, to guide our decisions in the future. This might conjure up an image of thousands of lines of data running through a super computer and spitting out the perfect answer. But really, it is about helping us understand trade-offs between risk and return, so we get the most out of every dollar we earn, and maximise shareholder value.
In this prize-fight, latent capacity options are often the heavy weight contender. Over the last two years we have progressed five of these options and our businesses have benefited from the cash flow they have delivered.
From Western Australia Iron Ore, to Escondida, to Queensland Coal these projects set us up for a bright future. As competition for capital becomes increasingly fierce, only the most attractive options will be considered for funding.
As the Chief Financial Officer, I like this competitive tension because it is good for BHP and it is good for our shareholders. I look forward to seeing what our teams around the world can do next to strengthen our project pipeline and raise the bar even higher in the future.