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BMO Global Metals and Mining Conference
Andrew Mackenzie, CEO
Slide 1: Title page
Thank you Ed.
Good morning ladies and gentlemen. It’s a great pleasure to be back in Florida at BMO’s 28th Global Metals and Mining conference.
Before I begin, I would like to echo Tom’s sentiments about the tragic incident at Vale’s Brumadinho iron ore operation in Brazil last month. We at BHP are all deeply saddened by this terrible tragedy and offer our heartfelt sympathy to all those affected.
As an industry, we must redouble our efforts to make sure events like this cannot happen. We absolutely agree that a fundamental change is required in the industry’s collective approach to safe tailings management, and I welcome the outcomes and actions from the ICMM meeting. I’ll expand on this later.
Slide 2: Disclaimer
As always, please note the disclaimer and its importance.
Slide 3: BHP’s investment proposition
At BHP, our focus is clear. To maximise cash flow, maintain capital discipline and increase value and returns. Our record shows that this is the right formula for our shareholders.
Since 2016, we have strengthened our balance sheet through a 16 billion dollar reduction in net debt, reinvested 20 billion dollars into high-return projects and returned more than 25 billion dollars to shareholders.
This track record was extended over the past six months through the solid results we delivered and the strong advances made to our strategic agenda.
We successfully exited Shale, invested in attractive early-stage copper through SolGold and oil in Canada’s Orphan Basin, had exploration success at Trion oil in Mexico and Oak Dam copper in South Australia, progressed Spence Growth Option and Mad Dog 2 on schedule and budget, and reached target depth at both shafts at Jansen potash.
In oil and gas, we approved two high-return projects, Atlantis 3 and West Barracouta, and further progressed options at Ruby, Scarborough, Samurai, Wildling and Trinidad’s deepwater.
We have a rich suite of options to choose from to navigate a range of possibilities in a changing world, under our disciplined capital allocation framework, to maximise value and returns under all eventualities.
Let me now turn to safety.
Slide 4: Sustainability
The safety, health and wellbeing of our people is our first priority. So it is with great sadness that I report our colleague Allan Houston died in an incident at BMA’s Saraji Mine in December.
On behalf of everyone at BHP, I extend our deepest sympathies to Allan’s family, friends and the team at Saraji. A thorough investigation is underway and we will share its lessons.
While the frequency of our high potential injuries fell 25 per cent in the December half, we can and will always do more.
To strengthen our culture of safety, we have three key priorities.
First, to embed a new contractor management framework to make sure our contractors, like our employees, are safe at work.
Second, to actively promote a mindset of chronic unease – a state of constant vigilance and awareness – that makes safety everyone’s responsibility.
Third, to use a new global tool that will make it easier to capture and report safety data and share lessons across the company.
Slide 5: Dams and tailings management
At BHP, we have an extreme focus on the safe management of tailings facilities. It is our responsibility to our employees, contractors and the communities where we operate.
We significantly increased the rigour of our assessment and management of tailings facilities since the failure of the Fundao dam at Samarco in 2015. Dam Safety Reviews have been performed at significant active, inactive and closed tailings facilities across BHP. This includes a thorough evaluation of risks.
The reviews identified that there were no significant deficiencies to the stability of the dams. All our significant tailings facilities have emergency response plans in place. And, we have implemented regular monitoring and review processes as directed by the Canadian Dam Association guidelines – widely regarded as the most rigorous in the industry.
In total, more than 400 actions were assigned from the Reviews. 93 per cent are complete and of those actions still in progress, none are overdue.
The recent tragedy at Vale’s iron ore operation shows we as an industry must act with even greater urgency to make sure these incidents do not happen.
While we don’t yet know the cause of the dam failure, we will review all the lessons as they emerge and apply them to further upgrade the construction and operation of our dams.
We will act with even greater care and attention to make sure our employees and communities are not in harm’s way. And we will continue and accelerate our work with the industry to advance the science and technology required to make tailings storage safe.
This includes work streams such as early warning technologies, better models and monitoring of possible modes of failure, tailings dewatering options, and dry tailings storage viability at scale.
At BHP, we welcome a common international and independent body to oversee the integrity of the construction and operation of all dams and we support increased transparency in tailings dam disclosure.
We will work with the industry to make sure the disclosure is consistently applied to better inform tailings dam stewardship.
I’ll now elaborate on our financial performance.
Slide 6: H1 FY19 scorecard
In the December half, despite some unplanned outages, our simplified portfolio of world class assets delivered a solid performance. This is shown in our financial scorecard for the period.
We generated Underlying EBITDA of 10.5 billion dollars at a margin of 52 per cent.
After disciplined investment through our Capital Allocation Framework, this was converted into free cash flow of 3.6 billion dollars. This excludes the proceeds from the recently completed sale of our
Onshore US assets of 10.8 billion dollars.
We reduced net debt and returned over 13 billion dollars to shareholders, which includes a 5.2 billion dollar special dividend paid in January.
Slide 7: Return on Capital Employed
Across our portfolio, the average return on capital employed was 15 per cent. We have plans to improve this at every asset and remain confident we will deliver returns of 20 per cent in the medium term!
Our bulk commodities provided exceptional returns.
At Queensland Coal, the Caval Ridge Southern Circuit conveyed its first coal to unlock latent capacity in the wash plant. We also offset a sharply higher strip ratio with record stripping and are confident of a strong end to the year.
At Western Australia Iron Ore, Jimblebar’s fully autonomous trucks are now our safest and most productive. This success will guide a phased roll out across other operations.
In Petroleum, several high-return projects are in execution. Mad Dog 2 is more than a third progressed, in December, we sanctioned the Bass Strait West Barracouta project, earlier this month, we approved Atlantis Phase 3, and we reached first production at Greater Western Flank B, with completion imminent.
Escondida’s labour agreement has triggered improvements in truck utilisation and labour productivity and increased concentrator throughput has helped offset lower grades.
Despite this grade decline and increased use of desalinated water, we will keep costs around $1.15 per pound this year and in the medium term.
Major investment, softer prices and unplanned outages at Olympic Dam and Spence reduced returns at these assets. However, their underlying performance is sound and we will do even more to improve the stability of these operations.
Jansen potash remains an important strategic option. We continue to investigate detailed engineering studies to improve capital efficiency and trial technology to improve operating costs to maximise the value of this project.
Our exploration strategy also shows great promise.
During the period in Petroleum, we had drilling success in Mexico and Trinidad and Tobago and we will now accelerate our appraisals in each region.
And, we’re excited about our copper exploration opportunities. We’ve increased our interest in SolGold and its highly-prospective Cascabel project in Ecuador and we’ve expanded our drilling campaign to appraise our recent discovery south of Olympic Dam.
Slide 8: Capital allocation
Our focus on value applies to every investment decision we make and is embedded across the organisation.
We use our Capital Allocation Framework to transparently direct cash to its best use, be that the balance sheet, investment or returns to shareholders.
Slide 9: Balancing debt reduction, growth and returns
Over the past six months, we reduced net debt to 9.9 billion dollars.
In the near term, we expect net debt to remain at the lower end of our range of 10 to 15 billion dollars.
In the half, we invested 3.5 billion dollars in maintenance and organic growth projects.
Our capital and exploration expenditure guidance for the 2019 and 2020 financial years remains below eight billion dollars.
Finally, over the past six months, we have returned to shareholders more than 13 billion dollars.
This comprises last year’s record final dividend of 3.4 billion dollars, the buy-back of BHP Group Limited shares of 5.2 billion dollars at a discount to today’s price of 27 per cent, and the special dividend paid last month of 5.2 billion dollars.
In addition to these record returns, last week the Board announced an interim dividend of 55 US cents per share – a payout ratio of 75 per cent!
So let me now turn to the future.
Slide 10: Market outlook
Our insights on economic and commodity markets inform our capital allocation decisions. We operate in an uncertain world. Unfavourable policies, demonstrated by recent shifts towards protectionism, undermine confidence and disrupt trade.
The free flow of capital, goods, services and ideas across the world sustain global growth and underpin the prosperity of companies, like BHP and their host nations.
We closely monitor the external environment amid current trade uncertainties and are somewhat cautious about the short-term outlook.
But our long-term view remains positive. Population growth and higher standards of living will generate demand for decades to come. And our Company is well placed for this future.
Slide 11: Our strategic framework
Our strategic framework provides the foundation for long-term value creation.
We’ve shaped our portfolio around the highest-quality assets in stable, low-risk jurisdictions. They supply premium commodities with attractive fundamentals, we hold development options, and exploration licences in the world’s premier basins with the potential to increase our exposure to copper, oil and potash.
This portfolio is unique in the sector.
But our competitive advantage must extend beyond world-class assets and attractive commodities. It is our culture and capability that will truly set us apart.
That is why late last year, we established a Transformation Office to deliver the next wave of value creation, which when completed could rival the NPV of our powerful suite of growth options and navigate BHP through this uncertain world to optimal and competitive returns.
Through this systemic program, we will take advantage of – and fully leverage – proven methods of continuous improvement, automation and our centres of excellence to make our operations more safe, stable and predictable.
At the heart of this transformation is our people.
It will build on our capability, strengthen our culture and empower our frontline to act on their ideas, in real time, unfettered by bureaucracy.
I am confident our Transformation program will shape our destiny and position BHP for the next decade and beyond.
Slide 12: We expect to deliver on our plans in FY19
So, to conclude.
Our focus is simple and resolute. To maximise cash flow, maintain capital discipline, and increase value and returns.
Our long-term plans delivered solid results and over the past six months and we returned record amounts of cash to our shareholders!
I am confident our asset-by-asset plans will improve safety, unit costs and production in the second half.
Slide 13: BHP’s investment proposition
Beyond this, there is still more we can and will do.
Over the past five years, we have streamlined our portfolio in the best commodities and jurisdictions. We have a rich suite of quality organic growth options, which we continue to build on. Our people are focused on transformational improvement, with a culture that builds capability and empowers our front line.
With a strong balance sheet, net debt at the lower end of our target range, a rich suite of growth options and disciplined investment plans funded by the strong performance of our operations, we expect to grow the value of our company under almost all possible outcomes in this changing world and return a higher proportion of excess free cash flow to our shareholders
This combination sets BHP up for a great future. Thank you.