12 May 2015
Andrew Mackenzie, Chief Executive Officer, BHP Billiton
Bank of America Merrill Lynch Global Metals, Mining & Steel Conference
Barcelona, 12 May 2015
Good morning ladies and gentlemen. It is a great pleasure to be here at this important conference. First, let me point you to the disclaimer and remind you of its importance.
As a global supplier of natural resources, we operate in highly competitive and cyclical markets where sustainable value creation requires a competitive advantage. In this context, our offering is unique in the sector. Our diversified portfolio of low-cost assets, unrivalled in scale and quality, provides resilience and flexibility through volatile market conditions to enhance value.
Our relentless focus on best-in-class performance supports margins and cash generation and simplification of the portfolio will enable the next phase of productivity improvement.
The strength of our balance sheet and the quality of our development options sustain our progressive dividend through the cycle and create long-term shareholder value through both cash returns and growth. We see the current phase of the commodity price cycle as an opportunity to further differentiate our performance as our relative advantages move to the fore.
Price cycles remain an enduring feature of commodity markets
The unprecedented growth in demand for commodities in the last decade supported extraordinary margins and record capital investment across the industry. Such favourable conditions incentivised significant additional capacity – much of it high-cost.
At today’s lower rates of demand growth, incremental supply will take longer to absorb. In this environment we are well prepared for the possibility of an extended period of lower prices in several commodities.
We operate in highly competitive and cyclical markets, where earnings outperformance through the cycle depends on being the most efficient supplier, not supply restraint. Any attempt to curtail low-cost supply in open markets only encourages the continuation – or entry – of more costly production. This deprives the market of its power to deliver the most efficient supply.
Therefore our ongoing success does not rely on supply restraint but instead rests on our foundation of the right commodities, the best assets, operational excellence, balance sheet strength, and capital discipline. A combination of these attributes serves us well during all points in the cycle, but particularly in the current environment.
Lower prices place a premium on the right commodities and the best assets
We have an unrivalled portfolio of truly tier-one assets for our chosen commodities in the world’s premier basins and provinces. We favour commodities where geological, geographical, or operational challenges see the economic rent collected upstream.
Post demerger our focused core portfolio will have just 12 operated assets (and 7 nonoperated) offering scale, diversification, and simplicity. These remaining assets are absolutely on strategy and have earned their place in the portfolio. Each one is long-life, lowcost, upstream, and expandable and collectively they are diversified by commodity, geography, and market.
Our portfolio is the fundamental source of our strength and cannot be replicated. Its unique diversification and sector leading positions on the cost curve provide us with a sustainable competitive advantage.
In Iron Ore and Metallurgical Coal we have high-quality, multi-decade resources, but as their markets are currently well supplied we do not expect to invest significantly more in these businesses. In Copper, our attractive suite of organic opportunities will support growth in a market with compelling fundamentals and embed our assets firmly in the first quartile of the cost curve. Similarly, we continue to pursue growth options in oil while strengthening the tierone position of our liquids operations. Finally, as the world makes its energy choices we will continue to optimise our Energy Coal and Natural Gas exposures.
Through our constant process of portfolio evaluation, productivity initiatives and sectorleading development options, we aim to drive all of our businesses towards the bottom left of their respective cost curves, where Iron Ore already sits.
Operational excellence maximises margins and returns
In today’s market conditions there is a bigger premium on running the best assets safely and sustainably at their optimal performance. Improvements in critical work can create very large benefits and through operational excellence deliver stronger margins and returns on capital. We have made great strides over recent years to be both the safest and lowest cost in everything we do.
Our Conventional Petroleum business in the Gulf of Mexico has set industry benchmarks through outstanding uptime performance as the lowest cost driller. Our Onshore US assets have also achieved significant performance improvement, like in the Black Hawk where we have reduced drilling time by 30 per cent.
Across our minerals assets, our productivity focus has also lifted our performance. Over the last two years, truck utilisation across our entire fleet at Escondida increased 15 per cent while Western Australia Iron Ore increased plant utilisation at Eastern Ridge by 30 per cent. At our Queensland Coal operation, Goonyella truck utilisation increased 20 per cent. These are the outstanding results of our unrelenting focus on operational excellence. But there is still room for improvement as we target our aspirational perfect day performance.
Simplification will further enhance productivity
Our structured approach to best-in-class performance across the portfolio has already delivered annualised gains of almost US$10 billion since 2012 and significantly reduced unit costs.
This push for operational excellence will continue as the demerger delivers unrivalled simplicity to our portfolio and operations. With a smaller set of similar assets, our common systems and processes will enable us to identify and deploy best practice more quickly. As a result, we expect to reduce costs faster and more profoundly than our peers and thereby steepen the gradient of the cost curve even in the bottom quartile.
At Western Australia Iron Ore, we forecast unit cash costs for the 2016 financial year of US$16 per tonne before freight and royalties, while at Queensland Coal we expect US$67 per tonne. At Escondida, on a grade adjusted basis, we expect to reduce unit costs over the course of the 2016 financial year by 16 per cent. In the Black Hawk we expect drilling costs per well to average US$2.9 million.
As we further de-layer and streamline our organisational structure, we also foresee a reduction in operating costs across our support functions and we believe that we are on track to deliver faster and in excess of the targets outlined earlier this year. The demerger achieves this simplicity in the fastest and most effective way for our shareholders so that our portfolio and operations become even more competitive throughout the cycle.
Disciplined capital management
Excellent assets and excellent operatorship are just one part of the story. How we allocate the capital generated is an equally important driver of long-term value creation and we remain focused on value and returns.
Our approach to capital allocation has worked well and resulted in us leading our peers on the ratio of cash returns to capital expenditure. Over the last decade we returned US$65 billion to shareholders and are confident in our ongoing ability to deliver superior shareholder returns.
Our capital management framework therefore remains unchanged. We are absolutely committed to maintaining a strong balance sheet and to our progressive dividend.
However, we must continue to do much more than merely protect the dividend and strengthen the balance sheet. We will use our growing capital productivity and increasing capital flexibility to selectively pursue the high-return growth options in our portfolio. We will continue to test all investment decisions against challenging criteria that include buying back our own shares.
Commitment to our progressive dividend reflects our underlying strengths
The progressive dividend remains an enduring commitment to our shareholders. Unbroken for decades, our track record of dividend growth has withstood many cycles and we have numerous levers available to safeguard the dividend into the future.
In the first instance, further productivity gains – as anticipated in our unit cost guidance – will realise more free cash. Secondly, the quality and longevity of our assets, coupled with our ongoing cost focus, will continue to make our capital more productive and more flexible.
We now expect capital and exploration expenditure of just US$9 billion in the 2016 financial year. This is sufficient to continue funding our most attractive growth projects, all of which have earned capital in a highly competitive environment.
Improvements in capital productivity have allowed us to exercise flexibility and to continue to invest in incremental, high-return brownfield opportunities. We also hold an A+ rating with S&P and have consistently maintained the sector’s strongest balance sheet.
Our disciplined approach allows us to be confident in our commitment to the progressive dividend. We do not plan to rebase the dividend following the demerger and shareholders can also enjoy the possibility of further cash returns from South32 dividends.
The combination of the quality of our assets, the strength of our balance sheet, and our confidence in future productivity gains allows us to see the current phase of the commodity price cycle as an opportunity.
The quality, depth and flexibility of our growth portfolio is a key differentiator
While productivity improvements and cost reductions are absolutely essential, longer-term value creation and future dividend growth also comes from investment in quality projects. This is a great time to invest. We have both the growth options and the financial strength to invest at all points of the cycle.
Our preferred development opportunities have an average rate of return in excess of 20 per cent. More broadly, the un-risked value of our growth options is over US$40 billion under our long-term price forecasts.
We have long-term security of tenure across our portfolio to allocate capital whenever and wherever it delivers the greatest value. Our uniquely diversified, long-life, low-cost resource portfolio – which is supported by security of tenure in stable jurisdictions – liberates us from volume-led investment decisions.
In Iron Ore, our recent decision to defer the Inner Harbour Debottlenecking project demonstrates the significant capital productivity gains that we continue to realise. We continue to expect to achieve a system capacity of 290 million tonnes per annum but at a lower capital cost.
Beyond these plans our Iron Ore business and Metallurgical Coal operations will only receive essential maintenance capital going forward, since these markets are well supplied. Instead the focus for future investment will switch to those commodities with more attractive supply-side fundamentals, namely copper, petroleum and potash where we have world class options in both the medium- and long-term.
In the first instance, we will continue with our value-focused approach to further develop our tier-one Shale liquids resource base and we will use the flexibility we have to respond to external market conditions.
At Escondida, the extension of Los Colorados will enable the utilisation of three concentrators, which will offset grade decline and maintain strong production for a decade without the requirement for further major investments. At Spence, the development of the hypogene resource has the potential to deliver incremental copper capacity of approximately 200 thousand tonnes per annum at low cost and increase mine life by more than 50 years. In addition, Mad Dog Phase 2 presents us with a significant conventional oil opportunity to develop one of the largest discovered reservoirs in the Gulf of Mexico.
Beyond these attractive medium-term opportunities, we are evaluating a low-risk, modular, capital efficient expansion at Olympic Dam that could support over 450 thousand tonnes of copper production per annum at first quartile cost. We also hold a 45 per cent interest in Resolution, one of the largest and highest grade undeveloped copper assets in the world that could eventually become the largest copper producer in North America.
In our Onshore US business, while our near-term focus will remain on liquids production, longer term, in line with our positive outlook for US gas, we will retain the option to fully develop our significant low-cost gas resources across the Haynesville and Fayetteville acreage.
Lastly, in Potash, we continue to make good progress in shaft excavation at Jansen. Once the shafts are completed we will have the most advanced option in the sector to bring new greenfield supply into a market with great fundamentals. As we monitor the evolution of the potash market we will continue to study the most robust and value accretive development plan for the next phase of the Jansen project. Through this measured but deliberate approach to our unrivalled position in the world’s premier potash basin, with long-term security of tenure, we are well positioned to create significant long-term value.
Beyond the existing options in our growth portfolio, exploration has the potential to further broaden our opportunity set, particularly in conventional oil with our Trinidad program set to commence drilling next year.
These copper, petroleum and potash options are world-class by any measure and we are preserving and progressing them at minimum cost. Meanwhile, we will also continue to evaluate our portfolio in the face of changing market conditions. If prices are high we will consider further divestments, while we are more likely to consider acquisition opportunities at this stage of the cycle with a focus on copper and oil assets. However, given the quality and depth of our growth portfolio, the hurdle on potential acquisitions is set extremely high.
Creating value through the cycle
As we look ahead, we aim to continue our established track record of superior shareholder returns and sustained dividend growth. We have the best portfolio of assets and further organisational simplicity will be a catalyst for greater productivity and flexibility which, combined with our strong balance sheet, will support our operations and further insulate the dividend through cyclical swings. This preserves our capacity to invest in high-quality growth projects across select commodities at all points in the cycle.
These are the building blocks of our unique offering and, by maintaining our focus, we will deliver shareholder value even in the current phase of the commodity price cycle.