10 May 2016
Andrew Mackenzie, Chief Executive Officer
Bank of America Merrill Lynch 2016 Global Metals, Mining and Steel Conference
Miami, USA, 10 May 2016
Good morning ladies and gentlemen. It is a great pleasure as always to be here.
Let me point you to the disclaimer and remind you of its importance to this presentation.
Three years ago I first presented at this conference. I asked you then to track me on the delivery of BHP Billiton’s strategic priorities:
- Portfolio simplification
- Capital discipline
I am pleased to report we have made good progress. While there is still much more to do, we have delivered:
- Annualised productivity gains of over US$10 billion
- Demerger of South32
- Reduction in capital spend of almost 70 per cent
Although we have been surprised by the speed, quantum and correlation of recent price falls, our actions position us well for this new era of economic uncertainty, market volatility and geopolitical instability.
Markets remain oversupplied, sentiment cautious and we expect a period of prolonged lower commodity prices and volatility. Notwithstanding new macro-economic realities, we are confident in the outlook for our portfolio of commodities, particularly copper and oil. However we are not merely waiting for prices to recover.
We have a diverse range of opportunities in the portfolio today and the financial strength and flexibility to pursue them. These opportunities will see us prosper in this volatile environment and grow value per share at all points in the economic cycle.
Our strategy of safe productivity and quality assets are preserving margins and releasing stronger cash flows. In the next financial year, we could expect to generate, at early April spot prices and foreign exchange rates, free cash flow in excess of US$5 billion dollars.
Our capital allocation framework prioritises asset integrity, balance sheet strength and then a minimum dividend payment under a pay-out policy. The framework then allows for excess free cash flow to further strengthen the balance sheet, to be re-invested carefully in the most accretive opportunities or returned to our shareholders through buybacks or additional dividends.
Today I present a roadmap based solely on our broad suite of existing opportunities which, even without a significant recovery in commodity prices, has the potential to grow the base value of BHP Billiton by more than 70 per cent.
The waterfall graph shows some of the opportunities we are actively progressing to realise this valuation uplift.
First comes the enormous potential we still see from safe productivity. This includes further operating and capital cost efficiency.
Second, incremental volume growth through the release of low-cost latent capacity which could add more than 10 per cent to our current annual production.
Third, our flexible shale assets with such a large resource base gives us the ability to respond quickly to higher prices and provides attractive growth opportunities in the near term.
Fourth, our portfolio of growth projects, at consensus prices and excluding shale, has an aggregate Net Present Value of US$25 billion. These projects continue to make strong progress through the study period. If their execution is the best use of capital funds, we expect some will begin production by the end of the decade.
Fifth comes exploration where the counter cyclical acceleration of our drilling programs, particularly in Petroleum, has the potential to create significant value as we test several large prospects in three basins over the next three years.
Finally our investments in technology can improve our safety, further lower our cost base and increase volumes leading to long-term value creation.
I will now step through each in more detail.
Our sustainable approach to productivity has already significantly reduced unit costs and delivered annualised gains since 2012 of over US$10 billion.
Of course we are not the only ones to have responded to this lower price environment. All have taken action to reduce their costs and with favourable exchange rates and lower oil prices cost curves have flattened.
We have been surprised by the extent of cost cutting across the industry. While some of this is likely to endure some appear to be approaching the limits of what is possible given apparent geological, geographic or scale constraints.
For many in the industry the next step in the productivity journey may be harder to take. As a result we believe productivity will become a greater differentiator in the future.
I am confident that our assets and people will allow us to continue to improve safe productivity and move further ahead of the competition.
The simplicity of our portfolio, the scale and quality of our ore bodies and oil and gas fields and our standardised systems and processes are all unique attributes.
When combined with a newly streamlined corporate structure, and centres of excellence in maintenance, projects and geoscience, we are well positioned to:
- Reduce costs faster and more profoundly than our peers;
- Steepen the gradient of the cost curve even in the bottom quartile; and
- Therefore grow our margin and free cash flow.
By taking advantage of these attributes, next financial year we expect unit costs across our major assets to be almost half the levels experienced five years ago:
- At Western Australia Iron Ore, we expect unit cash costs, before freight and royalties, to be approximately US$14 per tonne.
- At Queensland Coal, we expect to reduce unit costs to about US$55 per tonne.
- At Escondida, we expect to lower unit costs to just US$1 per pound, as we offset grade decline.
- Our average unit operating cost for conventional oil will be less than US$10 per barrel.
In the 2017 financial year we expect these reductions in unit costs to contribute to further productivity gains across the whole portfolio of US$1.6 billion.
Our relentless focus on productivity could also release over 1 million tonnes of copper equivalent latent capacity at a total capital cost of less than US$1.5 billion.
This set of opportunities reflects the scale, quality and diversity of our portfolio and delivers further returns on the investments made over the last decade.
Let me describe some of our key latent capacity projects.
First to copper:
- At Escondida, with the third concentrator and desalination plant complete, we can use the Los Colorados concentrator to help offset grade decline and over the next decade add incremental annual copper production of 150,000 tonnes.
- At Olympic Dam, over the next five years, with the current mine and surface facilities and without major capital, we could grow annual copper production to 230,000 tonnes. With efficient investment underground in the Southern Mine Area, we have the potential to reach 280,000 tonnes.
- The Spence Recovery Optimisation project which is really about improving the efficiency of the existing leaching operations achieves full utilisation of tank house capacity and increases annual copper production before the major growth option to 200, 000 tonnes. This incremental copper production generates high returns and targets strong fundamentals in the medium term.
In steel making materials:
- At Western Australia Iron Ore with minimal additional capital we are on track to reach 290 Mtpa before the end of the decade.
- Through the use of latent wash plant capacity at Caval Ridge, we could optimise highly competitive production at Queensland Coal to add 4 Mtpa. Under both current spot prices and consensus forecasts these incremental iron ore and met coal tonnes would be highly profitable.
These latent capacity projects generate strong returns across a wide range of commodity price scenarios with average internal rates of return exceeding 60 per cent.
Finally to Petroleum:
- We have the opportunity to create significant value within the liquids-rich fields of our Onshore US acreage where we have almost 1,400 wells yet to be developed offering competitive returns at oil prices below US$60.
- In the current environment, cash preservation is our focus: we have reduced capital spending to US$700 million next financial year; our rig count to four, and we continue to exercise flexibility in the pace of drilling and fracking to maximise value as prices recover.
- In the Permian, drilling obligations are well advanced. Further drilling cost and time improvements available through productivity will continue to reduce the obligatory costs to retain this valuable option for the medium and longer term.
- Beyond our liquids-rich opportunities, we can generate attractive returns by developing approximately 700 wells in our dry shale gas fields at less than US$3.50 gas. Our ongoing productivity initiatives aim to reduce these break-evens further well below US$3.50.
- Although the acquisition was poorly timed we believe our shale assets positively differentiate us from peers. Their huge resource potential, sector- leading operational efficiency, short pay-backs, and the option to match activity with price movements, position us well to maximise future value.
Our quality portfolio of tier 1 assets offers attractive medium-term growth options. These projects at consensus prices deliver an average internal rate of return in excess of 15 per cent and are valued at US$25 billion.
As we progress these projects we continue to improve their capital efficiency. Security of tenure gives us the flexibility to time first production to when supply and demand rebalance.
Studies on the Spence Growth Option (SGO) continue with the potential for this project to add 200,000 tonnes of copper by 2020. This will be well-timed for the improving market fundamentals we expect.
As with all our projects, through ongoing further study we will continue to unlock significant capital efficiency. For example at SGO, where Board review is scheduled to occur towards the end of 2017, we now expect the project’s capital cost to be less than US$2.2 billion dollars. This is 30 per cent below preliminary estimates.
At the same time throughput of ore is now expected to exceed the original plan of 95,000 tonnes per day.
We are also enthusiastic about the development plans for Mad Dog Phase 2 where first production is expected in the 2023 financial year.
Continued optimisation has reduced our share of expected capital costs to between US$2.5 and US$3 billion and our joint venture partner BP has stated sanction could be considered in the next 12 months.
The significant improvement in development costs makes Mad Dog Phase 2 even more resilient to lower oil prices.
We also see exploration as an important counter-cyclical investment to enhance our copper and oil reserves.
In copper over the years we have surveyed the world to match geological opportunity with geopolitical stability.
Today our focused copper program invests US$100 million a year to advance greenfield exploration. This year we have added over 140,000 hectares in Peru and the South West United States and increased the number of targets tested by 38 per cent.
These regions are well endowed with copper and continue to offer huge potential.
The petroleum exploration program we have embarked upon is our most significant in many years, and at a time when the industry is cutting discretionary spend, our program is one of the largest.
We are focused on our core competencies in conventional deep water with a portfolio of tier 1 liquids opportunities where we have a high working interest and operatorship.
We intend to drill six highly prospective plays in three years within the Gulf of Mexico, Caribbean and potentially the Beagle sub-basin off the coast of Western Australia.
Our most recent well in the Gulf of Mexico, Shenzi North has encountered hydrocarbons. While we continue to evaluate results, we are excited by what we have seen so far. Following this success early next financial year we plan to spud the Caicos well in the basin to the north of Shenzi. If successful this would significantly de-risk an exciting upside case in the area.
We have increased the pace of investment in our exploration portfolio over the last nine months. We have acquired 87 blocks in the Gulf of Mexico and we have secured an additional exploration rig, the West Auriga drillship, so that we can drill our Gulf of Mexico and Trinidad programs in parallel.
This is a high-quality portfolio of prospective options which is being progressed by our world-class exploration team and leading-edge technology, which finally brings me to technology.
Technology represents a further opportunity to create significant value and we continue to invest to lower costs and increase volumes and resources.
Our globally integrated technology team works in step with our Assets on prioritised initiatives focused on high-value opportunities. These initiatives are piloted at the Assets and once proven rapidly implemented across the Company. Examples include:
- Heap leach studies at Olympic Dam to reduce the cost of processing
- Unmanned aerial vehicles at Queensland Coal to improve safety and performance
- Use of completions technology in Onshore US to increase the permeability of fractures
- And a range of initiatives at Escondida to further offset the impact of grade decline
While harder to explicitly quantify our deep pipeline of initiatives, our employees and technology could add significant value.
Today I have presented a roadmap of diverse opportunities which have the potential to significantly increase the value of our company and the return on invested capital for BHP Billiton shareholders.
Despite a new era of economic uncertainty, market volatility and geopolitical instability we do have conviction in the outlook for our commodities, particularly copper and oil. Yet we are not merely waiting for commodity prices to recover to grow shareholder value.
Our relentless focus on safe productivity will continue to maximise cash flow and allows us to invest through the downturn in strict accordance with our enhanced capital allocation framework.
We have a shale business which we can ramp up quickly as prices recover, a portfolio of medium-term growth projects and we continue to invest in our exploration program and innovative technologies to secure growth in the longer term.
We recognise that while our new dividend policy increases flexibility, it also brings added responsibility to allocate capital in the most transparent and disciplined way.
Today, like three years ago, I ask you to track us on the continued delivery of BHP Billiton’s strategic priorities:
- Safe productivity
- Simplification, and in particular
- Capital discipline
The optimal allocation of excess free cash flow is critical and we will be transparent and disciplined with how we use every dollar between further strengthening our balance sheet, more cash for shareholders, dividends or buybacks or investment in growth, exploration and technology.
Our roadmap of diverse initiatives with investment at the right time has the potential to significantly increase the return on invested capital and grow the value of our company by over 70 per cent.
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