15 May 2018
Andrew Mackenzie, Chief Executive Officer
Bank of America Merrill Lynch Global Metals, Mining and Steel conference
Miami, Florida, USA
Slide 1: Delivering value and returns
Good morning ladies and gentlemen… it’s a great pleasure to be here today.
Slide 2: Disclaimer
Slide 3: Key messages
Over the past two years at this conference I have outlined detailed plans to improve returns and increase the value of BHP.
In that time we have:
- Maximised operating cash flow as we lowered costs through productivity;
- Been disciplined and transparent in capital allocation; and
- Identified new options to increase value and returns.
We’ve made substantial progress. And as we build on that momentum we have confidence.
That fundamental support for commodity prices will persist, driven by:
- Strong Chinese demand;
- A sustained recovery in the developed world;
- Environmental and supply side reforms in China; and
- Lower levels of investment observed across the industry, which have curtailed the outlook for supply.
We see a positive future ahead for both prices and our portfolio.
Slide 4: Value and returns are at the centre of everything we do
We’ve shaped our portfolio around the highest-quality assets in stable, low-risk jurisdictions.
They supply premium commodities with attractive fundamentals.
This portfolio is truly unique and impossible to replicate. But success is not just about the right assets in the right commodities, it’s how you operate that also creates real value.
We have distinctive enablers to deliver significant value.
Integrated systems and processes coupled with high standards of governance and transparency hold us true to our Charter Values. And our culture of connectivity and continuous improvement allows us to replicate best practice across our operations. Our drive to become leaner, more agile and more productive will never cease.
We have recently commenced work to elevate all our functions to a world class standard in both efficiency and effectiveness.
Our push to improve maintenance practices through a global centre of excellence targets increased availability in critical equipment and substantially lower maintenance costs.
And through all stages of the value chain from resource assessment, technology, and procurement, to operations, to marketing, we will test the boundaries of what is possible.
Even before we sanction any further projects, if we can deliver the full extent of these levers we could unlock significant free cash flow. We believe the potential is considerable!
Slide 5: Our plans are delivering
I’m delighted to report that higher prices for our commodities and the successful delivery of our plans has underpinned an increase in our return on capital employed from two per cent to 14 per cent.
Our actions, together with stronger commodity prices, have also resulted in a 30 per cent increase in BHP’s base value which reflects our current planning forecasts, before the addition of upside opportunities.
Slide 6: We have built base value over the last two years We have been transparent with our plan to increase value and returns through six key value drivers.
Across these focus areas we have:
- Reduced unit costs by more than 15 per cent;
- Accelerated our technology and innovation program;
- All but completed five high return, latent capacity projects;
- Sanctioned two major growth projects in copper and oil;
- Made discoveries at four exploration prospects;
- And, improved the performance of our Onshore US acreage, as we prepare for exit into a supportive price environment.
Alongside this we have:
- Reduced net debt by over ten billion dollars;
- Returned eight billion dollars to shareholders;
- And crucially, replenished our pipeline with new opportunities.
Slide 7: Future opportunities offer further upside
Despite what we’ve achieved we have identified new ways to take advantage of further upside across our six drivers.
The first is productivity. Here we continue to target a further two billion dollars in gains by the end of the 2019 financial year.
Second, we have sharpened and lifted our focus on technology to redefine what is possible to further lower costs, unlock resource and improve safety.
Third, we renewed our portfolio of low-risk, latent capacity options. These offer average returns of more than 100 per cent.
Fourth, we improved the risk-return profile of our major projects so they are more competitive within the Capital Allocation Framework.
Fifth, our exploration program aimed at copper and oil offers significant potential to replenish reserves and grow these businesses.
And finally, we are confident that our exit from Onshore US will accelerate our broader value and returns agenda.
Together these opportunities have the potential to add a further 40 per cent to the value of BHP.
However, before I step through each of these in more detail, let me reiterate that we will remain disciplined in the allocation of capital.
Slide 8: Capital discipline, debt reduction and shareholder returns
Our now familiar Capital Allocation Framework is institutionalised across every financial decision we make. It is highly transparent and guides the deployment of capital between the balance sheet, investment and returns to shareholders.
And so with conviction in the outlook, net debt within our target range, and with clearly defined capital plans, we expect a larger proportion of future free cash flow to find its way back to you, our shareholders.
Slide 9: Cost efficiencies – focused on further gains
So back to our focus areas. Since 2012 our annualised productivity gains exceed 12 billion dollars. While further gains will be harder won I am encouraged by what I see across our operations.
For example, at Escondida through improvements in fleet run time, targeted maintenance and better labour productivity, we reduced mining costs by almost one third.
And at Western Australia Iron Ore’s Yandi mine truck availability is consistently above 92 per cent, and unplanned down time at our train load out is less than one per cent. Both have pushed benchmark levels.
Despite a number of headwinds we have maintained our challenging target to achieve two billion dollars of productivity gains by the end of the 2019 financial year. It’s a high bar, and while we won’t compromise on safety. We will push ourselves to the limit to achieve it.
At Queensland Coal our medium term cost target has increased to US$57 per tonne. This reflects reduced low-cost tonnes from Broadmeadow, as we shorten longwall panels to avoid the low-shear zone, and slower regulatory approvals for new low-strip mining.
Overall, we are confident that our actions will help mitigate the impact of field and grade decline in our petroleum and copper assets and deliver further cost reductions at our bulk operations.
Now to technology, which has the potential to help boost our cost efficiency efforts.
Slide 10: Technology – improve safety, increase productivity, unlock resource
Technology can transform the resources industry. And as one of the world’s leading resources businesses our scale, simplicity and connectedness uniquely position us to capitalise on the benefits of new technology.
While in the past we have sometimes been comfortable as a fast follower we absolutely recognise the imperative to be at the forefront of this structural change.
To this end we have invested to build our capability and continue to advance projects that reinforce our safety and productivity leadership.
And, we have programs that identify our highest priority areas and fast-track our ideas.
One example is decision automation which allows us to better understand equipment variance across our operations. It creates machine learning algorithms that analyse root causes in real time to better and more accurately predict failures and plan maintenance in advance.
Slide 11: Latent capacity – attractive returns, limited risk
Latent capacity opportunities are some of the best investments we can make. They offer the highest returns, often with the lowest risk and remain attractive across a wide range of price scenarios.
Two years ago I presented an equivalent slide with five projects. We have since actioned all of them and they are no longer on this list. Our business is stronger as a result of the incremental cash flow and returns these investments have generated.
And thanks to the effort of our teams around the world, we have developed a suite of new initiatives in their place.
For example, through investment in stripping capacity and an increase in productivity across our Queensland Coal supply chain, we can shift the bottleneck towards our coal handling and preparation plants.
For a total capital spend of US$4 billion this suite of projects has the potential to deliver low-cost capacity of up to 2 million copper equivalent tonnes, at an average return in excess of 100 per cent.
Slide 12: Future options – worked for value, timed for returns
Latent capacity opportunities to debottleneck our assets are only possible because they piggy-back on previous investments we’ve made to develop new projects.
These projects have been an important contributor to BHP’s value creation over the last century so it is important that we maintain a broad suite of options for the future.
We must work on these options at all points of the cycle to cement our future over the medium to long-term, and to be ready to act counter-cyclically.
The opportunities we have today have been developed over many years. They are diversified across commodities and timeframes to provide attractive optionality and more fierce competition for capital.
In aggregate, they have an un-risked value of around US$15 billion, and have the potential to deliver average returns of 17 per cent at consensus prices.
As always we will be guided by our Capital Allocation Framework, which means we will only invest in the best of these. Combined with our ongoing focus on capital efficiency we expect annual capital and exploration expenditure to remain below US$8 billion over the coming years.
Over the past 12 months we have improved risk-return metrics across a number of our projects.
For example, at Olympic Dam we have taken a staged approach to resource development.
Current efforts will deliver operational stability and productivity as we move into the higher grade Southern Mine Area. The focus then shifts to the BFX option. Through investment in surface infrastructure and accelerated underground mine development. This option has the potential to increase production to 330kt of copper per annum. Over the medium-term, this approach offers attractive returns at low risk.
In Potash, Jansen shaft development has progressed well and we’ve now entered the ore body. Much of the project’s technical risk is therefore behind us. Jansen is a tier one resource but its future is still to be determined. In order for it to compete for capital we will look for ways to further improve risk-return metrics, as we refine engineering plans and consider potential partnerships.
Slide 13: Exploration – focused on copper and petroleum
Exploration is the most efficient way to develop future options to replace our resource base as we look to our longer-term future.
Our focus is on oil and copper in line with our favourable outlook for these commodities.
Several years ago we conducted a global endowment survey that influenced our decision to exit shale and informed a new conventional petroleum exploration strategy.
We are encouraged by the results. We have:
- Made discoveries in four out of the six prospects tested over the past two years, across two key basins;
- Secured more than 100 highly prospective blocks in the Gulf of Mexico; and
- Competitively acquired the Trion discovered resource in Mexico.
A similar endowment survey is underway for copper. As we do this, we leverage the expertise of our Petroleum geologists who have pioneered and advanced the science of sub-surface imaging and interpretation.
Our copper exploration is at an earlier stage than Petroleum but we continue to seek, secure and test concessions in high-potential locations such as Ecuador, Canada and Peru.
Slide 14: Onshore US – exit to maximise value and returns
We have made good progress with the exit from our Onshore US business.
We are open to a trade sale demerger or IPO, but our preference is a sale in one or multiple packages for cash or strategic assets within our existing footprint.
And the sale process is on track. All data rooms are open, bids are due in the coming weeks and we hope to announce the sales by the end of this calendar year.
The environment is supportive. The quality of our acreage, higher oil prices, a lower US corporate tax rate and positive results from recent well trials have all contributed to the interest from potential bidders.
An exit is the right approach to maximise value and returns. It has the potential to lift Group return on capital employed by 3 per cent with minimal impact to free cash flow.
Slide 15: Value and returns are at the centre of everything we do
We have achieved a great deal over the past two years and leveraged the simplicity that we have worked so hard to embed in our business.
Our actions across our six key value drivers, coupled with higher commodity prices, have increased returns by 12 per cent and improved the base value of BHP by 30 per cent.
Our future plans give us the potential to grow the value of BHP by a further 40 per cent and significantly increase return on capital employed.
Slide 16: Key messages
In conclusion BHP is well set-up for future success. We have a simple, unique portfolio of the very best assets, diversified across attractive commodities.
Our relentless pursuit of productivity, aided by our agile and connected culture, will make sure we realise the full potential of these assets and capitalise on strong prices. On top of this we have built an extremely attractive suite of opportunities to drive further improvement.
But as always we will be disciplined with our capital, with all investments weighed against further cash returns to shareholders.
As you can see we have everything we need in the portfolio to generate further value and returns.
Our path is deliberate, and our resolve to create value will never end.