08 October 2021
The FT Commodities Mining Summit
Mike Henry, CEO Interview with Neil Hume, Financial Times Transcript
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NEIL HUME, FINANCIAL TIMES: I would now like to welcome our first guest. It is Mike Henry, the chief executive of BHP, the world’s biggest mining company. Now, Mike, it has been a year since we last spoke at this event, and I think it is fair to say that a lot has happened since then. You have announced plans to spin off the petroleum business, collapse the DLC structure and move to a primary listing in Sydney, and you also okayed the big Jansen potash project in Canada. I do not want to go over all of those things in turn, but I wonder if you could tell me what this says about the direction you want to take BHP in.
MIKE HENRY, CEO, BHP: It is very consistent, Neil, with what I said when I first landed in the role. The focus, big picture, is on three things. One is ensuring that we are the best operator out there, running ever more reliably with a real focus on productivity and tight control of costs. Of course, we also want to be great allocators of capital, and I think we have demonstrated now over a number of years our discipline in that regard. The second area of focus is on social value and on ensuring that we are creating value for all of those around us, of course starting with shareholders but also all of those others who depend on and support BHP. That then provides a solid foundation from which we can continue to grow, and to grow shareholder returns and value, and we can do that through growing in future-facing commodities – those commodities that the world needs more of. Jansen is a prime example of that.
Everything you have seen us announce at the full-year results is about positioning BHP for the future, wholly in line with what we have said we are going to be focused on. You saw that shining through in the operational and financial results. That stable foundation has given us the ability to make some of these big moves to get BHP positioned for the next 20, 30 or 40 years and to progress further in weighting the portfolio towards future-facing commodities like potash, copper and nickel.
NEIL HUME: Okay, so that is what follows next, is it? It is a push into those future-facing commodities. From what you are saying there, you feel the foundation is in place. The operating performance is good; the social value piece is ticked off. Is it now time to go for growth, then?
MIKE HENRY: Clearly, both the operating performance and social value require constant focus, so we cannot be complacent on these things, but you can see the momentum that we are building in the underlying business. Yes, we do want to grow. We have good growth ahead of us in copper over the next five years thanks to bringing on the Spence growth option last year, more stable production at Olympic Dam and some grade increase at Escondida. We also have some growth opportunity ahead of us in nickel. But we want more. Clearly, the demand outlook for potash is very strong. We like these industries, and we believe we are well placed in terms of our operating capability and the way that we think about, deal with and engage with those around us on the social value front.
We are very well placed to be at the forefront of developing and supplying those commodities that the world is going to need more of, as the population continues to grow and as the world seeks to tackle the massive challenge that we have ahead of us on the climate change front. It is going to be very metals-intensive. The world needs good companies to be developing these resources. Our track record, our capabilities and our balance sheet put us front and centre in terms of being able to do that.
NEIL HUME: Perhaps we can come back later to actually how you will get access to these future-facing commodities, but just in terms of the changes that you have announced, so petroleum and the DLC collapse, what has been the feedback from shareholders?
MIKE HENRY: There is very broad-based support. It has been good to see how our shareholders, by and large, have really understood what we are trying to do by way of getting the company ready for the future, and they can see the value that is going to be unlocked through the petroleum merger with Woodside, where we are going to create a company that is larger and more resilient. It is going to be one of the top 10 independent E&P companies in the world, and it is going to unlock near-term value for shareholders in terms of synergies.
Of course, we have announced a lot in one go, starting with these record results and record final dividends. There were three big strategic announcements that we put out there. Of course, there are still questions from some, and we continue to work through those, but there is broad-based understanding and support for the direction we are taking the company in.
NEIL HUME: On the DLC, why are you collapsing that? Is it because it then gives you the potential to do bigger deals? I would have thought, perhaps, that having a London currency would make it easier to do deals. Can you explain some of the thinking behind why that structure is being collapsed now?
MIKE HENRY: I just want to make one point of clarification before I move on to the why. We will continue to have a listing in London, but it will be a standard listing, a secondary listing rather than a primary listing. We hope that the vast majority of shareholders who currently own BHP shares are going to continue to hold those BHP shares, and they will be able to do that through holding a London listing, an Australian listing or a listing in Johannesburg, New York and so on.
Now, as to the why, look, the DLC was put in place about 20 years ago now, and it was with a very specific purpose in mind. It was at the time of the BHP and Billiton merger, and about 40% of the company’s earnings were being generated out of the assets that sat below the plc side of the structure. That has dwindled away to zero. The original logic behind why we wanted to have the DLC in place has fallen away. There are certain inefficiencies that occur with the DLC. By collapsing it, we will be a more efficient and more agile company, and will be better positioned to continue to grow the company over time, because of that efficiency and agility that is going to come with the DLC collapse.
NEIL HUME: Perhaps I could just ask a broader question now. In the future of the mining industry, do you think big is still going to be beautiful, as it were? You have obviously announced the Jansen project. It is a big investment that you have to make in order to get to stage one. It is almost $6 billion. At stage one, it still does not really move the needle. That illustrates, I guess, the problem of trying to grow a business. Do you think there is a case that perhaps you need to consider shrinking the business in some way? You could have a steelmaking business that focuses on iron ore and, say, coking coal and then a future-facing metals business. You could split things up in order to grow more quickly. How do you see it?
MIKE HENRY: I will start by saying that we have spent a lot of effort over the course of the past decade simplifying and streamlining the portfolio. That has made us a simpler, stronger business.
Companies should not pursue scale for scale’s sake, but, if I step back and look at the world we find ourselves in, as I said earlier, the world is going to need a lot more by way of copper, nickel and even steelmaking raw materials in order not only to support ongoing global economic growth and population growth, but to tackle the huge challenge the world has ahead of it on the climate change front. Decarbonisation is a metals-intensive activity. At the end of the day, the supply of those commodities will be there, but the world needs it to be there as efficiently, as timeously, and brought to market in a way that is as ESG-friendly as possible.
In order to do that, there needs to be broad-based focus on ESG. The companies that are developing these resources need to be not only good at finding resources, developing those resources and operating the mines; they also have to be increasingly good at how they go about engaging society and communities, and tackling broader ESG issues. A company like BHP has the operating capability and the balance sheet to be able to do this. Part of that comes from scale. The fact that we have scale and that we are able to learn between different experiences around the world, I think, positions us better to develop these resources in a way that is at the very top end of ESG performance. That is what the world needs at the end of the day. There is a benefit that comes with scale in terms of the standards that we are able to set, the operating capability that we are able to build up, and of course the balance sheet that we are able to apply to developing some of these resources that the world needs.
On the growth front, of course we need to find more opportunities to continue to grow. I have been clear that we are focused on four levers. One is innovation. BHP has lots of copper units and lots of nickel units. The question is how many of those units are developable economically. Through innovation, we want to be able to unlock more of the resources that we already have. The second area of focus is on the exploration front. We have increased our activity in that space substantially. The third area is early-stage entry. Of course, M&A remains a lever, but that is something that we need to be really disciplined about. We need to pursue the right opportunities at the right point in the right construct.
NEIL HUME: You mention exploration there. In the past, I think it is fair to say that BHP has focused on OECD countries. Looking at Chile at the moment, you could argue about whether that is actually a stable jurisdiction, given what is happening with the various debates around taxation. I just wonder if, under your leadership, we are going to see a more pragmatic approach to perhaps riskier jurisdictions. You have the scale; you have the size; you should be able to manage risks. Could we see you going into Africa again? After South32, you no longer have a presence there. Could we see you going back in there to look at copper deposits and things? Are you confident that you could manage the risks of operating in some of these countries?
MIKE HENRY: It all depends on the opportunity. From a capability perspective, I am confident that we have the capabilities to pursue opportunities in what some would see as tougher jurisdictions, but of course the size of the opportunity needs to be commensurate with the increased management effort that is going to be required to pursue opportunities in jurisdictions that we may not currently be operating in.
But would we contemplate pursuing attractive enough opportunities? Sure, but I also want to be clear that we do not see exploration success as being confined to moving into new jurisdictions. We know that there is lots more copper to be found in the jurisdictions that we like, but it is going to be harder to find and perhaps deeper, which is going to bring different technological and financial challenges to its development.
There is a real focus within the BHP exploration team on securing those large deposits as well. We will do so through building internal capability around understanding the earth’s crust and geoscience. Having secured those sorts of new opportunities, we have to have the technical knowhow to develop those efficiently and reliably. We are building that capability within the company as well.
NEIL HUME: Okay, but it would be fair to say that perhaps the next big copper deposit probably is not going to be found in one of the Chiles, Perus, Canadas or Australias etc. It may have to be in a jurisdiction that is slightly different, which the industry has shied away from in the past, just given that the low-hanging fruit, as it were, has already been picked.
MIKE HENRY: There is no doubt that there are going to be new large deposits found in jurisdictions that BHP is not currently operating in, but I would point you to Oak Dam as well. Of course, we are still doing further work on defining that resource, but that is in our back yard. It was found through bringing together knowhow and technology to sift through information that was previously available to us but which people had interpreted in a different way. By bringing together new thinking around how the deposits have been formed in the region, applying new technology or bringing technology to bear on the data we already had, we were able to identify the Oak Dam deposit. That provides real opportunity for future growth right here in our backyard.
NEIL HUME: You mentioned earlier that steel is going to be crucial in the decarbonisation of the world, but I wonder also what the decarbonisation of the steel industry means for a big iron ore producer like yourself. What changes will you have to make? We are seeing one of your rivals, Fortescue, announce a big push into hydrogen, producing green iron. Is that the route you want to take? How do you see the business adapting to the pressure that is on steelmakers to reduce emissions and get to net zero?
MIKE HENRY: It is probably going to come, at a very high level, via three routes with three different timings. If I start with the question of hydrogen, we have said previously and we continue to believe that hydrogen will have its day. But it is going to take some time to get there given the current economics, which are not attractive for hydrogen-based steelmaking. Second is the massive quantum of capital that needs to be sunk into developing green DRI. The third factor is the remaining useful life of blast furnaces. If you look at the average age of the blast furnace fleet in China or India, for example, we are still looking at another 20 or 30 years of useful life. We think the economics of taking all that sunk capital, throwing it away and developing hydrogen-based steelmaking rapidly are going to prove to be too challenging.
We expect to see hydrogen making bigger inroads in two or three decades’ time, but, in the meantime, steelmakers have to decarbonise. The way they are going to go about doing that is by moving to more efficient blast furnaces. That is going to require higher-quality hard coking coal, and it is why we believe there is this great business in the higher-quality hard coking coals that BHP has. We have the best of the best in that regard. But then there are also going to be other things that blast furnace steelmakers try to do, like injecting hydrogen directly into the blast furnace and so on, which is one step earlier than actually moving to full hydrogen-based DRI.
With all of these things playing out over the next two decades, we believe this is going to have some benefit for our coking coal business. We also think in the case of iron ore there is going to be a focus on higher-quality iron ore. There is always going to be a tension or trade-off for steelmakers, given the cost of transport for even higher iron content ores from Brazil and elsewhere versus the proximity of Australian ores. For a company like BHP, which within the Australian mix has ores that are pretty well placed – with the development of South Flank we are increasing Fe content and the proportion of lump in our mix even further – we think there is going to be some benefit that we will see over the next decade or two and beyond, as steelmakers try to decarbonise in advance of the longer-term move to hydrogen-based DRI.
NEIL HUME: Okay, so you do not see BHP becoming a big green DRI producer, it is probably fair to say, from that.
MIKE HENRY: That is fair to say. It comes back to shareholder returns. We do not believe that would be a good use of BHP shareholder capital. The second thing is capabilities. One of the things we are always very focused on is, ‘Is it a good business? Does BHP have the capabilities to run it well?’ We think that something like hydrogen-based DRI, which is primarily a processing activity, is better left to somebody else. That is in addition to the fact that we do not see the returns being attractive relative to the other opportunities we have to deploy shareholder capital.
NEIL HUME: You mentioned the capital that would be involved. Can you give me a number as to how much you would think it is going to cost the industry to get into green DRI?
MIKE HENRY: There are many different estimates out there, but what I can say is it is going to be many hundreds of billions of dollars. Even for a company like BHP, if at some point in the future BHP changed its mind and wanted to become a green DRI producer and we wanted to convert all of BHP’s iron ore with hydrogen, the amount of capital involved would be well in excess of BHP’s current market cap, so it would have quite a dilutive effect in terms of return on capital employed for BHP shareholders. We just do not believe that is the right way to go.
Like I said, we believe it is going to have its day in the sun. We believe that day is some ways off. We do not think it is going to be a business that is going to be attractive for BHP.
NEIL HUME: On a related subject, if we could touch on scope 3 emissions, do you think you have been ambitious enough? Given the profits the company is making compared to the investments you are making in some of these greener ways of producing steel, do you think you should be a bit more ambitious and be sinking a bit more capital into it?
MIKE HENRY: I think we are being plenty ambitious. This is a very tough area. We have been quite clear about what we are doing on scope 1 and scope 2. We made the announcement last calendar year of a 30% reduction by 2030. That alone is going to cost between $2 billion and $4 billion by the end of the decade, back-end weighted. With our recent Say on Climate, we have come out and committed to a target of net-zero scope 3 for both shipping and the supply into BHP. But of course that leaves steelmaking out there. As we were just discussing, steelmaking is going to be quite hard to decarbonise. That is point number one. With known technology, it is still not economic to do so. Point number two is that BHP’s ability to determine that outcome as the seller of product rather than the procurer of product, given the position that we occupy in the industry, is not an absolute or as significant as it would be in the case of shipping or supply into the company.
Now, that does not mean we can ignore it. Steelmaking emissions need to be addressed if we are going to address the global challenge of climate change. How we go about doing this is going to be very important. The how is to collaborate with others in the supply chain. We have announced three big partnerships over the past year: with the Baowu group in China, with the HBIS group in China and with JFE in Japan. Those are all geared towards helping them to solve what for them is scope 1 and scope 2 and what for us is scope 3.
We are investing in the technologies that are going to enable decarbonisation, ultimately. We also have, through our ventures arm, some investments in even more even more bleeding-edge or cutting-edge technologies to enable steelmaking decarbonisation. I cannot go out with integrity and commit to something that is still as early-stage as the decarbonisation of steelmaking is and make that as firm a target as we have done for those things that we have a higher degree of confidence around. I want to ensure that anything we are specifically putting a target out there on is something that we have a high degree of confidence in our ability to achieve and that we have a real understanding of both the technologies and the costs required for doing so.
Against the backdrop of where the world is at currently, the Climate Transition Action Plan that we have put out there recently is really ambitious. We understand how we are going to go about doing it. We have costings sitting behind some of the key initiatives like scope 1 and scope 2, and we are working really hard with others in the supply chain to enable steelmaking decarbonisation, but it is a journey.
NEIL HUME: Perhaps we could just change tack now and talk about China quickly. We are seeing an energy crunch there at the moment, which is resulting in power rationing. Are you worried that that is going to slow economic growth and, ultimately, demand for the commodities that you supply in the near term at least?
MIKE HENRY: Well, clearly, we have seen some disruption in the near term. We have seen that coming through most significantly in iron ore prices and even in blast furnace utilisation, with even bigger cuts in electric arc furnace production. Having said that, if we take a step back, if you look at overall Chinese policy, it remains pro-growth. That is being disrupted somewhat by sector-specific measures in the near term, but end-use demand into machinery, consumer goods, exports and so on remains reasonably strong. We expect that will continue to be the case into calendar year 2022.
We do continue to believe that there is a pretty strong growth outlook for China. We are continuing to see strong demand for our other commodities, globally, of course, as economies recover, but even in China. I use the housing industry as one example. On the one hand, we are seeing pressure on housing starts, which will then impact on near-term steel demand. On the other hand, activity on work underway remains very strong, and we are starting to see the pull-through to housing completions, which of course is going to bode well for copper demand. So it is not all a bad news story. Our long-term outlook for China, with continuing strong growth there, has not really changed. We acknowledge that there are some near-term disruptions occurring that have impacted things like iron ore pricing, but that will work its way through the system in due course.
The big-picture outlook for commodities remains really healthy both in China and globally, where we are starting to see a bit of a pick-up in inflation, as well, which has been spoken about. Resources companies like BHP are right at the front end of that, and we are benefiting from that through prices for pretty much all of our commodities at this point.
NEIL HUME: Are you not concerned longer term in China that there seems to be a push by President Xi to roll back this decade-long evolution towards Western-style capitalism? We are hearing a lot about common prosperity. Does common prosperity ultimately equal slower growth or perhaps a slowdown in the property sector as well?
MIKE HENRY: First of all, BHP has always had a long-term view around growth and commodity demand in China. It is not like we have been expecting rates of growth to equal what they have been in the past. We have spoken previously about slowing rates of growth over time. That outlook holds. Clearly, it is going to be in the interests of the Chinese people for China to continue to grow. The composition of that growth will be driven by policy. On something like common prosperity, one would expect that is common prosperity to an increasing standard. We think the outlook for commodity demand there remains strong, albeit that how that growth is achieved will continue to evolve.
NEIL HUME: I just have one final question on China. Relations with Australia seem to be getting steadily worse. How worrying is that for you?
MIKE HENRY: What I can say is that BHP’s relationships with its suppliers and customers in China have never been stronger. We are working very closely together. We saw that early on in COVID, with a number of our Chinese customers and suppliers going the extra mile to help us and others navigate some of the challenges that we were facing at the time. In the period since, you have seen us establish these strong partnerships as a global resources company with our Chinese counterparts.
In terms of Australia-China specifically, one has to believe that the complementarity between the two economies is so strong that, in the fullness of time, we will see things move back into a more constructive space. But in the near term we need to ensure that we are doubling-down on our engagement with our counterparts in China, both customers and suppliers, and looking at how we can collaborate ever more strongly.
NEIL HUME: On ESG, I wonder if we can touch on that. It is clear that we are going to need more metals for the energy transition, but is this focus on ESG investing making it more difficult for the mining sector to access and get those metals by not allowing you into certain countries or making certain stipulations? What are the unintended consequences of this ESG movement?
MIKE HENRY: I will start by saying that the broad push and the demands from investors are laudable, and they are something that we should all be celebrating and supporting. In any time of significant rapid change like we see on the ESG front, of course there are going to be unintended consequences and imperfections in the way the system operates along the way. The challenge for all of us is to come together and get the system operating in the way that the world needs it to operate as quickly as possible.
In terms of unintended consequences, yes, there are some. For example, in the strong push for decarbonisation with the ensuing implications in terms of copper demand, nickel demand and so on, the world does need more copper supply to be brought to the market more quickly, and the same for nickel. Without a concurrent focus on community, water stewardship, biodiversity and so on, you could see unintended or bad consequences on those ESG fronts. So, as we all look to grow supply in those commodities, it is important that it is done with a broad-based focus on ESG. Yes, the commodities supply decarbonisation, but we need to ensure that the standards are set around things like water stewardship, biodiversity, community engagement and indigenous cultural heritage.
Clear standards have to be set, against which companies can be benchmarked in a uniform way. Right now in certain areas the standards still have further to improve. They need to be as global as possible. The way that companies get benchmarked against them still has opportunity for improvement. If we can get all of that right, the world will be able to meet the needs of decarbonisation efficiently, timeously and in a way that sees concurrent improvement in absolute performance in other areas of ESG as well. I believe that all of that is going to lead to advantage for some in the sector, and those are going to be companies like BHP that are large, have strong balance sheets and real technical capability, operate to high standards and can learn, from the global footprint that they have, best practices in one area and then apply those best practices to other areas.
We think BHP is well advanced and very well positioned to be able to meet the needs of the world in terms of growing commodity demand, at least for some commodities.
NEIL HUME: Yes, but, in the same way that we are seeing an energy crisis unfold around the world at the moment due to a lack of investment, do you think policymakers are cognisant that the same thing could happen in metals? It seems that every big project now faces opposition. Resolution, which you are a shareholder in, in the US could supply 40% of US copper for 25 years or even 40 years, and yet this project could be stopped. At the same time, you have the Biden administration talking about wanting to create an EV industry in the US. Could we be sleepwalking into the same sorts of problems?
MIKE HENRY: Yes, in short. I start from the perspective that policymakers are smart, thoughtful people, but they are also needing to manage multiple priorities and multiple constituencies at the same time. Sometimes the fact that things are not coming together in as tight a way as the world needs them to or as quickly as we would like is not necessarily due to a lack of understanding; it is due to the complexity of the stakeholders that are involved and the various tensions that need to be navigated.
Having said that, I think that what you have said is an absolute reflection of reality. Some of the policy overlay that exists currently will work against the world’s need for more of these commodities quickly and reliably. To some extent, that is the history of the resources sector. It is why we have such a cyclical industry. In this case, we owe it to ourselves and to the world to ensure that policymakers and industry players from the resources industry but also in the capital markets are coming together in a thoughtful, purposeful and quite deliberate way to ensure that we understand where these tensions are likely to arise, what we can collectively do to ensure that we mitigate them through the standards we set and the way we benchmark companies, and how we get financial markets working in a way that flows capital preferentially towards companies and opportunities that are going to assure high ESG performance whilst meeting the world’s need for more commodities to continue to grow and decarbonise.
NEIL HUME: I just have one final question, because we are out of time. What narrative would you like to see change perhaps around the mining industry, as the head of the world’s biggest miner?
MIKE HENRY: What narrative would I like to see change? Look, one of the things that I am always keen to get out there about the industry is that this industry is absolutely critical to the world’s ability to continue to grow and to decarbonise. I know that policymakers know that, but it is something that I am very keen for the broader public to understand as well. Pretty much everything that happens, if you go right upstream, starts with resources and mining. All the products that we need, including those products that are going to be required to decarbonise, require mined products or recycled products. With a growing world and a growing economy, there is going to be a need for more mining in spite of high rates of recycling. That is point number one.
Point number two is that mining does a lot of good for the world. Of course, in an industry this big and this expansive, there are examples of where the industry has not performed to the standards the industry needs to perform at – or, rather, individual companies within the industry. But there are plenty of examples where mining is life-changing for communities, provinces, states and nations. Through the way we come together between policymakers, financial markets and the industry, we can set the standards and drive the performance that unlocks even more of that good for the world.
We are certainly focused on that. I know that is the intent of policymakers as well as many in the capital markets. Then we have the industry coming together in the ICMM collectively to do exactly this: to set standards, to come together, to share knowledge and to lift the overall performance of the industry, because we know that it is important for the world.
NEIL HUME: Mike, I think our time is up, sadly. We could have chatted for a lot longer, but I would like to thank you for agreeing to appear at the summit again this year. Perhaps in a year’s time we will see some more significant changes from BHP. Who knows? Mike, thank you very much.
MIKE HENRY: Thanks very much, Neil. It was great to see you.