BHP Group Limited (BHP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the BHP half year financial results, investor and analyst Q&A session. I advise you that this conference is being recorded today. [Operator Instructions] I'd now like to hand the conference over to Mike Henry, Chief Executive Officer, BHP Group.

Thank you. Well, hello, everyone. Thank you for joining. I'm here with David Lamont, our new Chief Financial Officer. We're going to make some quick comments before we go to questions. We had a strong first half operationally and financially, EBITDA up by 21% period-on-period to USD 15 billion, and EPS up by -- underlying EPS up by 16% to just over $1.19 per share. We had the second highest margin in 20 years at 59%, and the highest return on capital employed in the past 9 years at 24%. We have seen record production at Western Australian Iron Ore with full calendar year shipments of 290 million tonnes, record concentrator throughput at Escondida and the best production half at Olympic Dam in 5 years. And very, very importantly, we did all of this safely. We progressed our growth projects on schedule and on budget, in spite of the challenges faced elsewhere across the sector with Atlantis Phase 3 and SGO delivering first production during the half, and South Flank remaining on track to deliver first ore within the next 6 months. We secured a further 28% stake in the Shenzi asset through a well-timed countercyclical acquisition. And we've continued to advance our securing and de-risking of options in future-facing commodities. And finally, we continue our track record of ESG leadership, including on climate change, with the announcing of a new set of climate change commitments, further renewable power contracts, the world's first tender for LNG fuel bulk carriers and steel industry partnerships with the China Baowu Group and JFE. All in all, a very strong half performance-wise. And in terms of advancing our strategic agenda, all achieved, of course, against the backdrop of continuing COVID challenges and disruption in some of our markets, thanks to the way our people have stepped up and the support we've had from our stakeholders. So our business performance is strong, our strategy is intact and advancing, and the outlook for commodities is promising. Overall, a pretty compelling picture for BHP and continued strong shareholder returns and value creation. David, I'd like to turn it over to you for a few comments before we go to questions.

Thanks, Mike. And let me start by saying it's great to be back at BHP after 15 years. I'm certainly very pleased to be joining such a strong leadership team and what a great set of results to start off my CFO role here. As Mike has mentioned, the first half was a very impressive result. Net profit before one-off items was up 16% to that USD 6 billion. And importantly, the reliable and consistent operations, combined with those higher iron ore and copper prices, delivered a stable and strong cash flow, reaching USD 9.4 billion in net operating cash flow for the half. Return on capital employed was a very impressive 24%. The highest that it's been in some 9 years. And importantly, we're able to keep the net debt at the bottom end of our target range. Certainly, from my initial impressions of BHP today, it is clear that the capital discipline and social value are fundamental to how the company thinks about every decision that we make, and that is one of the reasons that I joined the organization. So with that, I might pass back to Mike, and we'll open it up for questions.

Okay. Thanks, David. So operator, we'd like go to questions now, please?

[Operator Instructions] Our first question comes from Paul Young at Goldman Sachs.

And David, 2 questions from me. One on the portfolio -- and one on the portfolio, one on the cost performance. First, just on the Oil division and honing on acquisitions. The question is, with all the majors tilting towards investors on renewables, do you see further bolt-on opportunities in the GOM? Or does the Biden administration's review on new leases and permits on federal end make you pause on acquisitions. Second question, Mike, is on the cost performance. Pretty solid performance, but I do note that FX was stronger, it's impacting cost industry-wide, but kind of single out 2 assets, which actually in there, on my numbers at least, negatively surprised. One being Olympic Dam. Costs were at nearly USD 750 million. I think it's the highest in over 7 -- the highest in a half in over 7 years; and met coal, absolute costs are up USD 250 million half-on-half, yet volumes came down. I'm just curious about how much of the increase in absolute costs, particularly at OD and met coal, might unwind in the next half, if at all?

Okay. Thanks, Paul. So David, I might ask you to comment on costs, but I'll address the question on oil first. So we've been clear in the results, Paul, that we will continue to consider countercyclical acquisitions for the right assets that are a close fit with the existing portfolio. With Shenzi, of course, we knew that asset very well. Time, the acquisition was timed very well, countercyclical in nature, and the drilling work that we've undertaken since the acquisition has been very promising and points to the upside of the internal view that we had of value range. Now you've also referenced the Biden administration's pause on granting of new leases on federal lands. We're still assessing what the implications of that are, as is the rest of industry. But while it may -- under some scenarios, it could impact on exploration-related activity, it, of course, wouldn't preclude existing assets and I think would also have a counterbalancing positive effect in terms of perhaps putting one further constraint on the supply side on top of the big pullback in capital investments that occurred across the industry over the course of the past 12 months. We'll continue to assess the situation. But if the right opportunity is to arise, we're certainly open to considering them, and we've got the ability to pursue them. David, maybe on costs, the question on costs.

Yes, certainly. And let me put the answer in the context, and you certainly did call out, Paul, OD and also met coal. But I would start with the premise that we have certainly not changed any of our cost guidance for the year. So the performance of the assets is in line with our own internal expectations as such. Now met coal for the half was slightly above, and that was largely driven by maintenance costs. So it's a timing aspect, and we certainly see that that will come back in the second half as such. So again, I'd point you back to the guidance that we've given for the full year. In relation to Olympic Dam, we continue to look at the asset integrity side of things, and some of the costs in the half were driven by the SEM process as well.

Our next question comes from Lyndon Fagan at JPMorgan.

Thanks very much. Look, the first question is just on the dividend payout. Obviously, great to see a high number there and certainly, beat the market expectations. Just wondering if you can provide some detail on how we should forecast that going forward, given that, I guess, you are still at the bottom of the gearing target, yet, the payout ratio is materially higher than anyone expected. And the second question is, again, on the portfolio, given the sort of volatility in results out of coal, just wondering if you can talk a bit more about your commitment to coal going forward. And I'm talking now met coal. Obviously, you've made your thermal coal commitments clear. But do you see, I guess, a potential to maybe sort of look at that further? And also petroleum, given, I guess, the way things are moving in terms of decarbonization and investors wanting companies out of fossil fuels, obviously, still profitable, but any thoughts there?

Okay. David, do you want to comment on the dividend question, and then I'll come back to the portfolio question.

Yes. Thanks, Mike. Look, on the dividends, you're right, it was a very healthy payout for the half. I would just stress that what we do is we do look at each half in its own merits and look at, obviously, how the half has performed and what that actually means. And I'll single that out in the context of the capital allocation framework, which let me start by saying, I'm a believer in the CAF. From my side of things, it does create really good capital discipline across the organization, and it's something that we're certainly firmly committed to. So as you know, under the CAF, a minimum payout would be 50%. So that's your starting position. Over and above that, what I would just give you an indication of is that if you look back over the last 3 years, we've paid out $30 billion in cash as a dividend. So that gives you a view that certainly says that if we have excess cash over and above that 50% minimum in accordance with the CAF, we'll pay that out. Now I'm not going to predict what that is. That's largely your role to have a look at, but we'll obviously look at how much cash we've generated in the 6-month period and look to return an appropriate amount back to shareholders.

I think the -- I would just add, Lyndon, that the -- what you've seen us declare this time around is informed by, as David says, was somewhat driven by the CAF, informed by performance during the half and our positive outlook for commodities. Now we still have 4.5 months to go in this half, so we'll have to see where we're at, at the end of the half. But we are constructive in our outlook for commodities, and the business is performing really, really well. Now if I come back to your question on portfolio, so met coal and petroleum. We -- yes, near-term challenges posed by what's happened with the China coal then. But we do -- in looking at this from a medium to long-term perspective, we do need to keep in mind that the -- there's high complementarity between the Australian metallurgical coal resource base and the Chinese steel industry, as there is between the 2 economies. And so one has to hope or believe that in the -- in due course that there will be a resetting of things, and both parties will be able to enjoy the fruits of that complementarity. The other point I would note, however, is that our met coal business, unlike iron ore, for example, is much more diversified by market anyways. And so we started with greater market diversification. That, coupled with the strong customer relationships we have, has allowed us to continue to move all of our products. And if you look at the economic growth that we expect to play out globally, we do believe that there's going to be increasing demand for metallurgical coal. And in particular, the premium quality metallurgical coals, we think, demand is going to remain resilient and that the value of those calls will be increasingly recognized and rewarded as steelmakers seek to decarbonize and we are sitting on the premier business in the world. And so we do see the outlook for that business as remaining positive. Oil and gas, we in the -- really no change in view from what we had in the middle of last year. And that was we, of course, recognize the trends that are playing out around us in terms of long-term oil and gas demand in a decarbonizing world. However, given how essential oil is to so many of the processes that underpin life as we know it today and for it -- well, will remain the case for some time, we think there will be a measure of resilience to demand going forward. You couple that then with a combination of natural field decline and the big pullback in investment that's occurred in the sector over the past year -- we think there's a number of positives to point to in terms of the near- to medium-term fundamentals in the industry for investment. And so we still hold to the view that the industry will remain attractive as a destination for investment, more broadly, for the next decade and likely beyond. In terms of our portfolio, we're going about this in a very balanced way, looking to invest in high-returning options, derisking the options that we've created through our exploration success, but also looking to divest assets that are more mature.

Our next question comes from Hayden Bairstow at Macquarie.

Just a couple from me. Firstly, Mike, you said iron ore, as you said, you sort of touched the 290 run rate for calendar year '20. Just interested in sort of where you see that business going from here. We know you've applied for potential port capacity increases, whether there is some scope to creep a bit higher from here? Or is it going to require some pretty meaningful investment and try and unload capacity at the port? And then just on Olympic Dam. I mean an asset that continues to struggle. I mean I'm just interested to understand, given the decarbonization potential on mining fleets, and hence, the pre-strip and the lack of success on the underground, is a relook at the open pit long term something that would be considered, given you could theoretically cut it back for a lot less and a lot lower carbon emissions than was originally planned?

Okay. Thanks, Hayden. So look, in terms of iron ore, as I've said previously, we don't -- we're not -- we didn't seek the license to be able to ship 330 million tonnes because we intend to expand to 330 million tonnes. My challenge was the business, year in and year out, has been performing better and better and better. Now what I didn't want to see is that we end up in this weird situation of needing to stop production 90% of the way through the year because the team has done a fantastic job. So we wanted to deconstrain ourselves from the 290 million tonnes limit. And as we've shown over the course of the past 12 months, the business does have the ability to perform at that level. First focus is on getting sustainably at 290 million tonnes per annum and doing so with a real discipline around costs, which you can see coming through in the last half as well. I want to maintain that. Now as the team focuses on that continuous improvement in productivity uplift, could it see us go a bit beyond 290 million tonnes? Possibly. But nobody should read this as an intent to pursue expansions per se. Now on Olympic Dam, if I come back there, there was really 2 things in the question that you asked. One was around -- or a point you made around performance, then question around whether the open cut was coming back again. On performance, I just want to draw everyone's attention back to what we've said previously, and that is that our focus was on securing reliable operations, getting back to circa the 200,000 tonne per annum copper cathode production level consistently, to improve underlying productivity in the underground and then to look at medium-term debottlenecking and larger expansion options. And I think what you've seen come through in the past half performance and the trend on performance over recent periods is that increasing reliability. That's happened in 5 years. So we're starting to see the fruits of all of the effort that we've had underway around asset integrity. Still a couple of years to run, then we get through SCM21. And I think the business will be set up for more consistent, high productivity performance from there on out. We then have the question of long-term expansions, which is your point on the open cut. If I think back to the open cut at that time, the capital costs associated with that was going to be huge, and the cash flows or the payback very, very long. Nothing has changed in terms of those fundamentals. So for that to ever be revisited, there would have to be quite a radical shift in underlying productivity assumptions around moving of dirt. So that isn't a focus for us at this point in time.

Our next question comes from James Redfern at Bank of America.

Two questions, please. The first one is just around the potential demerger or trade sale of BMC and thermal coal assets. Obviously, creating shareholder value is a key priority. But just maybe wondering if you could please touch on the pros and cons of a demerger versus trade sale process. And I've got one more question after that, please.

Okay. So thanks, James, and David, you may want to comment on this as well. But let me just -- before I talk to the pros and cons, where are we at in the process? As we said last year, we saw it playing out over a 2-year period or up to a 2-year period, because we were still early in the process and wanted to explore different avenues for divestment, trade sale, variance on that and demerger. We're still looking at the range of options. And at the end of the day, it will come back to what we see as being the best value and risk outcome for shareholders. For us to get a sense of that, there will be a level of market engagement that needs to occur to be able to assess market views of demerger and likely acquisition prices in a trade sale. And it's still a bit too early to tell. We'll be guided by what we surface through the market engagement. David, is there anything you want to add to that?

No. I think other than to say that, as you said, it's a 2-year process, and we're in the midst of that. So we're meeting the guidelines that we've articulated to the market, and the process is underway.

Yes. And sorry, just one other thing I should have mentioned, James, of course, it's a dynamic environment that we find ourselves in. And the conditions for a demerger or -- and/or the conditions for a trade sale aren't static. So there will be a bit here of making our final choice based upon the circumstances at the time or as they evolve over the next 1.5 years. I think you had another question, James?

Yes. Yes. The second question is on Jansen. That's on track to be presented to the Board by the middle of the year. Given BHP wants to grow its copper nickel exposure and essentially potash being the future-facing commodities, copper and nickel, very long-dated given that most of the projects are in the exploration phase. Potash can obviously come on a lot faster and the commentary in the release sort of talked about being positive on demand of potash. So should we read that, that there'll be a strong likelihood of Jansen being approved in the middle of this year?

Look, I really would encourage you, James, to support -- and maybe it would be helpful for us to come back and think about the -- or talk to the way that we think about our commodities and projects. The first thing that we assess is what is the industry attractiveness of a given commodity, which comes back to demand and supply fundamentals, how we see those playing out over time under a range of scenarios. The next question then is, okay, so if we find a commodity attractive, are we able to get our hands on assets that are going -- that are large, expandable at the low end of the cost curve, so we can create a sustained good rent? Third question is do we have the capabilities to operate those assets? Well, what we're trying to draw out in our results presentation or release is that we do like the commodity. So that first test is met. We think that the mega trends that we see playing out in the world bode well for long-term potash demand under a range of different scenarios. And in a more rapidly decarbonizing world, things look even better for potash. Can we get our hands on good assets? Yes, we've got a large position in the world's premium potash basin, and we believe we have the capabilities to run those assets well. Final question then when it comes back to the individual project is, does it generate attractive returns and compete well into the capital allocation framework? And that's the test that needs to be met. And if the answer is yes, so if we believe that the project is attractive on its own 2 feet and it competes well into the CAF, then we'll take that to the Board for a decision. If the answer were no, then we wouldn't carry it forward. Final point to note here is I don't like where we're at with this asset. The fact that we've got $4.5 billion sunk into Jansen and the time it's taken us to get here is something that's certainly not pleased with. And we will build upon the learnings that we've taken away from that in how we think about further projects in future-pacing commodities. But as CEO, I'm accountable for ensuring that we make the right decisions in respect of fresh shareholder capital. And so we will look, when it comes to our position on Jansen, the decision we take in the middle of the year, it will be based on what do we think the best application of shareholder capital is given what we can see in the project and given the other opportunities that we see via other projects or increased returns to shareholders.

Our next question comes from Glyn Lawcock at UBS.

Just 2 questions quickly. Just your commodity commentary obviously just feels -- reads a little bit better than what it did 6 months ago. Clearly, the vaccines come through. Just wondering, in the context of how you're seeing the backdrop, have you looked at -- have you revised, and I know you can't quantify the absolute numbers, but have you revised any of your medium to long-term commodity prices on the back of how you're seeing the world? And given your comments on electrification and I guess, decarbonization, is lithium still a no-go? That's the first one. And then the second one is, hopefully, pretty quick. Just you answered -- you were talking about the 290 million tonnes cap, hopefully, going to 330 million tonnes. Can you help us understand how the dialogue is going with the EPA? Do you see any risks? And do you have any thoughts on when the timing for that could be announced?

Okay. David, do you want to maybe speak to the -- to Glyn's question on the commodity price outlook, and then I'll address iron ore 290 million tonnes.

Yes. So Glyn, let me start by saying, we constantly look at our commodity price protocols. We have a process that's in place, and you would expect, and coming into the organization, it's a very robust process that we follow. There's an annual cycle that we walk our way through, so we review those on an annual basis. And they're staggered. It's not as though we do more at one hit. We stagger those throughout the year based on the commodities. So we fundamentally see that the commodity prices are something that we look at from a strategic perspective. They're not something that you would expect us to fluctuate feeling simply on where spot prices are at. So we go back to a fundamental base, look at the supply curves, look at the demand side of things and constantly update those. So have they changed from 6 months ago? Some have, yes.

But the other thing I would say, Glyn, is -- and this was a big, I think, change that was affected in the way that we think about commodity prices and investments over recent years, and it's the use of scenarios. So everything that you see playing out currently in the world, if you're at the view that things are going to decarbonize more quickly, we have a number of scenarios to deal with that. And so if I think about the range of prices that we test our portfolio and individual projects against, everything that we see playing out around us is within those ranges. But as David said, each year, we will finesse kind of the ranges and where we see ourselves sitting within them. On your second question around iron ore, the -- so it's still a work in process with the authorities in WA. But I think there's broad recognition of the health of the underlying business. And so the conversations often come back to what are the conditions that are put in place under which the license will be granted. And we've -- because we've got a track record of improving dust management, improving water stewardship, improving community engagement, I think all of those are positive and would point to support for the request that we've made. But until we've got approval in hand, of course, you can't say for certainty to how it's going to come through. But as we've done in the past, we'll work constructively with whatever information is required and requests that the regulators have. Sorry, I just recall, Glyn, you did ask about lithium. And no, the view hasn't changed on lithium. But that's not a view on demand because I think as we've said previously, we do think there -- of course, there's going to be strong demand for lithium. We think the industry is going to grow. But our view was primarily based upon an expectation the cost curve is going to be quite flat for lithium, and therefore, the ability to extract great rents there isn't -- we don't believe it's going to be there. And so it's a no for us now, but we'll maintain a watching brief on it.

Our next question comes from Peter O'Connor at Shaw and Partners.

Welcome aboard, Dave. My case explore the supply and demand pathways you mapped out during your presentation and the divergence that I kind of picked up between the 2. So I love your anecdote about copper and nickel demand had a doubling or quadrupling. And also the commentary about steel and its impact on coal and iron ore. So clearly, a robust view is I think you've got a constructive view going forward. And then you talked about iron ore and coal, and I think you talked about only incremental growth opportunities via productivity. Could you just join those somewhat divergent views on demand versus supply on that -- those 2 commodities and how that comes out throughout the year?

Sure. Yes. Okay. Yes. So the -- so what we're trying to draw out there, Peter, is that many -- because -- almost because of the focus on how positive things look for copper and nickel, I think there's this latent view that somehow things must be bad for all other commodities. What we're trying to say is that's not the case. And we also said this when we spoke about our 1.5-degree scenario last September. In a more rapidly decarbonizing world, we actually see that that creates positive or more demand for a number of parties, including the steelmaking raw materials. So the way to read this is, copper and nickel will have faster rates of growth than for other commodities, copper, nickel, potash. In addition to that, of course, you've got the issue of grade decline, which tends to compound the investment attractiveness there. In the case of steel and coal, for the right products, we think demand is going to be resilient. The question is, for how long? So for example, in China, we're still predicting that steel demand is going to plateau and then move into a decline. And over time, there will be some pressure in the iron ore market, but there would be less. That will be -- the pressure will be alleviated a little bit if the world gets onto a stronger trajectory of decarbonization. Now in the case of metallurgical coking coal, there, there's specifically positive dynamics, I think, for the right quality coking coal in a decarbonizing world as steelmakers seek in the interim to reduce their carbon footprint by increasing blast furnace productivity. So for the core of the BMA coal, we think demand will be particularly resilient and the value will be increasingly recognized and rewarded. Now why are we not talking about big expansions in iron ore and coking coal? Because we see the overall market rates of growth, not -- whilst demand will be resilient, they're not going to have the sort of market or demand growth that we'll see for copper and nickel. And so our predominant focus has to be on creating more value through productivity. But if we're wrong and somehow demand takes off in iron ore and met coal, we tried to flag that we do have the latent ability, because of the big resources that we have, to grow those businesses more proactively, but that's not our kind of starting view.

So Mike still, you mentioned doubling over the next 30 years versus the last 30, and you're saying there's not room for iron ore expansions beyond your 330 million tonnes you're asking for the port or the 290 million tonnes cap.