BHP Group Limited (BHP) Earnings Call Transcript & Summary

I lead Metals and Mining Research for [ BABs ] bases in Australia. We're very pleased to introduce our next company, BHP Group, the world's largest mining company. Presenting from BHP, we have CEO, Mike Henry. Mike Henry started as CEO of BHP in January 2020. And prior to being appointed CEO, Mike led the Minerals Australia business. Mike has also been with BHP since 2003. Mike will be doing a hybrid presentation today. So presenting on BHP recent slides, and I believe we'll have some time for Q&A at the end. Mike, I'm looking forward to your presentation, and the floor is yours. Thank you.

Thank you. Well, good morning, everyone, and thanks for the opportunity today to speak with you about how BHP is performing. And how we're positioning ourselves for the future. But I'm going to talk about 2 things this morning. One is the consistency of our business and the reliability of our cash flow and returns. And the second is value growth, including this exciting opportunity that we have in the Jansen project. It's a simple story. Let me start by saying, though, just how pleased I am with how the company is performing, that's been performing for some time now. As demonstrated in our third quarter results, our business continues to perform well in the face of why I think everybody would admit has been some pretty tough circumstances. Our Western Australian iron ore business remains on track for full year guidance on both production and cost. And this is in spite of having to contend with the state's first major COVID-19 breakup. Amid record high coal prices our Queensland metallurgical coal business has delivered strong underlying performance, and in copper production is growing at Spence and Olympic -- the Olympic Dam smelter is performing well after undertaking a major campaign maintenance in the past year, and it's returned now to full production following that maintenance. We've done all of this. We've achieved these great results whilst delivering on some strategic decisions that we announced last year. So we've completed the divestment of our BMC asset. That's further focused our portfolio or our coal portfolio on high-quality coals for steelmaking. We're weeks away subject to final approvals from merging our petroleum business with Woodside. And in doing so, we're going to create a global top 10 independent energy company. We've entered a new commodity potash through our Jansen Stage 1 project. And in doing so, as I'll speak to later, we've opened up a new growth front for the company. We've also unified our corporate structure back to Australia, and we've set out our climate transition action plan through our Say on Climate vote, and this was strongly supported by our shareholders at our 2021 AGM. Now as I said, we continue to perform well and to execute our strategy. And notwithstanding the challenging near-term environment, we do see a pretty healthy outlook for demand for our commodities. It is clear, though, that the effects of the pandemic are not behind us. We have some jurisdictions where we're already in recovery. And then there's other jurisdictions where they're still seeing substantial and rising case numbers. China being a case in point. They suffered protracted local lockdowns. But policy support should allow for the economy to recover once it's considered safe to do so. Now we are forecasting a bit of slippage of growth out of this year into next year in China, but we expect a pretty strong catch-up once the lockdowns ease. Both Ukraine and COVID-19 have led to lowered expectations for Chinese and global GDP growth in the near term. We also expect that the current supply chain disruptions that we're seeing around the world could take up to 2 to 3 years to resolve. Demand-led inflation, though, is expected to persist for some time. And as everybody in this room would know that's a positive for commodity demand and pricing. There's obviously some growing concern in some quarters about there being potential for a further lag down in terms of economic activity. However, one point I would make is that BHP is positioned well in that sort of environment to continue to deliver value and returns for shareholders and the other stakeholders depend on the BHP business. We bring together world-class resources, a strong balance sheet and differentiated operating capability. And that differentiated operating capability that I think you've all seen over the past few years is underpinned by our technical centers of excellence and the BHP operating system. We maintain the position that we have captured as the lowest cost major iron ore producer in the world. and we're increasing our average product quality through bringing on the South Flank project, and that's currently ahead of schedule. We have the largest copper resource position and the second largest nickel sulfide resource position in the world. and that provides us with expansion potential. The reliability of our operations enables us to capture maximum value from our base of installed capital and it makes us a partner of choice for our customers. We have set ourselves up to win. We're increasingly able to deliver strong performance in all circumstances. And we are delivering strong and consistent results. And this has been enabled by the portfolio choices we've made over time through our approach to capital allocation that we set out in 2016 and by our reliable operating performance. We've consistently achieved, as you can see on the chart here, higher margins in our peer group. And these high margins give us greater through-the-cycle resilience. All of this has come together to deliver over USD 15 billion in net operating cash flow in all bar one of the past dozen years. And that's even though, of course, in those 12 years, operating conditions, market conditions vary greatly. This consistent strong cash flow delivery is a hallmark of BHP and it's something that few others can claim. A few others can claim that level of consistency. Now I want to shift focus now to our largest current growth option. And I'd like to talk about our investment in the Jansen potash project. This project and the future opportunity it brings in terms of growth is pretty exciting. We've been positive on potash dynamics now for many, many years. Strong potash demand growth will be driven by ongoing global population growth, changing diets and stronger expectations globally in terms of environmental stewardship. Jansen is a good project in a great commodity and investing in potash is going to add further resilience to future BHP returns. In addition to being in a different attractive operating jurisdiction and likely having a different spread of markets, potash demand and pricing are uncorrelated or even negatively correlated with the other commodities that BHP produces. Whereas on the other hand, if you look at oil, if you look at aluminium, these commodities are quite highly correlated with the other commodities that we produce. So potash is going to bring greater cash flow stability and returns resilience. And the fundamentals for potash remains strong. The tragic events of recent months playing out in the Ukraine have highlighted the higher-than-usual potential for supply side disruption in this market or in this commodity with Russia and Belarus accounting for 40% of global production. All of this has positively reinforced the decision that we've taken to enter potash. And I do want to spend a bit of time talking about that decision itself. So in August of last year, we approved the first stage of Jansen. And standing here today, of course, I wish we had have approved this 5 years ago or even 10 years ago because we would have been enjoying another $2 billion to $3 billion of EBITDA per year. But as you would know, with these decisions, all the stars have to align and they finally aligned for Jansen. And we -- in August, we took that decision to proceed with the first stage. And that first stage is tracking the plan of the USD 5.7 billion investment, we've awarded around USD 1.4 billion in contracts so far. That's $200 million more than we spoke about at the half year results in February. This -- the contracts that we've had so far cover things like port infrastructure, underground mining systems and other shaft and surface construction activities. Now the fact that at the time of sanction, we had over 50% of the engineering completed. That gives us greater confidence in our schedule and capital cost ranges. Now Jansen Stage 1 is compelling in its own right, but the overall Jansen proposition is even more attractive. We see Stage 1 as unlocking new future -- a new future growth front for the company with really significant expansion potential. And it's expected to sport up to a century of production. And it's that longevity, which is common to the assets and the investments that have been the bedrock of BHP for many, many years now. And these assets include the Western Australian iron ore business, the Escondida copper mine and the BMA business in Queensland. As we have demonstrated time and again, good resources get better over time. Large assets with expansion potential provide inherent capital-efficient, high-return growth options for when the time is right. Now in respect to Jansen Stage 1, we're looking at options to accelerate first production into 2026. And of course, the Saskatchewan winter build conditions make it hard to envision the acceleration beyond that, but we are looking at bringing first production from 2027 into 2026. We've also kicked off our studies for Jansen Stage 2. Now Jansen Stage 2 would add around another 4 million tonnes per annum of potash production, and that would be at a capital intensity of USD 800 to USD 900 per tonne. That's almost 30% lower than for Stage 1 because Stage 2 will be able to leverage the infrastructure being put in place with Stage 1, and this includes the shafts. Now while it's still early days, we expect that Stage 2 would have an IRR of around 18% to 20%, a payback period of around 4 years at long-term consensus prices, which are well below current spot prices. And if the market suits, we may be able to bring this extra product to market more quickly. Across all 4 stages of Jansen, we envision between 16 million and 17 million tonnes of annual production. That's about 25% of the current market, albeit by the time we brought them on the market would have grown. What's really important to note is that each of these stages would come at a lower operating cost, lower capital intensity, faster payback, and with higher incremental returns than Stage 1. That was always our capital allocation framework will guide our decisions around the successive phases of Jansen, but we can see a strong case building in the favor currently. In fact, we see a path to a potash business that is at least equivalent in size and scale to our current petroleum business. And whilst Stage 1 won't deliver that alone, if we decide to bring on all 4 stages, and even with prices just half of where they are today, we'd be generating about $4 billion to $5 billion per annum in EBITDA. And by way of comparison, our petroleum business has delivered around $3 billion per annum over the past -- on average over the past 5 years. So of course, it will require some significant capital to bring on all 4 stages. But -- and this is a really important point. Unlike petroleum where you're constantly fighting against reservoir decline and needing to bring fresh capital in just to sustain production, you don't have that issue in potash. So there's upfront capital that you invest. And then it doesn't have that same cash draw or capital draw over time. So I mentioned $4 billion to $5 billion EBITDA versus $3 billion EBITDA, the cash flow or the free cash flow comparators are even more favorable for potash. And of course, potash also has the added advantage of not having a strong correlation with the other commodities that we produce and better long-term fundamentals. Now I've just spoken about the growth optionality that comes with owning a large resource like Jansen. That same growth optionality is inherent in the existing copper and nickel resources that we hold. And this is a really enviable position to be in when recently, there's been so few new large-scale high-grade discoveries globally. And we've just completed bringing on South Flank and iron ore, the Spence growth option in copper, and we've sanctioned the first phase of Jansen. We're now turning our attention to how we go about unlocking more growth or creating more growth options in these big resources of copper and nickel that we hold. We're looking to create some more capital efficient by returning growth options that will see us unlock more from these resources more quickly. In copper, we have the world's largest resource endowment and amongst the highest average grade. This includes 27 billion tonnes of resource at Escondida at an average rate of 0.52%. But Escondida, as you'll know, we're targeting average annual production in the medium term of 1.2 million tonnes per annum. We've also increased our copper production in Spence by adding a concentrator stream and that's extended the life of that asset by up to 50 years. At Olympic Dam, we've improved operating stability over time, and we achieved record production just last year. As I said earlier, smelter operations have come back strongly following our 2021 major smelter maintenance. And the next major rebuild there isn't expected for another 6 years. We used to work on the basis of a 3-year campaign life we've extended that out now to 6 years. We have the second largest nickel sulphide resource base globally, and we own the majority of tenements of known resource in the Agnew-Wiluna basin in Western Australia. We've also recently brought on a nickel sulphate plant at Nickel West, and this is allowing us to capture incremental margin. We're intending to capitalize on the strong growth in demand for nickel for battery production for electric vehicles. And the method that we use to produce nickel sulphate produces a cleaner product that's ideal for battery production. We're also continuing to explore pathways to unlock more nickel, which will turn Nickel West into a materially larger business for BHP. Now as Duncan highlighted in his speech, it's been difficult for the industry to find more resources. It's becoming harder to access deeper, lower grade ores in countries or circumstances, which are more challenging in terms of operating conditions or permitting. What does that mean for BHP? Well, that makes the enormous endowment that we already have in copper and nickel even more valuable. In terms of high returning production growth, our current portfolio of large, long-life resources offers plenty of opportunity for organic growth. And this is about making more out of what we already have, which is significant in both copper and nickel. But in iron ore, we've increased our export license to 330 million tonnes per annum, providing headroom to pursue low-cost initiatives across our supply chain if market conditions warrant. We're also seeking growth through exploration. This includes an Oak Dam copper resource near Olympic Dam, and for nickel in an area called the Seahorse Tenements in Western Australia. We've also moved our exploration team from Santiago to Toronto and we'll be growing our presence in Canada, along with potash, and we'll be looking at more opportunities there. We're seeking value growth through technology and innovation, including through investing in emerging technologies working on efficiency, increasing technology like primary sulphide leaching and innovative exploration methods. We're also securing growth options through investing in early-stage entry. And these are opportunities like Kabanga Nickel in Tanzania, SolGold in Ecuador, and more recently, Filo Mining in Argentina. Now finally, mergers and acquisitions. Mergers and acquisitions, of course, remain an option, and we keep our eyes open in this space. But any opportunity we would pursue has to be completely on strategy. It needs to deliver clear value for shareholders and it has to compete well against all these other options that I've spoken about. So we're going to remain really disciplined and extremely selective. Even as we consider options for growth, we keep a sharp eye on the disciplined and transparent allocation of capital and on maintaining a strong balance sheet. If we look at how we've allocated capital since we put the capital allocation framework in place in 2016, we've balanced investment or reinvestment back in the business and cash returns to shareholders. We want shareholders to see the short-term benefit of these cash returns even as they trust us to plan for the future by investing where it matters. We've recently delivered the Spence growth options, South Flank, and numerous oil and gas projects on time and on budget in the face of the pandemic. And of course, we've sanctioned Jansen Stage 1. Now with the pending separation of our petroleum assets, we're going to place even greater focus on capital spend and growth in future-facing commodities. Again, we're going to be disciplined with our capital spend and with our cash returns to shareholders. Now I've spent some time here talking about the strength of the portfolio that we have and the approach that we've put in place. With that strength, we've returned over USD 17 billion to shareholders in the last 12 months alone. And the scale of these cash returns might be worthwhile putting it in context. Over the past year, we were the second largest nonstate controlled corporate dividend payer globally irrespective of sectors. So some pretty big numbers. Well, this is BHP. We continue to demonstrate our ability to execute well through all of the challenges that the world and the industry have faced over the past couple of years and continue to face. We've maintained safe, reliable operations, and we progressed a number of strategic decisions all in parallel. We're increasing our leverage to commodities that stand to benefit from a faster decarbonizing world and the other big trends that are underway, not least of which are climate and decarbonization. Now after the divestments that we currently have underway, we'll be left with a portfolio of all or almost all commodities with decarbonization upside, copper, nickel, potash and the high-quality iron ore and high-quality coking coals that the steel mills are going to need as they seek to decarbonize. We're delivering more reliable operational outcomes enabled by our efforts on workforce, the BHP operating system and technology. And it's this powerful combination of operational excellence, a stronger portfolio and our focus on social value that are going to underpin continued attractive returns and long-term value growth. Thank you. Across the questions.

Johnny here. You've got time for a few questions. You talked about your organic opportunities in nickel and copper and also in potash, with your future-facing commodities. Can you touched on M&A as well. So I just wanted to talk about M&A a little bit. BHP's net debt is below the $5 billion to $15 billion target range. The collapse of the DLC is designed to make BHP agile. And I guess, the early stage investments in copper and nickel are very long dated, maybe 10 years to bring a new mine on as we've heard this morning. So I'm just wondering and also with the recent pullback in copper prices and copper equities. At what point does M&A become a viable option for BHP in terms of moving the needle in those future-facing commodities.

Sure. So let me start by saying that our strategy isn't dependent on M&A. And you hear me out there talking a lot about all of the efforts that we have underway around unlocking more options within the big resources that we already have, longer-dated stuff in exploration and early-stage entry. So I'm pretty comfortable that we'll be able to continue to develop more options for growth within BHP without being dependent on M&A. Now of course, if the right opportunities come along, and that's a pretty narrow set for BHP in terms of the sorts of assets that we like. But if the right opportunities came along at the right price, we'd be ready to act on them, but I'm not feeling any urgency to get out there and chase after M&A because of all the other effort that we have underway. Now you mentioned that it can take up to -- well, 10 years or more to bring on a new mine, certainly, and Duncan mentioned this as well for a new greenfield resource finding that, getting a permit, bringing it on, that's a 15- to 20-year prospect. That's why I point back to the big resources that BHP has. And I think as we've been developing some of the projects that we've had underway because we have projects in petroleum, I think there's more that we -- I wish we -- now that we had have done in terms of focusing on the brownfield options within the existing resources. We've got an accelerated effort underway there now currently. And that could certainly be under a 10-year window for some of those.

BHP's operational and safety record has been very strong, note to some of your peers. Wonder if you could please make some comments around the key drivers of that?

Well, look, thanks for calling that out. And you are right. And the thing that we can be proudest of is 3 almost 3.5 years now without anybody losing the life on the BHP site. And I still remember, it was probably only about 6 or 7 years ago when we were celebrating 1-year fatality-free. We had a few successive years of 1-year fatality free and to now have 3.5 years without anybody losing the life. That's -- I mean, that's something that is seriously motivating for all of us. Now that's been accompanied by more reliable operations. And I think that those things go hand in glove to some extent. What's driven it has been serious day in, day out management focus because as everybody in this room knows safety is a -- that's a daily thing. So serious ongoing focus and commitment from management and investment, investment in people, culture, asset integrity, all brought together under the BHP operating system, which kind of provides the overall framework or package under which we bring together the skills that we're creating, the capability that we're creating in the company and our basic operating practices that drive safer, more reliable outcomes.

Okay. I've got some more questions, but we might move to the audience and see if there's any questions from the floor, please. Well, waiting. Mike, lithium is not a commodity that BHP is involved in prices have increased 500% in the last year and doubled year-to-date. BHP is certainly been involved in lithium because of the view that the supply cost curve is flat. Maybe wondering if you could please comment on your latest fees around lithium place.

Yes. So it's not lost on me that I've been talking for a year or a couple of years now about the fact that we don't like lithium, there's not a commodity for BHP long term and all the while prices have been going up. In short, our views haven't changed. It's something that we keep a watching brief over. But if we look at the amount of lithium out there, it's significant. So we don't see a real long-term constraints in terms of resource. Barriers to entry are relatively low as we see with all the juniors popping up in Australia currently, the demand outlook, we think, is strong. So we're pretty aligned with everybody else around how the demand prospects for lithium. This is really driven by our views of the resource, how we see the long-term shape of the cost curve playing out. And then finally, our other options. So because we've kind of staked out our ground in potash, I've spoken about the fantastic opportunity that creates for a very sizable high-returning long-term business. We believe that there's more to do in copper and nickel, where we see better cost curve shape, particularly for the sorts of assets that BHP would hold at the low end of the cost curve. So we're not feeling pressed to pursue lithium.

Thanks, Mike. I think Jason has a question.

Mike, just a question on COVID. So a lot of your operations were impacted by COVID. I think Escondida, in particular, we saw it on production. It's an industry-wide thing, where do we stand in terms of recovering from the after effects of COVID? And are there now any permanent changes to your business because of practices you might have adopted during COVID?

Yes. So that's a big question, Jason, in terms of what are the long-term effects of COVID. First of all, it wasn't just Escondida and it's not over. We continue to face up to 15% to 20% absenteeism at some of our operations. COVID's presented a recent challenge to operations in Australia, for example. But I think Escondida was hit particularly hard earlier on in COVID. We've seen that sweep across the world. Now the great thing is that through all of that, high rates of absenteeism, in some instances, high rates of turnover as labor markets have tightened and people haven't wanted to travel and be away from family for the long periods of time. We've maintained safe, reliable operations. You saw in the third quarter results that we just released on track for full year guidance in iron ore and -- in iron ore on both production and costs. I really can't speak highly enough of the teams and the work that they've done to navigate COVID. Where are we at in terms of the impacts, there will be lagging -- some lagging impact in terms of stripping where we need to reprioritize away from one activity to another activity, but all manageable. I think there's some bigger long-term impacts in terms of the lagging effect of all the debt that's accumulated at government levels at COVID. The change perception of the workforce in terms of what's important in some instances and frankly, change working practices. So COVID, to some extent, forced an acceleration in some of the things that we already had underway around restructuring work, making it more flexible, opening up opportunities to a wider range of people that's going to be a permanent and positive feature of certainly our landscape, and I'm sure it's the same for others.

Thanks, Mike. Everybody, please join me in thanking Mike for his presentation this morning.

Thank you.

Thank you very much. Thank you.