BHP Group Limited (BHP) Earnings Call Transcript & Summary

Hello, everyone. I'm Gab Notley. Thank you for joining us today. A few weeks back, we asked shareholders if there was anything they would like more information on about BHP's strategy, how the Board is thinking about the world and BHP's prospects. And our Chairman, Ken MacKenzie, is here with me today to answer those questions. They actually cover a wide range of topics, from growth markets, shareholder returns, as well as some of the big issues, including decarbonization. Thanks for joining us today, Ken.

It's great to be here, Gab. Thanks.

Perhaps before we take questions, maybe it would be good for you to give us an overview of how the Board is thinking about BHP and its opportunities.

Sure. Well, look, as always, I'd like to start with safety. And '23 was a difficult year from a safety perspective for the company. We had 2 tragic fatalities, 1 in our Western Australian iron ore operation and another 1 in our Olympic Dam operation. And the organization has taken those incidents very hard. I think shareholders would be aware that it's been 4 years since we've had a fatality at BHP. And in the case of Western Australian iron ore and Olympic Dam, it's been over a decade since there's been a fatality in those operations. So obviously, our sympathy goes out to the families and the coworkers who would have been impacted by these incidents. And look, we can't bring the coworkers back. But what we can do is work very hard to ensure that these types of incidents don't happen again at BHP. And so we are doing thorough investigations around them, getting the learnings from those, sharing them widely internally, but we're also sharing them externally with our resource sector peers as well. And we need to double down on the execution of safety processes in the field, and we'll continue to drive the safety culture needed to eliminate these sorts of incidents from occurring again within the company. So safety is our #1 priority. But the company is also working hard on strategic positioning of the portfolio. Shareholders will be aware it's been a busy couple of years at BHP. We've had the unification of our dual-listed structure, where we unwound the dual listing and consolidated here on the ASX. There was the exit from our petroleum business, which was an innovative transaction where we sold our Petroleum business to Woodside in exchange for shares and then demerged those shares out to shareholders, which was quite an accretive transaction. There's been ongoing consolidation of our coal portfolio as we exit energy coal progressively and focus on the higher quality, higher value-add metallurgical coal within our portfolio. And shareholders will be aware, we've just entered into agreement to divest the Daunia and the Blackwater mines in Queensland, and that's obviously a further refinement of that metallurgical coal portfolio. And we're very much focused on what we call future-facing commodities. So that's copper, that's nickel, and that's potash. And in the case of potash, we've got that exciting greenfield project in Canada, over USD 5 billion investment, should be coming on stream in 2026. And in the case of nickel and copper, there was the acquisition of OZ Minerals, another exciting project, both nickel assets in Western Australia and copper assets in South Australia. In terms of operational performance, our focus has been on safety, reliability, productivity, and we've generated strong margins and cash flows last year. We had a dividend of USD 1.70 per share, which was a 64% payout ratio. And that was the third largest ordinary dividend in BHP's history. And if you look over the last 3 years, it's been $40 billion in cash dividends fully franked for shareholders. And we have been the largest -- it's an interesting fact, actually. We have been the largest dividend payer globally over the past 2 years. So very strong cash generation. And I think if you look at the company's economic contribution, it's been $54.2 billion last year, and that's defined as payments to suppliers, payments to employees, community contributions and also taxes and royalties to government. And we paid 8% of all Australian company tax last year. And this economic contribution is part of our broader social value agenda.

On the social value agenda, the Board talked about a framework for that. How has that progressed in the past year?

Yes. So that framework was launched last year. There's 6 pillars in that social value framework: decarbonization, the environment, indigenous partnerships, workforce, communities and supply chains. And for each one of those pillars, we've got systems and processes and targets for each of them. So it's a really well-defined framework. And I would encourage shareholders who they're not familiar with it, they go to the website, it's there and to have a look. And I think there were 3 -- to your question, there were 3 highlights, in my view. Last year, the first is in the decarbonization pillar. We were able to reduce our Scope 1 and 2 greenhouse gas emissions by 11% year-on-year. And that brings our reduction overall in Scope 1 and 2 since our baseline year of 2020 to 32%. So I think we're making good progress there. Indigenous partnerships, and really, that's -- we're focused around procurement with indigenous businesses, and that's increased to over USD 330 million and around 220 suppliers. So effectively doubling that quantum year-on-year. So again, good progress. And then finally, in our workforce, I think everyone is aware, we've got a very ambitious gender balance target for 2025 that we launched back in 2016, and we made further progress last year. Female participation in the company is over 35% now, which is a doubling of female participation since when we launched the target in 2016. So again, another highlight for last year, in my view.

Really distinct summary and obviously, a lot of big numbers. I actually want to go to a couple of questions that have come in around shareholder returns and dividends, Ken. The first is from [ Katie ] who asks, is BHP share price undervalued? Why has the share price not steadily increased with BHP's impressive performance that you've actually spoken to? And then maybe at the same time, a question on the dividend from Raymond. He says, when the fertilizer business starts producing in 2026, can you see an increase in the dividend?

Right. So look, great questions. The market determines the share price. I'm not going to try and second guess the market, but I will make a couple of comments. Last financial year, lower global commodity prices were the main reason for our drop in earnings, and that's outside of our control. But in terms of things that we can control, our operational performance and managing costs, we did very well. And we continue to be the lowest cost iron ore producer in the world. And as a matter of fact, the gap between us and #2 widened again last year. So we're continuing to make progress there. Again, last year, our total shareholder return was 20%. So that's the combination of both share price accretion and dividend yield. And over the past 5 years, our average annual return has been around 15%, and that's well above the ASX 200. And as I mentioned earlier, dividends, USD 40 billion over the last 3 years. And I think that that's we -- want to continue to generate that cash. It allows us to continue to pay strong dividends going forward, and we've got a payout ratio of 50% of profit after tax as a dividend policy, which leads to the question from Raymond around potash. And yes, it's the production for Jansen, which is our potash asset is for late 2026. It's an exciting new commodity for BHP. It's another growth front for BHP. We're developing one of the largest and lowest-cost potash mines in the world. And I think importantly, it's going to have lower operational greenhouse gas emissions within its footprint, and the water use intensity will be lower relative to other mines in the potash segment. So I think both of those greenhouse gas emissions and lower water use intensity are important for our social value agenda as well. And we're going to have options to grow the business for decades and decades. And there's 100 years plus of ore in the ground. And so this is going to be an opportunity to deliver long-term value for shareholders.

Thank you. And maybe I could put another question to you from Arthur, who is asking about other metals and BHP's interest. He says, I really like that BHP is starting to position towards copper production, but aren't you considering greater diversification in this sector? Aluminum appeared on the market -- when aluminum first appeared on the market, it costs more than gold. And now it's one of the most popular industrial raw materials and very cheap at that. Most over 80% of aluminum, he says, comes from recycling, which makes this metal cheap. Isn't BHP considering takeovers of companies purchasing nonferrous metals to recover raw materials?

Right. There's a bit in that, isn't it? So let's sort of unpack it. Look, copper is one of our future-facing commodities. And people may not realize that BHP has the largest resource base of copper of any company globally. So we're already well positioned. And our outlook is that copper will go from strength to strength in coming decades because more copper is needed to supply global demand that's going to be driven by decarbonization and support for an increasing urbanized population. And so in the case of decarbonization, for an example, I drive an electric vehicle. There is 4x the copper in electric vehicle than there is in a standard combustion engine vehicle. So that's where the demand for this copper is going to come from as we decarbonize and we electrify, the demand for copper is going to increase. And towards the end of this decade, we anticipate the global deficits in copper, that's the difference between global demand and what is produced, will start to grow. We're always looking at how we can grow further value from our existing copper assets, which are in Chile and Australia. But copper is also a major focus of our exploration activities globally. And so OZ Minerals, which I talked about in the opening comments, will create a new copper province opportunity in South Australia by combining our existing Olympic Dam operation and the potential Oak Dam discovery. So we've got an exploration project ongoing called Oak Dam, which is South of Olympic Dam. And combining Olympic Dam, potentially Oak Dam with the 2 assets that we've acquired, Carrapateena and Prominent Hill mine, which came from OZ Minerals, there's a great opportunity to put all of those assets together into a copper province and to extract further synergies from that. So it's an opportunity that is contingent on us continuing to have the right policy settings to enable the investment, but it's an exciting copper growth opportunity here in Australia. The second part of that question, I think, was about moving into metals recycling. I think that's a bit of a different proposition for BHP. I think we always have to think about, is this an attractive business for BHP to be in? Do we have the capabilities? What's the risk profile of this business? And fundamentally, is this the best place for us to invest our shareholders' dollars? And I think in the case of metals recycling, it's not naturally aligned with the BHP capability set.

Thanks, Ken. Maybe -- and maybe you've answered it. But Lauren has asked a general question about growth. She says, where is BHP's growth going to come from? And do you have priorities for the growth?

Right. Well, it's a great question, Lauren. And I think copper we've touched on. So our resource base continues to provide organic development opportunities in our world-class assets, both in Australia and in Chile for our copper assets. But it also includes our investment in potash in Canada, and I've talked about that as well. Again, it's coming on stream into production in late calendar year 2020, and this provides horizons of growth opportunity for BHP. But beyond those opportunities, which is growth from our existing assets, we also have and are looking at 4 further levers for growth: technology and innovation; early stage entry; exploration; and of course, there's the potential for further M&A.

Ken, maybe this is somewhat related and probably you're thinking about this as well. One of our shareholders has asked about debt and capital expenditure. It's from Angela. And she says, I was looking through the annual report and saw that debt has increased substantially. And I also saw that you are looking to increase capital expenditure going forward as well. Should I, as a shareholder, be starting to get worried?

Right. Look, great question, Angela. And this allows me to talk about one of my favorite topics, as you know, which is our famous capital allocation framework, which guides all of our decision-making around capital allocation and how we use the cash flows of the company. So how does it work? The good news is within BHP, because of the strong positions that we have, the business generates cash through the cycle. And how we allocate that cash is a key determinant of how much value we create for shareholders. And the way it works is with the cash coming in, we have 3, what I call, first calls on cash. So 3 first priorities for the cash that the operations generate. And the first is the minimum payout ratio for the dividend of 50% of profit. So I think that answers Angela's question around the stability of the dividend. There is a policy around a minimum payout ratio of 50% of profit. Second call on cash is we look at maintenance capital. And maintenance capital is what we need to keep our operations reliable and safe and also to continue to decarbonize them. And that's the second on cash. And the third, coming to the question around the debt, is the balance sheet. And we have a net debt target of between USD 5 billion and USD 15 billion. Now how did we come to that target? Well, what we've -- the balance sheet is designed so that if we were to go through a down cycle, let's say, 3 years. And so we've programmed the prices of a down cycle into our business model over 3 years. And let's say we still wanted to continue to spend the $10 billion or so of CapEx per year over that period of time and we plugged that into the model as well. And then above and beyond that, because we think value is created at the bottom of the cycle, we want to have flexibility in the balance sheet to do things. It could be buy back shares or it could be to make an acquisition. And we factored that into the model. And so if we look at that modeling, $5 billion to $15 billion of debt is around the right number to be ready for the bottom of the cycle to continue to invest in the business and to have some flexibility to look at opportunities if it were to arise. Now again, Angela is right in that we had virtually no debt and now we've got about USD 11 billion of debt. And that's about in the middle of that $5 billion to $15 billion range, so comfortable. But that increase in debt has come from the acquisition of OZ Minerals, which was about USD 7 billion. And so that's largely where it's come from. We still have a very strong balance sheet. And I think it's important that we're not pursuing growth for growth's sake, but we're pursuing growth for value creation for shareholders. And we're always thinking through the lens of how is this going to create value for shareholders.

Thank you, Ken. That's great. I'm actually going to go a little bit into the business now back again. It's a question from [ Sonia ]. And she asks about West Australian iron ore. She says, what is the outlook for West Australian iron ore if China and Taiwan tensions escalate conflict, given embargoes would be implemented preventing export to China of iron ore?