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Edited Transcript of BLT.L earnings conference call or presentation 17-Feb-20 11:00pm GMT

Half Year 2020 BHP Group PLC Earnings Call - Session 1

London Mar 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Bhp Group PLC earnings conference call or presentation Monday, February 17, 2020 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mike P. Henry

BHP Group - CEO & Executive Director

* Peter Beaven

BHP Group - CFO

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Conference Call Participants

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* Brenton Saunders

Pendal Group Limited - Portfolio Manager & Analyst

* Christian Eric Andre Georges

Societe Generale Cross Asset Research - Equity Analyst

* Glyn Lawcock

UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst

* Hayden Bairstow

Macquarie Research - Analyst

* James Redfern

BofA Merrill Lynch, Research Division - VP

* Lyndon Fagan

JP Morgan Chase & Co, Research Division - Analyst

* Paul Young

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Paul Joseph McTaggart

Citigroup Inc, Research Division - Metals and Mining Analyst

* Sam Webb

Crédit Suisse AG, Research Division - Associate

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Presentation

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Mike P. Henry, BHP Group - CEO & Executive Director [1]

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Thank you for joining me and Peter today as we deliver BHP's December 2019 half year results. It's an incredible privilege to be here as CEO today. And of course, I am pleased to be able to present a strong set of results, grounded in solid operational performance.

Recognizing this is my first time with you in my new capacity, I will also take the opportunity to provide some comments on how I see the world, the company and the future. Before I go further, though, please note the disclaimer and its importance.

I want to start with the people at BHP. Following the announcement of my appointment as CEO in November last year, I spent 5 weeks on the road, visiting all of our businesses, most of our major offices and many of our operations. I met many thousands of employees and BHP contractors around the world.

These engagements reinforced for me that we have some incredibly talented people who are eager to perform. I kind of knew that, of course, but it was good to have that brought home to me through this tour and just as I landed in the role. We have an incredible portfolio of assets, but we unlock their potential through our people.

I was struck by what they told me. The 3 things I heard most consistently from all corners of BHP that they're passionate about were our new purpose, our focus on improvement and our commitment to social value. They also provided me with plenty of feedback on what we can do to build on our momentum and take what is good performance and make it exceptional.

Finally, they accepted the challenge to personally step up, push the limits of what's possible and make the fast decisions that will allow us to improve at pace and unlock more of what's possible in BHP. They know that through doing that, we can achieve exceptional financial and operational performance and grow value for both shareholders and society.

I intend for BHP to be unquestionably the industry's best operator: safer, lower cost, more reliable and more productive. This will drive value and returns. We will be more open to new ideas, more connected to those around us and more commercial in thought and action.

Today, we already have a positively differentiated strategy in terms of where to play, with fewer commodities and great assets in stable jurisdictions; and also how to play with our operating model, our approach to technical excellence and our focus on social value that will support long-term outperformance. But our operating environment and our competition are dynamic. We cannot stand still. With our strong portfolio and performance momentum, we are set up much better than most. However, to unlock more of our potential to further address the challenges coming at us and to capitalize on the opportunities that the environment will reveal over time, there are some things we must strengthen.

We must be lean and high-performing in all parts of BHP. In the face of market uncertainty and slowing rates of growth in commodity demand, a greater proportion of value growth will come from an unrelenting focus on being great at what we do.

We must become even safer with a focus on eliminating fatalities and high potential injuries.

And we must create more options in future-facing commodities to help us continue to grow value. These options will come from both within our existing footprint as well as through securing more resources through exploration and early-stage entry.

Through being safe, lean, high-performing and future fit, we will reliably grow value and returns for decades to come. We've made huge inroads in strengthening our foundations over recent years.

Of course, achievement of these goals will require the effort of people across all parts and all levels of BHP. And we'll focus on 5 specific levers to unlock our performance potential. First, culture. We will build upon our distinctive inclusive culture with strengthened self-accountability, performance edge, hunger to learn and improve and a greater commercial mindset.

Second, capability. We will invest in people and the capability required to support consistently high performance and to unlock options. This includes achieving a gender-balanced workforce.

Third, we will instill an asset-centric focus throughout BHP. Everyone across the company will understand and fulfill their role in making our assets safer, lower cost and more reliable.

Fourth, technology. We will restructure, reorient and build capability to apply technology at scale quickly at lower cost and for value.

And finally, capital allocation. I am totally committed to continuing the discipline that we've created through our capital allocation framework. It is driving better decision-making, and it's making us more productive through the way in which it stimulates focus and competition.

What does all this look like in action? Let me touch on just a few examples to help bring them to life. In technology, in addition to aligning our structure to our assets and streamlining our processes, we will greater leverage external providers of infrastructure, systems and services. We will sharpen our portfolio of projects and shift our weighting towards opportunities that generate higher returns earlier.

We've spoken previously about our multiyear effort to make our functions more efficient and more effective. We're accelerating delivery of this, bringing forward some efforts that were otherwise to be delivered 2 years later.

This and our changes in technology are expected to reduce overheads by well over $0.5 billion by 2021, relative to last financial year. As importantly, it will better enable and free up those working on the front line of the business.

We're also supporting frontline leadership through further streamlining administrative processes, enabling them to spend more high-quality time in field and through reducing average spans of control, particularly for our supervisors.

On the capability front, we will have a workforce that is committed to BHP and who we can invest it. We're moving from 30% to 40% of our people being permanent BHP employees to double that.

I will also create a senior role on my team that will be accountable for leading excellence in our technical disciplines and who will help stimulate performance across the company.

These are just a few of the changes we are rapidly making in our effort to create a safe, lean, high-performing and future-facing business.

With that, let me outline our half year results. Over the past 6 months, we delivered a strong set of financial results. Underlying EBITDA was up 15% to USD 12 billion; our margins expanded to 56%; and return on capital employed increased to 19%.

Continued solid operating cash flow combined with disciplined investment in our high-quality projects generated free cash flow of USD 3.7 billion.

With our balance sheet strong, the Board today announced an interim dividend of USD 0.65 per share, our second highest ever.

Operationally, our performance was solid. We maintained production and reduced unit cost despite field decline, grade decline and significant planned maintenance in the half.

We progressed our major projects over the period and expect 2 of these: the Spence Growth Option and Atlantis Phase 3, to deliver first production within the next 12 months.

The most important part of our work, however, is keeping our people safe. It is, without question, our highest priority. Our safety record reflects the quality of leadership, the culture of the organization and how disciplined we are when it comes to planning and performance. Over the period, we reduced our total recordable injury frequency by 2%. However, the rate of high potential injuries rose by 5% due to an uptick in our Minerals Americas business. The reality is that we are not yet consistently where we need to be.

At Samarco, resettlement remains a priority of the Renova Foundation, and it's progressing well. And across all our operations, we continue to invest in the integrity of our dams.

We're also taking action on climate change. A couple of highlights are: that we're on track to meet our 2022 targets for greenhouse gas emissions; and we have signed contracts to move towards 100% renewable power at Escondida and Spence.

With that, I'll now hand over to Peter to take you through our results in detail.

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Peter Beaven, BHP Group - CFO [2]

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Thanks, Mike. This was a strong first half result, with solid operating performance and lower unit costs.

Underlying EBITDA increased by 15% to just over $12 billion at a margin of 56%, one of our highest in recent times. With a lower effective tax rate of 33%, underlying attributable profit was $5.2 billion, up 29%. On a total operations basis, our underlying earnings per share increased by 46%.

Exceptional items primarily relates to the cancellation of power contracts at Escondida and Spence, with a shift towards 100% renewable energy. Not only is this the right thing to do, it's highly value-accretive for our shareholders as the new power purchase agreements are lower cost.

The EBITDA waterfall shows the benefit of higher prices driven by iron ore. In addition, with IFRS 16, operating leases are now charged to the income statement as depreciation and finance costs, positively impacting EBITDA.

Our strong and stable operating performance delivered a substantial increase in copper production despite grade decline and growth in iron ore. However, this was offset by expected petroleum field decline and substantial planned maintenance.

We also had a solid cost performance across the business, with lower unit costs at Western Australian Iron Ore, Petroleum and Escondida.

Western Australian Iron Ore generated EBITDA of $7 billion, with a margin of 69%. While the increase in average realized prices contributed significantly to the result, our team's drive to unlock volumes, despite the major maintenance campaign, and further reduce costs fully captured the benefit of these higher prices. Over the half, we lowered our C1 unit costs to just $12.75, an outstanding result.

In copper, EBITDA increased by 22% to $2.4 billion. This was largely driven by a 7% increase in production. Record throughput at Escondida from improvements in maintenance and operational performance more than offset the impact of grade decline and social unrest in Chile. Unit costs were better than full year guidance driven by good cost control and higher by-product credits.

Our met coal business contributed EBITDA of around $1 billion at a margin of 37%. A strong underlying performance was more than offset by a 22% reduction in price and the impact of major planned wash plant maintenance. A stronger second half performance is expected with lower strip ratios, optimized maintenance strategies and continued efficiency improvements. Production and cost guidance remains unchanged.

And finally, our Petroleum business achieved an EBITDA of $1.6 billion at a margin of 65%. Now while down on the previous period, this was driven by lower realized prices and natural field decline of around 5%. Despite lower volumes, we reduced unit costs by 14% to $9.56 per barrel with lower overall maintenance activity over the period.

Excluding 2016, when we saw a dramatic fall in commodity prices, we've generated net operating cash flow of at least $15 billion every year over the last decade.

Solid operating performance and higher prices meant we continued the strong operating cash delivery with $7.4 billion this half despite significant adverse working capital movements of $600 million. These included: a $400 million inventory build for 2 reasons, to help underpin better operational stability, and due to planned maintenance during the half; price-related impacts on accounts receivables and royalties; and payment of the Western Australian Iron Ore royalty settlement agreed in June last year. These were partly offset by the raising of the provision related to the cancellation of the Chilean power contracts.

In the next period, we would expect to draw down a portion of the inventory build and no repeat of the royalty settlement.

So with a stable, low-cost operating base and CapEx in line with guidance, we're in a good position to continue to generate strong cash flows going forward.

As you know, our capital allocation framework informs every financial decision we make. It transparently directs cash to its value-maximizing use. And this slide shows how we've done that. The $3.8 billion investment in maintenance, growth projects and exploration was in line with our plans. CapEx guidance remains unchanged at below $8 billion for the full year.

Our balance sheet is strong, with net debt at $12.8 billion, at the bottom end of our target range. Compared to net debt of $9.2 billion at the end of June 2019, the inclusion of derivatives and the application of IFRS 16 has increased net debt by $2.3 billion.

New leases in the second half, largely related to the desal plant at Spence are expected to increase net debt by a further $1.1 billion.

As we look forward, while the underlying fundamentals of our commodities remain sound, the coronavirus outbreak, debate on the Chilean constitution, trade policy and geopolitics remain key uncertainties. We always consider downside risks in all our cash allocation decisions and retain our preference for net debt to be at the bottom of our $12 billion to $17 billion target range.

Off the back of our strong results, today, we announced an interim dividend of USD 0.65 per share or $3.3 billion. It's our second highest ever. This equates to a payout ratio of 63%, 13% over the minimum under our payout ratio policy.

Including the dividend announced today, over the past 4 years, we've returned around $33 billion to shareholders, around 1/4 of our current market capitalization. And this excludes the demerger of South32.

Over the half, our return on capital employed increased to 19%. It's a healthy number that includes over $8 billion in assets under construction and a further $2 billion due to the capitalization of leases. And while prices have clearly helped, the increase is also driven by our ongoing operational improvements and disciplined capital allocation. At constant 2017 prices, we've lifted our return on capital by 70% since 2016.

Western Australian Iron Ore again led the way with an outstanding return on capital of 49%. Escondida improved its return to 15%, while existing Pampa Norte operations, excluding SGO, delivered 12%.

Despite lower prices, our Petroleum business continues to provide high returns to shareholders, just below 20%, excluding projects and execution. Even with lower prices, Queensland Coal returns were 13%.

In summary, these results continue the strong performance we've achieved over the past few years. Our focus on operational and financial performance across the organization has set us up to deliver a strong second half and achieve our 2020 financial year guidance.

And while we remain confident in the positive underlying fundamentals of our commodities, there are a number of near-term uncertainties, including obviously, the coronavirus, which we're monitoring closely.

As always, our first priority is our people in locations that could be impacted. While it's early days, it's clear there will be demand loss on oil and demand deferral in steel and copper. Somewhat offsetting this are current supply disruptions in iron ore, met coal and oil. And overall, the impact is likely to be dependent on the pace of recovery in end-use activities in China and the risk of spread to other countries.

We're used to dealing with price volatility. With our low-cost assets, diversified portfolio and strong operating performance and balance sheet, we're ready for whatever happens.

Thank you.

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Mike P. Henry, BHP Group - CEO & Executive Director [3]

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Thank you, Peter. As I've mentioned, we have a strong foundation upon which to deliver exceptional operating and financial performance. Our portfolio is simple and solid. It's comprised of commodities with attractive supply side fundamentals and durable near-term demand growth.

Our assets are some of the world's best, and they're located in favorable jurisdictions. We have a pipeline of high-return opportunities to grow value, through productivity and brownfield and greenfield projects.

And we are performing well operationally and financially with good momentum. Our iron ore operations are advantaged in terms of size, quality and proximity to market. Over the past 5 years, we've halved our unit costs and increased production by 20%. Once South Flank is completed, we can sustain production at a higher grade for many years.

Our Escondida copper mine in Chile has kept costs and production flat over the past 5 years, despite 35% grade decline and increased use of desalinated water.

We remain the largest seaborne supplier of coal for steelmaking with a high-quality product. Over the past 5 years, despite a 14% increase in strip ratios, we've increased production and reduced unit costs by over 15%.

And our Petroleum business has leading exploration and operational capabilities and numerous options that can add valuable growth.

Let me now give you an update on how we'll further lift performance through our culture, capabilities and the use of technology, focusing on our major assets.

Our bulks businesses are incredible cash generators for the group and have further potential to grow value. At Western Australian Iron Ore, we remain focused on unlocking the full potential of this business through becoming even more reliable through reducing costs and through optimizing our supply chain. Our program to improve port reliability is progressing well. This will provide a stable base for our tightly coupled supply chain as we further lift rail capacity and mine production. We intend to bring cost down further as we creep towards 290 million tonnes per year.

The South Flank project was designed leanly and moved into execution with a commercial mindset. This is paying off. The project is progressing well on time and on budget. And when completed in 2021, it will lift the average product grade and the proportion of our production that is high-value lump.

At Queensland Coal, we are breaking records in stripping the bottleneck amid a period of higher strip ratios. As we move the bottleneck to the wash plants and the benefits of technology and the BHP operating system flow through, we will also reduce costs and unlock volumes should the market require. Our strip ratios will moderate over time, also supporting lower costs.

As good as the underlying assets are, we will only realize their true potential when we have the right people properly led and enabled, and when we are great at applying technology to make us safer and more productive.

The rollout of Operations Services in Australia and autonomous haulage are 2 examples. BHP's Operations Services is an innovative model founded on people, connectedness and high performance. It now operates in 13 locations across Australia and has created more than 1,500 permanent jobs in production and maintenance. I expect this to be closer to 3,000 people by the end of the financial year.

Through hiring great people, giving them the right leadership through tighter supervisor spans of control, creating a high-performance culture and providing more training, Operations Services is achieving some strong results. This includes reduced outage time in maintenance and up to 30% improvement in productivity. We see potential to grow this part of our business to improve safety and productivity and create more permanent jobs and opportunities for our local communities.

Likewise, our implementation of autonomous haulage at Jimblebar produced outstanding results. Incidents with fatal potential are down more than 80%, and haulage costs by 20%. We expect to see similar improvements at Goonyella Riverside with first trucks arriving later this year. We will continue to assess the value case for deployment of this technology to other sites, always through the lens of our capital allocation framework.

Our copper assets are all improving performance and collectively has some near-term growth and longer-term potential. Escondida continues to set records in concentrator throughput, supported by improvements in maintenance and operational performance. We expect this strong performance to continue and to support average production of 1.2 million tonnes per annum in the medium term.

At Spence, our optimization technology has lifted recoveries by 14%, and we're now replicating this at Cerro Colorado. When I was at Spence in December, I visited with the growth project, and it's also progressing well. Initial copper production is expected in the second half of this calendar year. Together with the current operations, the total annual copper output at Spence will reach 300,000 tonnes per year over the first 4 years.

Across both Escondida and Spence, we are not only improving performance and returns, but we're also making our assets more sustainable. Escondida's desalination plant expansion was completed in December, lifting capacity to 3,800 liters per second. As a result, we've ceased drawing water from the local aquifers a full 10 years ahead of schedule.

While use of desalinated water is more expensive, we have managed to keep costs at Escondida flat through some great cost management. The desalination plant at Spence is near completion and will allow its expanded operations to use desalinated water as its main source of supply.

We've also signed agreements in the past half to move towards 100% renewable energy sources by the mid-2020s. This will reduce 3 million tonnes or approximately 60% of CO2 emissions per year across our Chilean operations at significantly reduced electricity prices. This is an important example of how we can meet the objective of green, low-cost, stable supply of electricity.

At Olympic Dam, our multiyear effort to remediate asset integrity is progressing to plan and will help us secure more reliable operations. At the same time, we've improved grade. Combined, these will help us to lift returns and provide the foundation for significant production growth, which we continue to evaluate. Clearly, returns at Olympic Dam are not where they need to be. I'm absolutely committed to addressing this.

In Petroleum, our suite of competitive projects has the potential to substantially increase production over the next decade. Geraldine and her team spent time with many of you in November to talk about the potential of this part of the portfolio. We have a rich suite of high-return brownfield and greenfield value-creation opportunities. Atlantis Phase 3 is on track to deliver first oil this year, with Ruby and Mad Dog Phase 2 to follow over the next couple of years. These major projects will add a combined 25 million barrels of oil equivalent in 2023.

Beyond these, several unsanctioned projects will be considered for approval over the next 12 to 18 months. In the Gulf of Mexico, growth opportunities at Shenzi and Wildling Phase 1 could add production from late 2022. And in Australia, the Scarborough LNG development offers material growth, with potential first production from 2024.

Our successful appraisal program at Trion in Mexico has reduced resource uncertainty, and the development is advancing towards potential FID within the next 2 to 3 years.

And following our material gas discovery in Trinidad and Tobago, we are progressing appraisal and development options. Our successful petroleum exploration program continues to replenish our portfolio.

So to recap. We have a compelling investment proposition. We remain focused on maximizing cash flow and continuing our track record of disciplined application of our capital allocation framework. Our foundations are rock solid, and our strong first half performance is indicative of our momentum.

And we see enormous potential to reliably deliver sector-leading operational performance, financial returns and social value in the years ahead.

Our foundations are strong and performance momentum is with us. We will deliver a BHP that is safe, lean, high-performing and fit for the future. Thank you.

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Operator [4]

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Ladies and gentlemen, thank you for standing by, and welcome to the BHP Half Year 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 of BHP Group.

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Mike P. Henry, BHP Group - CEO & Executive Director [5]

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Well, good morning, everyone. I have Peter Beaven here with me as well. I'm really happy to be here. We have a strong set of results. But of course, I'm very pleased with the opportunity to lead BHP.

Let me touch briefly first on results. We've reported a great set of numbers with strong underlying operating performance. We kept everyone safe. So everyone made it home to family and friends at end of shift. We had no significant operational disruptions. In fact, we've been pretty steady for 12 months now and certainly, during the half.

And cost control has been strong, meaning that all the benefit of higher prices, USD 1.5 billion, has flowed directly through to higher EBITDA. And this has supported a 46% increase in underlying earnings per share. Net debt starts with a 12, good thing, plus strong balance sheet. And we've declared our second-highest ordinary dividend ever.

If I turn then to how we're seeing the near-term outlook, our operational performance means we're on track to meet cost and production guidance for the full year. Coronavirus, of course, presents near-term uncertainty. But if the epidemic is contained by the end of this quarter, then we do expect the economic impact to be muted with some catch-up on lost demand for most of our commodities by the financial year-end. Of course, the impact in terms of people has been tragic.

Let me now turn to how I'm seeing the company and the future. I've been fortunate to take up the reins from Andrew with the company's foundations strong. We have a differentiated portfolio that's diversified, exposed to different markets and points in the economic development cycle. We have some of the world's best assets, and this supports margins and it gives us high-return organic growth options.

We have a strong balance sheet. This supports resilience and our ability to invest countercyclically. And of course, this is backed up by the discipline and competition stimulated through the capital allocation framework.

We've delivered some outstanding outcomes on social value, including full desalinization and green energy in Chile this year, and we have a strong brand in our production bases. And just to be absolutely clear, I am wholly committed to our approach on social value. We will achieve the commitments we've set out.

So our foundations are strong, but there's further to go, further to go on safety and sustainability and further to go on performance. In a changing world, we need to be fast-paced and commercial in our approach, we cannot stand still. And I see immense potential in this company.

And to unlock more of it, there are some things that we have to strengthen. We must become even safer with a focus on eliminating fatalities and high potential injuries. And in the face of market uncertainty and slowing rates of growth in commodity demand, a greater proportion of value growth is going to come from unrelenting focus on being great at what we do. We need to be lean and high-performing in all parts of BHP, and we've called out 5 specific things we'll focus on.

Then in respect to portfolio, an obvious question is about the future fit of the portfolio. In my view -- our view is that we have a demonstrably strong and resilient portfolio for today and for the foreseeable future. And this comes back to things like the time it will take for the transition towards a decarbonized economy, the decline curves for some of our commodities, the lack of substitutability and the position -- the advantaged position that we have on the cost curve. We have been very thoughtful and deliberate about the construct of our portfolio over many years.

So clearly, the world trend is towards decarbonization. And we've been active advocates for this, and we've been taking tangible action on the things that we control. We already produce some of the products that will be essential as the world transitions to a lower carbon economy and which will continue to prosper in a decarbonized world.

We will also need to create more options in future-facing commodities so that we can be even more resilient and so that we can grow value over the long term. And these options will come from both within our existing footprint as well as through securing more resources through exploration and early-stage entry, all supported by our disciplined capital allocation framework.

In short, I intend for BHP to be unquestionably the industry's best operator, safer, lower cost, more reliable and more productive. And I intend for our portfolio and capability to be fit for the future. And through these outcomes, we will reliably grow value and return for decades to come.

So with that, I'd like to open it up for questions.

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Questions and Answers

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Operator [1]

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Our first question comes from Sam Webb from Crédit Suisse.

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Sam Webb, Crédit Suisse AG, Research Division - Associate [2]

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Just your comments there about being fit for the future, are you able to put a bit of meat on the bones and talk to plans or timing that you're targeting to divest the thermal coal assets?

And as you think about the debate today around carbon more generally and even more so in the 5-, 10-year view, how are you thinking about other parts of your business like petroleum and met coal?

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Mike P. Henry, BHP Group - CEO & Executive Director [3]

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Okay. So the -- let me start first with thermal coal. It's pretty straightforward. We've spoken about this previously, small part of the portfolio. In terms of the outlook for that commodity, on balance, we see the downside scenarios as being greater than the upside. So if somebody presented an offer for us to exit for value, we'd consider that.

Now, as to the other parts of the portfolio, we're in quite a fortunate position today through past effort in that we have commodities that fit. So -- well, actually, let me take a step back and talk about how we think about commodities in the first place. So the commodities that we want to be in are those that have strong industry fundamentals where it has steep cost curves, there's opportunity to generate rent and where we believe that we can secure good assets, and we've got the capabilities to operate them very well. And commodities like petroleum and met coal fit those criteria.

So in the case of oil, even in a -- through -- in a decarbonizing world, given steep decline rates in current production, in current reservoirs, there's going to be more investment required. And so that's going to support pricing. So to the extent that we can secure good assets, we have some and we've got high-returning growth options and where we've got capability. We like that. We like that commodity, but we'll continue to test that over time.

And the same thing applies to met coal, difficult to substitute. We have the best assets in the industry, and we've got the capability to operate them well.

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Operator [4]

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Our next question comes from Paul McTaggart from Citigroup.

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Paul Joseph McTaggart, Citigroup Inc, Research Division - Metals and Mining Analyst [5]

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Look, I just wanted -- I watched your video beforehand, and I just wanted to follow up around how you're transforming, so further productivity gains, and in particular, the Operations Services business. And I wanted to ask, you talked about tight supervisor operator controls. I mean, how is that business model evolving? And how do you see that day-to-day operations might change? We're just trying to understand the cultural shift in terms of operations.

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Mike P. Henry, BHP Group - CEO & Executive Director [6]

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Sure. Okay. Thanks, Paul. The -- so I'd start with a deep belief that there's a lot more potential to be unlocked in BHP. But then I stand back and look at how we're trying to do that currently. And for us to unlock potential, we have to have great people trained up in the right way, led in the right way and with everybody being clear on what the objectives are. But we start today with a workforce that is only 30% to 40% permanent BHP employees, and with leadership in place that oftentimes -- and I'm talking about frontline leadership here, so, for example, our supervisors, who are quite stretched in terms of spans of control and are needing to spend a lot of time out of field because of the processes that they get loaded up with. So Op Services was meant to help address this. It's in line with us -- well, with me wanting to achieve a much higher proportion of the BHP workforce that are permanent employees that we can invest in.

That investment will also be in capability building. So we have a program called Mastery, which is all about frontline technical skills. And then we'll give them leadership that have appropriate spans of control. So rather than supervisors having spans of control of 25 to 40, they'll have spans of control of 8 to 15. And through that then, we'll have supervisors -- and we'll remove a lot of the administrative processes that are holding them back from spending time in the field. So they'll be more capable. They'll spend more time in the field. They'll have people that are there permanently, and we'll be investing in skills building. That's the winning formula for unlocking the true potential at the frontline of this business to become more reliable, lower cost and more productive and safer.

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Operator [7]

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Our next question comes from Hayden Bairstow from Macquarie.

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Hayden Bairstow, Macquarie Research - Analyst [8]

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Just a couple on copper, if I may. Firstly, just in Chile, I mean you talk about moving to 100% renewables by the middle of the decade. Is there anything you can sort of provide on a cost side of these things in terms of how much they might be? I mean, obviously, 300-odd-milion to get out of the coal contracts, just interested in capital from this point.

And then just on Escondida itself, I mean, there's obviously a grade profile decline over time. I mean, how far away are we from a major decision on another phase of CapEx to increase throughput to offset that decline?

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Mike P. Henry, BHP Group - CEO & Executive Director [9]

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Look, I might ask Peter to comment on these as well. But if I just give a high-level view, Hayden. The -- so on the renewables front, I mean, what a good news story in that not only are we able to move to full renewables, reduce our operational footprint by 60% in Chile, it's actually cost beneficial to us because of the price of renewable power. So there's no capital associated with it. And the other thing I would highlight is it's come through some very deliberate effort over a long period of time, first, moving from coal to gas and then from gas to renewables.

Now with Escondida, we've just recapitalized that business. So for the foreseeable future, we don't have the big chunks of new capital coming. But, Peter, you might want to comment on both those things.

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Peter Beaven, BHP Group - CFO [10]

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Yes. So just on the power cost, I think we will see lower power costs coming through over the period those PPAs come in. They will, of course, be somewhat offset by increased desal. And of course, that's always the game, unfortunately, with Escondida. But when you put it all back together again, the increased throughput, the greater efficiencies that have been driving, you see the numbers today, even today, we have really, I mean, really, really good cost control there. And so we would -- that's why we think we're going to continue to be able to produce this 1.2 at less than $1.15 for the -- certainly for the -- I think probably until about 2027 onwards. What will happen with the grade profile, it will probably go along to what it is at the moment, probably -- what is it, 0.83 at the moment -- we dropped another 5%. So we did -- I mean, again, I just want to point these things out because it meant getting those costs down to where they are today, in spite of desal, in spite of grade and so on, so again, just great performance. But we'll get a little bit more grade probably in the middle of next decade as we get into the PLs and those pushbacks. And then probably '28 onwards, it starts to drift off towards the reserve grade. The reserve grade's probably 0.6, 0.65 or something. So we've got a bit of time to figure out what's the next set of debottlenecking projects and so on to do better than what would otherwise be the case if we just ran the place as it is at reserve grade.

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Operator [11]

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

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James Redfern, BofA Merrill Lynch, Research Division - VP [12]

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Two questions, please. First one is just on Scarborough with a target FID for the middle of this year. Just wondering what portion of BHP's equity volumes plan to be contracted prior to FID? And then I have another question after that.

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Mike P. Henry, BHP Group - CEO & Executive Director [13]

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So James, that's one of the very live things that we're looking at currently to help. So if we look at Scarborough, one of the things that we're -- we want to do is to be able to cap the downside or reduce downside risk in the project, given the range of potential market outcomes. And part of that is our commercial and contracting strategy. I wouldn't want to give a specific number other than to say it's something we're quite focused on.

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James Redfern, BofA Merrill Lynch, Research Division - VP [14]

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Okay. And then second question is in relation to Queensland Coal. Just how we should think about the strip ratio decline going forward. Are we going to see a material step-down in strip ratio in FY '21? Or is it more gradual over the medium term?

And then just in terms of how many autonomous trucks will be deployed at Goonyella Riverside in 2020.

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Mike P. Henry, BHP Group - CEO & Executive Director [15]

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Okay. So in terms of the Queensland Coal strip ratio, certainly, on a product basis, it will be a gradual decline over time. So we have seen this hump come through. It will come down over time. But I also want to be clear that the cost improvements that we're targeting for Queensland Coal don't just come from the strip ratio decline. I believe there's a lot further to go in terms of our productivity in that business, and that's going to be supported by things like Operations Services.

Trucks at Goonyella, between 80 and 90 autonomous trucks being deployed over the course of this year.

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Operator [16]

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Our next question comes from Lyndon Fagan from JP Morgan.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division - Analyst [17]

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Mike, first question is would you consider a petroleum division demerger as new CEO? Is that something that would be an option on the table?

Second question is would you consider canceling the Jansen Project? Or are we a bit too far along the path there?

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Mike P. Henry, BHP Group - CEO & Executive Director [18]

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Okay. So look, on those 2, the petroleum -- on petroleum, we like petroleum or the parts of -- so conventional oil in the jurisdictions that we're in, and we like gas that is close to infrastructure. I said earlier, I think, that we have a certain way of thinking about commodities. Do we like the commodity because it's got relative steepness in the cost curve? Is it a big industry? Can we get our hands on good assets, And do we have the capability to operate those assets well? And we meet all of those criteria for our petroleum business.

On Jansen, Jansen will only proceed if it meets 2 criteria. One is it has to compete well under the capital allocation framework. So there's no free passes here. Secondly, I do want to personally get across and comfortable with the assumptions that underpin the investment case. Subject to those 2 things, then we would look to take it forward to the Board by next February. But if it doesn't meet either of those criteria, then, yes, I wouldn't take it forward for sanction.

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Operator [19]

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(Operator Instructions) Our next question comes from Glyn Lawcock from UBS.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [20]

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Mike, 2 questions. Firstly, you talked about portfolio additions through future-facing commodities, and then you said exploration and early-stage entry. One of the things that the company has always talked about is it needs to move the needle. If you look at some of these future-facing commodities, the market size isn't big enough. So can you talk and share your thoughts about how you think about future additions to the portfolio? Are you still in the camp that it must move the needle? Or are we prepared to just focus on higher-returning assets and projects rather than just moving the needle?

And then secondly, I guess the other elephant in the room, the DLC. Just I know you've been on the ExCo, but just can you share your thoughts like you did on Jansen on the DLC future?

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Mike P. Henry, BHP Group - CEO & Executive Director [21]

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Sure. Thanks, Glyn. So on the question around future-facing commodities, I'm definitely of the frame of mind that it must move the needle. I've seen the power that comes with having these really big assets with upside. So that allow us to create more future options, and where we can apply the capabilities that we've built to generate value at scale, no change.

What does that then imply in terms of the sorts of commodities and assets that we pursue? Well, there's a couple of straightforward ones. So copper and nickel, these are going to both be essential to the transition, and they will continue to benefit in a decarbonized world, potentially potash. We've spoken already on this call about the decision ahead of us on potash.

If I then go to the other end of the spectrum, because there's the obvious questions that arise around, well, what about cobalt, what about lithium? Cobalt, byproduct, too small as an industry, and that wouldn't be of the scale that we would be looking to from a BHP perspective. Lithium, we've also concluded the same thing, but that's a -- it's a commodity in transition and so that's something that we'll continually review. But at this point, we look at it and say relatively flat cost curve. So we don't see the opportunity to extract rent, but you can never say never. We'll -- we review that and other commodities on a regular basis. At this point, focus on copper, nickel, possibly potash.

Now on the DLC, this is -- so I've been in and around BHP since the timing of the DLC actually, so joined shortly thereafter. It was established for a specific purpose at the time, and that was to facilitate the merger. We wouldn't do it if we were starting afresh just with the BHP portfolio that we have of today. On balance, simpler, better, but we also know that the business case has to stack up. And we've been clear that there's impediments, at least in the near term, to our ability to do that, right? So as of today, the business case doesn't stack up.

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Operator [22]

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Our next question comes from Christian Georges from Societe Generale.

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Christian Eric Andre Georges, Societe Generale Cross Asset Research - Equity Analyst [23]

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A question on iron ore. And what's your current take on the Chinese level of demand? We were seeing steel inventories in China seemingly rise at a faster pace than we've seen in the past 4 years, and we saw reports of lower production, as I know, in China. So is your take at present that demand should fall, but so should supply fall in China? Or do you think we should expect some headwinds in the next couple of quarters?

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Mike P. Henry, BHP Group - CEO & Executive Director [24]

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Thanks, Christian. Well, I think it depends in part on how coronavirus plays out. So what have we seen in the near term? We've seen, of the steel curtailments in China, the weighting has been towards EAF, whereas blast furnaces -- and certainly, the state-owned enterprises have held up a bit better. Port inventories have increased, but they're still at reasonable levels, and we're seeing that growth less marked than some people would -- might otherwise have anticipated. And of course, you've had domestic restrictions on iron ore supply as well.

What has that led to? Coupled with other supply disruptions in the seaborne market, demand for our products has been healthy, and prices have held up reasonably well. And as long as coronavirus is better contained or better contained within this quarter, on balance, we think that for the remainder of the half, things will -- the overall market demand and the economy will hold up. If it extends beyond that, of course, then we'd be back in looking at what the implications are.

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Operator [25]

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Our next question comes from Paul Young from Goldman Sachs.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [26]

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Mike, a good first set of results to present. I've got a few questions on the copper assets, in particular, first of all, Escondida. What is driving unit costs back up $0.10 a pound in the second half to match with guidance, i.e., at the lower end of the range?

And then on Olympic Dam, maybe one for you, Mike. Costs are back up, annualizing about $1.1 billion per annum. That's the highest run rate in 4 years despite the weaker Aussie dollar. So can you comment on any cost-out initiatives there?

And then also, do you have an update on the studies and timing of the BFX project?

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Mike P. Henry, BHP Group - CEO & Executive Director [27]

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Okay. So look, on Escondida, Paul, the -- if I just think forward to what occurs in the second half, I mean, there's nothing -- certainly, no major slugs of costs coming through. Peter, was there anything further you can say about that?

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Peter Beaven, BHP Group - CFO [28]

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Yes. Look, I think, Paul, a couple of things that have gone -- done -- that has happened this half really is, as always, there are some ups and downs on deferred stripping and actually went against us on this one. But really, I think cost control was good, and byproducts is also quite a big one. So we had slightly better production than we thought in terms of production, but it's always a byproduct, so that comes with whatever presents and prices have been pretty good. Now, to the extent that the gold price, in particular, would continue to hold up in the second half, then obviously, that would be -- continue to be a tailwind. And then, of course, depending on which FX rate you use, as we know, there's been -- we lost tonnes through the Chile unrest, but the countervailing to that, of course, was we had some periods of really extremely weak CLP. So again, we'll see what happens in the second half, right?

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Mike P. Henry, BHP Group - CEO & Executive Director [29]

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So just on Olympic Dam, Paul. The -- so we've had a program of work underway there. And if you recall, the effort on Olympic Dam is to remediate asset integrity to secure more reliable operations. Through those more reliable operations, increase grade to have a disproportionate uplift in production then. All of that continues per plan. So we're about halfway through our asset -- more than halfway through our asset integrity program. We're into the SMA. That's helping to lift grade.

And then longer term, of course, we're looking at BFX. So in terms of further updates on the BFX project, nothing further to talk to at this point in time.

In -- on your question around cost, part of the effort on asset integrity comes through capital. But a good part of it also comes through OpEx. So part of what you're seeing coming through OpEx is related to ongoing asset integrity work. And over the next couple of years, we'll -- we do expect to secure more reliable operations, more reliable production and, through that, to bring cost down.

Specific cost-reduction initiatives: very much the same as we're doing elsewhere, which is improving some of our discipline around maintenance, so getting more out of our equipment; optimizing our maintenance costs; and certainly, improving labor productivity. So I think that there is a big opportunity across the business to improve labor productivity.

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Operator [30]

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Our next question comes from Brenton Saunders from Pendal Group.

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Brenton Saunders, Pendal Group Limited - Portfolio Manager & Analyst [31]

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Just a couple of things. Firstly, I was just interested in a couple of anecdotes around how corona might actually be impacting the business, i.e., deliveries, transportation, freight, payments, anything like that, and how we should think about that.

And then maybe just back to Paul's question on why Escondida's costs were higher, not lower. I think Peter gave a whole lot of reasons why they were lower, not higher.

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Mike P. Henry, BHP Group - CEO & Executive Director [32]

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So the -- let me deal with coronavirus first, Brenton. The -- I mean it's interesting. So the -- as of today, we aren't seeing any impact on demand, pricing or payment terms. There's been some obvious, and I think reported, challenges, but not that have seen us not shipping product in copper concentrate because the smelters are becoming backed up with acid and so on. But overall, demand continues to be healthy. A lot of interest in our products, in part because of the supply side disruptions elsewhere, both in coking coal and in iron ore. Prices have held up and no issues with payment terms. And nothing that we're seeing at this point in time suggests that things are going to turn bad quickly. The only caveat on that is if coronavirus continues longer, then we have to go back in and revisit it. But at this point in time, it's fine.

Now on the cost front, Peter, you're wanting to go...

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Peter Beaven, BHP Group - CFO [33]

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Yes. Brent, I mean I think -- well, again, I'm not exactly sure which some of you are looking -- I'm just looking at the half 1 FY '19 was $1.17, and this -- and realized exchange rates were $1.10. So I think that is definitely lower. So -- but if you put the -- what the CLP that we have originally guided, $1.14. So I think, overall, it was a pretty decent, as I say, good throughput, 5% decline in grade, good throughput. We were hitting, I think, on average, almost 370,000 tonnes a day, which is good and yes, with a couple of things that went for us. There's a few things that went against us -- against us: deferred stripping; for us was, I guess, gold price. And so yes, that's, I think, a decent outcome.

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Mike P. Henry, BHP Group - CEO & Executive Director [34]

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Maybe, Brent, because I was at Escondida in December, I can give you a sense for what I saw there in terms of the focus. So clear focus on driving improvement. I see -- I think you see that coming through in the record concentrator throughput. And we've had some periods throughout the half that were at kind of 400,000 tonnes per day. A lot of focus on driving productivity improvement. I think one of the things, Peter, and I don't know about the half, but certainly in terms of the trend, increase in desalinated water…

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Peter Beaven, BHP Group - CFO [35]

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Yes, it is.

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Mike P. Henry, BHP Group - CEO & Executive Director [36]

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But from my perspective, they've been focused on offsetting the cost. But that's the only sort of structural thing there. And then there's some potential that given the unrest in Chile and some of the response to that, that we will see the 6% staged over multiple years increase to effectively labor costs coming through because of the increased pension contribution. But structurally, the only thing that's driving cost upwards there is the increase in desalinated water, and that's being offset by the improved -- the focus on continued improvements in productivity.

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Peter Beaven, BHP Group - CFO [37]

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Yes. And grade has been a really -- we lost 35% grades plus another 5 in the last half since, what, 2015, something like that?

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Mike P. Henry, BHP Group - CEO & Executive Director [38]

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2016, yes -- '15, yes.

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Peter Beaven, BHP Group - CFO [39]

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Yes. So Brenton, I mean, it's been -- the team has done a reasonable job there, I think.

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Operator [40]

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Our next question comes from Hayden Bairstow from Macquarie.

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Hayden Bairstow, Macquarie Research - Analyst [41]

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Just a couple of follow-ups. Firstly, just on Hunter Valley. I mean, EBITDA loss for the half, I can't actually find one since the formation of BHP. It must be the first one. Just your thoughts on what's driving that other than price and what you can do about it.

And just secondly, on the opening statement, Mike, around lower costs and those sort of targets. This Operations Services division, 1,500 jobs, I mean, is that a short-term cost increase that's going to drive the medium-term outcomes? Or is it just replacing contractor roles? I mean could you sort of talk through that a little bit more?

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Mike P. Henry, BHP Group - CEO & Executive Director [42]

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Sure. Okay. So the -- look, on Hunter Valley, you're right, not a great set of numbers there. What's driving it is a combination of lower prices. So prices have been markedly lower. The increase in strip ratio that we're seeing as we move through the monocline, and that being particularly marked in the near term as we seek to open up some further pits to allow us to manage strip ratio in the medium term, has also been impacting our costs. There's a bit of disruption due to the fires and so on and fair to say that, that hasn't been our area of highest truck/shovel productivity, so there's a lot more opportunity to get there. The last couple of months have seen an uptick in truck/shovel productivity, which is going to help address the cost challenges there.

Now Operations Services, this is something -- there is no increase in costs associated with Operations Services. It's bringing costs down. And I want to be very clear about that. That was one of the riding instructions that the team had in developing Operations Services and one of the reasons -- or a reason that it's helping to bring costs down is because we're getting much higher productivity out of the Operations Services crews in both maintenance and in truck/shovel operations in the order of 20% to 30% in terms of overall outcome. So it's a fairly significant net cost benefit or a significant cost benefit to the group.

And the 1,500 people we're replacing, as you say, labor hire and service contractors. And we're going to go further with that. I'm expecting upwards -- or approaching 3,000 by the end of this financial year and further in the years ahead, always with a focus on performance and -- performance, productivity and cost-out.

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Peter Beaven, BHP Group - CFO [43]

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Mike, if I'd just add also, just to remind, once we're through the monocline, we get back to the sort of the medium-term guidance of $46 to $50 a tonne for New South Wales Energy Coal. And that is at a stronger-margin product base -- a smaller production base, sort of 16 rather than 20, but certainly, those costs will go down. And I guess you know exactly what's happened to the thermal coal price. It was a particularly weak half, and I think normal service will be resumed in due course.

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Operator [44]

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

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James Redfern, BofA Merrill Lynch, Research Division - VP [45]

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Just 2 follow-up questions, please. The first one is just in terms of WA Iron Ore reaching that 209 million tonnes. From memory, the key bottleneck has been the car dumpers at port. I'm just wondering if you could please provide an update on how that is going in terms of upgrading the car dumpers.

And then the second question is has BHP received any unsolicited offers for Mount Arthur in the recent months?

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Mike P. Henry, BHP Group - CEO & Executive Director [46]

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Okay. James, so I don't want to harpy on -- or I don't want to comment on Mount Arthur.

In terms of WA Iron Ore, the car -- so the port reliability program has been going very well. And we had significant refurbishment of one of the car dumpers earlier in the half. We've got more to come. But overall, car dumper performance has been strong. The 2 other constraints in the system are rail and then the overall network of conveyors and so on in the port. Rail reliability has continued kind of the strong trend in recent years. There is a program that we have underway to move to a different signaling system in rail, which will then permanently deconstrain rail as a constraint. And the port reliability work that we have underway will also give us greater throughput through the port. But I mean, basically, everything going according to plan, and we are definitely seeing an uptick in reliability and capacity.

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Operator [47]

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(Operator Instructions) There are no further questions -- sorry, we've had a question coming through from the line of Paul McTaggart from Citigroup.

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Paul Joseph McTaggart, Citigroup Inc, Research Division - Metals and Mining Analyst [48]

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Look, I just want to quickly follow-up. Trinidad and Tobago, I mean, I know when we talked earlier about petroleum, you've still got quite a constructive view about long-run gas, but gas prices continue to be weak. Mike, do you -- no change in the view in terms of the long-run gas? Because Trinidad and Tobago is an important part of lifting production long run in that oil business. Do you feel positive about LNG, long run?

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Mike P. Henry, BHP Group - CEO & Executive Director [49]

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Well, I think we always have to combine the view of the markets with the view of the resource, Paul. So we do see gas resources that are close to infrastructure or LNG infrastructure as remaining attractive, and that's the case in Trinidad and Tobago, and no change in that. So we're not looking at the current spot prices in LNG and seeing them as being representative of long-term markets. Clearly, there's an overhang on supply at this point. We believe that, that will get worked out of the market in due course. And so gas assets or gas resources that are close to existing infrastructure where we then don't need to invest in the infrastructure, we just invest in the upstream, Scarborough is another example of that, yes, there's still -- we still see opportunity there. But as I highlighted on an earlier question around Scarborough, we do then seek through our contracting strategy and commercials to make sure that we mitigate the downside market risk as well.

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Operator [50]

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There are no further questions -- sorry, Mike, go ahead.

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Mike P. Henry, BHP Group - CEO & Executive Director [51]

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Okay. No. I'm sorry. I was just going to say, so it sounds like that was the final question, so I just want to thank everybody for joining the call. And of course, we'll see many of you in the coming weeks.

Just to close out, as I said earlier on, I really want BHP to be an -- I intend for BHP to be unquestionably the industry's best operator. What does that mean? It means safer, lower cost, more reliable and more productive.

On the portfolio front, I think we've got a great portfolio today. I want to ensure that we have a portfolio and capabilities that are fit for the longer-term future. And through bringing those things together, we will reliably grow value and returns for many decades.

Thank you.

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Operator [52]

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Thank you. Ladies and gentlemen, thank you for your interest today. You may now disconnect.