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Edited Transcript of BLT.L earnings conference call or presentation 20-Aug-19 10:59am GMT

Full Year 2019 BHP Group PLC Earnings Presentation

London Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Bhp Group PLC earnings conference call or presentation Tuesday, August 20, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Mackenzie

BHP Group - CEO & Executive Director

* Peter Beaven

BHP Group - CFO

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Conference Call Participants

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* Alain Gabriel

Morgan Stanley, Research Division - Equity 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

* Izak Jan Rossouw

Barclays Bank PLC, Research Division - Director

* Jason Robert Fairclough

BofA Merrill Lynch, Research Division - Head of the Developed & Emerging EMEA Metals and Mining Equity Research

* Lyndon Fagan

JP Morgan Chase & Co, Research Division - Analyst

* Myles Allsop

UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research

* Paul Young

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Paul Joseph McTaggart

Citigroup Inc, Research Division - Metal and Mining Analyst

* Sam Webb

Crédit Suisse AG, Research Division - Associate

* Sylvain Brunet

Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research

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Presentation

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Andrew Mackenzie, BHP Group - CEO & Executive Director [1]

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Hello, everyone, and thank you for joining Peter Beaven and myself as we present BHP's 2019 financial year results. As always, please note the disclaimer and its importance. So today, we announce a strong set of results, built on our foundation of simplification, capital discipline and culture. This underpinned record cash returns to shareholders and a return on capital employed of 18%. This is the product of our strategy, which over the past 5 years has seen us increase volumes by 10% and reduce unit costs by over 20%.

Our focus remains as strong as ever: to maximize cash flow, maintain capital discipline and increase value and returns. And there are significant opportunities ahead to further transform our business and grow value and returns for our shareholders. But first, let me give you a rundown of our full year results.

Higher prices and solid operating performance contributed to underlying EBITDA of $23 billion at a margin of 53% as well to strong operating cash flows. And we used this cash to progress attractive growth projects and after disciplined investment, converted this into a free cash flow of $10 billion. We've announced a record final dividend of USD 0.78 per share. That's a 73% payout ratio or $4 billion, which is on top of the $17 billion already distributed to shareholders this year.

We've also invested in our future. We've had further exploration success in copper and oil and with the approval of the Ruby oil and gas development this month, we now have 6 major projects under development. All of these are on schedule and on budget, and they deliver average returns of around 20%. We apply the same discipline to our small projects as we do to our major ones.

We achieved these results through the hard work and ingenuity of our people. So their health, their safety and their wellbeing is and will always remain our highest priority. So it's with great sadness that last December, our colleague Allan Houston died at BMA's Saraji Mine in Queensland. Allan's death impacts us all and serves as a stark reminder of why safety must always remain at the forefront of what we do.

After a thorough investigation, we could not determine the direct cause of the incident. However, we have identified several areas for improvement. And as always, we shared the detailed findings of this investigation and redoubled our commitment to safety. And of course it's reinforced our drive to improve our safety culture and strengthen the quality of our field leadership program.

This year, our leaders again spent more time in the field as they coached their teams to identify and speak up about safety risks. While we saw a slight increase in total recordable injury frequency to 4.7 per million hours worked, we reduced the rate of events with a potential to cause a fatality by 18%. And we are encouraged by this result, nonetheless, there is still more work to do.

Last year, we reduced our scope 1 and 2 greenhouse gas emissions compared to our target baseline by 3%. It's a good result, but we again have more to do. So that's why just last month, we committed $400 million to address emissions across operations and our value chain. Safety and our approach to global warming are critical components of our overall focus on social value, and we'll update you on this more later this year.

So I'll now hand over to Peter to take you through our financial performance in detail.

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Peter Beaven, BHP Group - CFO [2]

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Great. Thank you, Andrew. A solid second half performance sustained our strong earnings and further strengthened our financial position in the 2019 financial year. Excluding Onshore U.S., we generated underlying EBITDA of $23 billion, with a margin of 53%, and underlying attributable profit of $9.5 billion. These results are largely in line with last year and demonstrate the consistency of our business, a product of our diversification and solid operational performance.

Including Onshore U.S., underlying attributable profit was $9.1 billion, up 2%, and underlying earnings per share increased by 5% due to fewer shares on issue following the buyback. This year, we recognized an exceptional charge of $818 million, and this consists of a $240 million gain related to global taxation matters resolved during the first half and a $1.1 billion charge related to Samarco. This is largely due to updated estimates for Renova's programs and a provision for accelerated decommissioning of the Germano dam. Including these, our attributable profit was $8.3 billion.

Higher prices and the stronger U.S. dollar increased EBITDA, as shown on the waterfall chart. We delivered underlying productivity improvements of $1 billion, with record throughput at our Chilean copper assets and record volumes at several Australian operations. However, these gains were offset by several factors. Significant resource headwinds, most notably copper grade decline, had an $800 million impact. Unplanned outages in the first half amounted to another $800 million. And we had a higher unit cost in coal, due to a higher strip ratio.

Stable operations in the second half have locked in this year's underlying productivity gains. And over the medium term, we expect grade and strip ratios to stabilize, and our transformation program to further improve operational performance.

Our results were underpinned by a significant contribution from each of our commodities. Western Australian Iron Ore generated EBITDA of $11 billion at a margin of 65%, the highest since 2012 when prices were double 2019 levels. Though an 18% increase in prices clearly helped, this outstanding result can be attributed to our team's ongoing efforts to realize cost and volume efficiencies. We finished the year with record volumes at Jimblebar and an exit run rate above 290 million tonnes per annum. Despite the train derailment and the cyclone, we continued our multiyear track record of reducing unit costs. For the full year, we delivered sector-leading C1 costs of below $13, and we'll not only sustain but build on the strong performance in future years.

In Copper, optimized maintenance strategies produced record throughput at each of our Chilean operations. This helped offset a 12% decline in concentrate grade at Escondida. Despite this, and payments of the end of negotiation bonus to the unionized workforce, Escondida's absolute costs remained flat year-on-year. However, with prices 13% lower, overall copper EBITDA decreased to $4.6 billion. While Escondida's medium-term cost guidance remains unchanged at less than $1.15 per pound, guidance for next year reflects significantly lower by-product credits.

Our Coal business contributed EBITDA of $4.1 billion at a margin of 45%. A solid operating performance, which included record production at BMC, helped offset a 10% increase in strip ratio and the impact on unit costs.

And finally, in Petroleum, higher prices and strong uptime performance supported a 14% increase in EBITDA to almost $4 billion. Total production increased by 1% despite planned maintenance activities and natural field decline of around 5%.

Even with fluctuations in prices and volumes over the past few years, our diversified portfolio has provided strong and stable cash flows. Over the last year, net operating cash flow was $17 billion, in line with the previous 2 years. After disciplined investment, free cash flow was $10 billion. BHP has now generated over $35 billion of free cash flow over the past 3 years. And this excludes the $10 billion in proceeds from the sale of Onshore U.S.

Our capital allocation framework informs every financial decision we make. We use it to transparently guide capital between the balance sheet, investment and shareholders in order to maximize value and returns. It has continued to work well. And I'll step you through this.

Over the year, we maintained our strong balance sheet and reduced net debt by $1.7 billion to $9.2 billion. Investment in maintenance, growth projects and exploration totaled $7.6 billion.

Guidance for CapEx remains below $8 billion for the 2020 financial year and at approximately $8 billion for 2021. With our balance sheet strong, and capital expenditure at the optimal level, remaining cash has only one place to go. Over the past 12 months, we returned $17 billion to shareholders, a record amount. And today, we announced a further $4 billion in cash returns with a record final dividend of USD 0.78 per share. This includes $0.53 under the 50% payout ratio and an additional amount of $0.25 or $1.3 billion.

We're acutely aware of the current trade tensions and consider downside scenarios in all our cash allocation decisions. With our balance sheet, solid operational performance and a flexible dividend policy, we're well positioned to weather any future volatility.

Now before I move on, let me remind you that under the new financial reporting standard on leases, IFRS 16, approximately $2.3 billion of operating leases are brought onto the balance sheet from 1st of July 2019. A change in our definition of net debt to include the fair value of debt-related derivatives will also increase net debt by $200 million. So had these changes been in effect at 30th of June 2019, net debt would have been $11.7 billion. Additional new leases commencing in the 2020 financial year, largely related to the desalination plant under construction at Spence, are expected to increase net debt by a further $1.3 billion.

So reflecting these impacts, which totaled $3.8 billion, we've revised our net debt target range to between $12 billion and $17 billion.

There is no change to our cash flows due to the application of IFRS 16. And we continue to expect net debt to remain at the lower end of this revised target range in the near term.

Over the year, our return on capital employed, excluding shale, was 18%. Our Western Australian Iron Ore business led the way with a near 40% return on capital. A strong operational performance, particularly in the second half, allowed us to capitalize on higher prices.

Queensland Coal, again, provided a strong return of around 30%, despite the stripping and weather challenges over the period. And Conventional Petroleum posted a significant year-on-year improvement, with a return of just below 20%, up from 12% in the prior year.

Our Copper assets had a tougher year from a returns perspective, the softer prices, grade decline and unplanned outages at Olympic Dam and Spence weighed on returns. At Pampa Norte, returns on the existing business, so excluding SGO, are 16%. And while there are bright spots in underlying performance at Olympic Dam, the team there is focused on delivering a multiyear program of work to improve stability and growing production through access to higher grade ores and increased throughput. And both are key to improving returns.

In summary, we delivered well against our plans. We exited shale cleanly, invested in high-return projects, reduced net debt and returned a record amount to shareholders, including the buyback of limited shares at below AUD 28. With our operations stable over the past 6 months, we've delivered $1 billion of underlying improvements in productivity, building on the past few years. And we are pressing ahead. Our transformation program and strong suite of options will offset inflationary and resource headwinds and set us up to deliver, at 2017 prices, returns around 20% in the medium term.

We're ready for whatever the future holds, and we'll remain focused on maximizing cash flow, maintaining capital discipline and increasing value and returns in accordance with our capital allocation framework. Thank you.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [3]

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We operate in an uncertain world. Unpredictable policies, trade volatility and a slowdown in global growth have weakened confidence and affected commodity markets. And we do remain cautious about the short-term outlook. But as we look ahead, we are positive about the long-term outlook. We know this because we run scenarios and monitor strategic themes to guide our actions in order to -- we create a portfolio of assets and options that thrives in any future. And from this, we are confident that our portfolio is well positioned to seize the opportunities that will come from the inevitable, population growth, higher living standards and mega trends such as electrification and decarbonization. All of which are likely to increase demand for our products for decades to come.

Our timely demerger of South32 and more than $18 billion of divestments have shaped our portfolio around some of the world's best assets across commodities that all have attractive fundamentals. And with our simplified portfolio, we've made significant changes to our operating model to consolidate functions globally and embed common processes, systems and practices. Since 2015, we've sustainably reduced overheads by more than $1.5 billion. And the continuation of our transformation programs, which include World Class Functions will remove an additional $500 million.

And to further harness the power of our operating model and maximize efficiency, we invest in our people and in our centers of excellence for maintenance, engineering, projects and geoscience and in automation and other areas of innovation, all of which create a culture and a workforce that is more empowered and connected than ever and will allow us to meet future challenges. It'll also drive greater operational and capital productivity and, ultimately, cash generation for years to come.

So for example, our maintenance team at Daunia last year used new technology and the BHP Operating System to refine their work. And this reduced truck downtime from 1 hour to just 20 minutes per week. And when we apply this across Daunia's fleet, this equates to additional coal production of around 25,000 tonnes each year. And this is just one initiative at one mine. Imagine the impact of these incremental improvements when they're applied all the way across BHP.

And we also know that a diverse workforce that represent the fabric of our communities is safer, is more innovative and more productive. And that's why we are focused on greater female and indigenous representation across our global workforce. And that includes our aspirational goals to achieve gender balance by 2025 and to increase indigenous employment in our Australian businesses by over 40% by the end of 2020.

A strong, empowered and inclusive culture, our simplified portfolio and world-class assets increase our competitive advantage and set us up for long-term value and returns.

So let me now turn to our business performance. We had a strong year, and it was built on improvements we've already made.

For the past 5 years at Western Australian Iron Ore, we lifted plant and equipment performance to well above design capacity of 240 million tonnes a year. In total, we've increased production by 20% and reduced costs by 50%. We are now the lowest cost iron ore producer and have plans to go lower as we work towards 290 million tonnes a year on a sustainable basis.

Over the past 5 years at Queensland Coal, despite a 14% increase in strip ratios, we have increased production and reduced unit costs by over 15%.

At Olympic Dam, while the surface operations have experienced challenges, underground development has progressed well with record kilometers drilled. And we've made good progress to catch up on maintenance, and our plans are now firmly focused on the stabilization of the asset and medium-term growth.

Finally, over the past 5 years, at Nickel West, the team has reset its cost base and created options to increase annual production to well above the current 90,000 tonnes. Increased exploration has already delivered positive results with contained nickel reserves now more than 75% above 2018 levels. This, Nickel West, is a valuable asset to hold as we monitor the expected growth in battery markets.

Across our Australian assets, our new Operations Services model will reduce our reliance on external contractors and mitigate skilled labor shortages. While we're in the early stages of its rollout, at the most established sites, we've already seen improvements in labor productivity of 20% and a reduction in injury rates of 50%.

As part of our transformation program, we expect the gradual deployment of autonomous trucks at our Australian core and iron ore sites, and they'll unlock further efficiencies. A decision to proceed with our first deployment at Queensland Coal's Goonyella Mine is expected to be made by the end of next month.

Over the past 5 years at Escondida, despite grade decline of 35% and higher power and water costs, a 50% lift in concentrator throughput at Escondida and a 10% higher site-wide recovery have maintained annual production from Escondida at approximately 1.1 million tonnes, and they've kept their costs flat at just over $1 a pound. We've achieved all of this while improving the sustainability of our assets. So across our Chilean operations, we've made large and early investments in desalination in both Escondida and Spence, and that will reduce our reliance on the aquifer. And in the medium term, we aim to source most of the power for this process from renewables at significantly lower cost than current carbon-based sources.

At Spence, we deployed new leaching technology, which has increased throughput and improved recoveries. In just 2 years, it's up by 14%. And the growth project to unlock the hypogene at Spence is on budget. We now expect first copper production to be ahead of schedule in the first half of the 2021 financial year. So that together with the current operations, total annual copper production over the first 4 years will now reach 300,000 tonnes.

At Jansen, final lining is being installed in the shafts. We expect this to be completed by early calendar year 2021 as we finalize the feasibility study in parallel. And in copper exploration, we added to our set of options in Ecuador, in Canada and Mexico.

In Petroleum, over the past 5 years, our operating performance and high-return infield drilling programs have stemmed field decline and delivered strong margins as well as reducing unit cost by 25%.

Mad Dog Phase 2 and Atlantis Phase 3 are on schedule and on budget. And just this month, we approved the Ruby project in Trinidad and Tobago. In the medium term, the combined volume produced from these major projects will more than offset field decline and lift our total production.

During the 2019 financial year, we discovered hydrocarbons at 7 of our 9 wells. We had drilling success in Mexico, the U.S. Gulf of Mexico and Trinidad and Tobago. Over the past 2 years, our petroleum exploration strategy has increased our 2C contingent resources by more than 55%. This is a lead indicator for future production, and it excludes our evaluation of the successful Phase 3 drilling campaign in Northern Trinidad and Tobago and the latest well at Trion, which was drilled in July. And this well didn't encounter a gas-oil contact, as expected, and that indicates there's more oil there than we previously thought.

So to recap. Over the 2019 financial year, our disciplined execution of plans, simplified portfolio of world-class assets delivered a strong performance, and we carry this momentum into the 2020 financial year as we remain focused on cash flow, capital discipline and volume returns.

In the year, we expect volume growth of 2%, disciplined investment in our quality set of options and a further increase in return on capital employed, which is spot prices will reach 19%.

Although we're well positioned for the future, there's still more we can and will do to maximize the value of our assets. Our transformation programs will standardize the way we work. It will lift our workforce capability, establish innovative partnerships and create more stable and predictable operations. Our future prosperity also depends, though, on our ability to cultivate more opportunities. And we have a strong set of options to grow value that spans various stages of development and covers a range of commodities. They're also spread across each quadrant of the risk-return matrix. And this allows us to balance return on capital employed, value growth and cash returns to shareholders. Our disciplined framework makes sure always that we deploy capital and cash to the right project at the right time.

So to conclude, BHP is set up to deliver strong returns over the short, medium and long term. We have a solid outlook for both volume and costs. The quality of our assets, our strong balance sheet, our empowered culture and capable workforce will grow value for decades to come. BHP is well positioned for a great future. Thank you.

Hello, everyone, and thank you all for joining Peter Beaven and myself to discuss BHP's result for the 2019 financial year. I'm also joined in the room by Tristan Lovegrove. He's our new Chief Investor Relations Officer, who many of you will have the opportunity to meet over the next few weeks.

In the 2019 financial year, we delivered record cash returns for shareholders. The Board has declared a final dividend of USD 0.78 per share or approximately $4 billion in total, and that's on top of the $17 billion we've already returned to shareholders this year. Higher prices and a solid underlying operating performance contributed to an EBITDA of $23 billion at a margin of 53% and, of course, strong operating cash flows, which after a disciplined investment we converted into a free cash flow of $10 billion. Over the year, our return on capital employed, excluding share, was 18%. Operationally, strong results in petroleum and iron ore offset lower contributions from copper and from coal.

Over the past 5 years, BHP's volumes were up 10%, and unit costs were down by over 20% across our major assets. In that same period, our Western Australian Iron Ore business has increased production by 20% and reduced cost by 50%. That means we are now the lowest-cost iron ore producer in the world, and we achieved these results through the hard work of our people. And that's why their health, safety and well-being is and always will remain our highest priority.

And so it was very tragic that last December, our colleague, Allan Houston, died at BMA Saraji Mine in Queensland. After a lengthy and thorough investigation, we could not determine the direct cause of this incident. But we did, however, identify several ways for improvement and, of course, have redoubled our commitment to safety.

We enter the 2020 financial year with a very positive outlook for our business. That's because we have a simplified portfolio of world-class assets and a strong balance sheet. And as you've seen today, with our high quality of operation, we have 6 major projects on track and on budget in iron ore, copper, oil and potash; we have exploration licenses in the world's top basins, with options for future development; and a greater focus than ever on workforce capability, getting an empowered culture and technology also add up to further transformations of our business to improve its efficiency and effectiveness, both in terms of operational efficiency and capital efficiency.

And that's why I'm confident this will deliver value and returns for shareholders for decades to come. But I'll leave it there and open the line now for questions.

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Questions and Answers

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Operator [1]

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Our first question comes from Paul Young from Goldman Sachs.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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Andrew, a very clean set of results here. Just a few questions on copper and then oil. First one is on the FY '20 cost guidance at Escondida. I see production's increasing by 5%, yet unit costs are actually increasing 10%. So I'm wondering what's driving that? And what will drive unit cost down to a medium-term target of $1.15 a pound as grade declines?

And the second one, Andrew, is on the oil division, and I appreciate all the drilling and reserve disclosure. That's much appreciated. Question is actually on Trion. I see that your 2C reserves have increased by about 200 million barrels so far, so I'm curious about -- this is really shaping up now -- what is your total reserves for the field now? Any upside scenarios you can talk about it? And do you have a target for first year production?

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Andrew Mackenzie, BHP Group - CEO & Executive Director [3]

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Okay. Let me handle the oil question, and then perhaps, Peter, you might want to just go into the detail of the copper question. There are some issues there, quite complex to do with coal product credits and how we mine through the ore body. We may have to get back to you on that. Peter can give you some of the things.

So on Trion, yes, the last well drilled on Trion didn't find a gas oil contact. We thought there was a reasonable amount of gas in the crown of the structure, and we now realize this is maybe -- there may not be a gas cap, or if it is, it's very small. And therefore, that, combined with some of the other wells, has increased particularly the liquid content of that deposit. I don't have the exact reserves to hand, but I'll get the IR guys to get back to you on that.

And then of course, we are working hard with the authorities in Mexico to figure out now what we think should be a very impressive development and the right phasing to do that.

But maybe, Peter, you might want to add to some of the detail over the copper?

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Peter Beaven, BHP Group - CFO [4]

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Sure. So Paul, just as always, a few things sort of moving in Escondida. Firstly, probably another 5% down on grade this year, this FY '20 year, and sort of then it stabilizes, happily. But in the meantime, we've got that. And at the same time, we've got lower by-products, a little bit of grade, and obviously a little bit of price, but mostly grade. As you know, it's just really -- it's a gold thing. But offsetting that -- sorry, also that we have high strip ratio -- stripping, so that's also going to crimp. And then, I mean, again, after FY '20 sort of settle down again, but offsetting that is more productivity.

That story continues at Escondida, and we will get more throughput. And recoveries are going quite well. It's not just a recovery thing by pushing material out of leaching into concentrators, obviously that's been a very big thing. But also, we are getting decent recoveries out of the sulphide leach as Epp [E4] really starts to hit its stride, so a decent story there. It will continue to be, I think, a very good cash returner for us for the next decade, depending on copper prices, obviously.

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Operator [5]

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Our next question comes from Sam Webb from Crédit Suisse.

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Sam Webb, Crédit Suisse AG, Research Division - Associate [6]

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Andrew, just 2 for me, quickly. Scarborough, if we can start with some comments from your partner this week. Just interested in what are the key terms, from your perspective, to be determined to reach an investment decision here. And is early 2020 still feasible from your perspective? And on met coal, are strip ratios still expected to unwind over the medium term? And just conscious that we increase again in FY '20, when is the first year strip ratios are expected to come down?

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Andrew Mackenzie, BHP Group - CEO & Executive Director [7]

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Okay. So look, on Scarborough -- and again, I'll half answer the coal one, and then Peter may have a bit more of the detail on 1 or 2 of these things. On Scarborough, there's not a lot I want to say. I mean we've enabled this development in the first instance by effectively selling down our holding previously to Woodside, and they ultimately then bought out ExxonMobil. And so that has definitely moved it up the queue. I mean clearly, we think this potentially an attractive development.

And the debate that we're having is to how is the most effective way to process the products or the gas and associated liquids that come out of the production of Scarborough. These are very confidential discussions between ourselves and, obviously, the counterparties, and I intend to keep them that way until we can resolve them. Peter, I mean I think on the met coal one, I mean there's a lot of -- again, there's a lot of moving parts there, but we are looking forward to -- as you've seen, we've guided to following costs.

Even though we are facing a fair bit of inflation, we believe that we can offset that through a combination of volume dilution on a unit basis, but -- as some of the increased stripping we've been doing of late really comes through. And we have a number of productivity measures there as well, I think most prominent of which is a reduction in cycle times through just getting the movement of the mobile fleet more efficient. But I think there's some other detail on that, that Peter wrote down, he may be able to fill in on that as well.

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Peter Beaven, BHP Group - CFO [8]

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Yes, that's a good summary, Andrew. I mean, I think from a strip ratio, that's really the specific question. I think we'll -- it continues at a reasonably elevated level this year, probably into next financial year, and then it starts to fall away at the same time as the plans come through, so that's a good combination, obviously. As Andrew described there's, in addition to that, we will also be able to continue to reduce costs through productivity, so that's why we are expecting something in the order of a $10 a tonne reduction, maybe more in Queensland Coal.

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Operator [9]

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Our next question comes from Paul McTaggart from Citigroup.

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Paul Joseph McTaggart, Citigroup Inc, Research Division - Metal and Mining Analyst [10]

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Andrew, I just want to get a sense of Resolution, and I know that's still some way off, but plenty of risks around a deep block cave. And what would be -- I know it's not your project -- when you can obviously see what's been going on with, OT, Oyu Tolgoi, how would -- how do you think about the risks around large block scale -- block cave developments?

And what sort of level of work -- and obviously, in OT, there's been some discoveries around geotechnics subsequent to initial planning, how does that make you think about Resolution? And what additional work do you need to do to be confident, ultimately, that you've got a project that's going to work for the money that will need to go into it?

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Andrew Mackenzie, BHP Group - CEO & Executive Director [11]

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Okay. You're right, it's not our project. And I do not want to give you a detailed answer to Resolution. I think that's Rio Tinto's job, but I might offer some more broader commentary on capital investment and block caves, generally. Look, we have to find a way to test the likely performance of a block cave at Resolution as cheaply as possible.

And we certainly have no problems with the -- an appropriate front-running of a modest investment that would actually derisk or otherwise the investment in that project. And I think we have good agreement with the operator there. I think the more you are able to, in these large developments that we face, in some way, invest a small amount of capital, which can lead to more capital being invested later, but not if it's the case to, in some way, derisk a project better.

And part of our success in -- and I think in improving our capital efficiency, instead of going for these big bang early investments that the net present value calculation would say you should do because you're worried about the time value of money -- less of a concern, I would say, these days with such low interest rates, you actually try and just kind of get in, in a small way into the elements of the project into the ore body, understand what's going on, put a small cost, which could be added to a bigger project rather than rushing in upfront.

I think as you look at what we've done recently, we've actually done that, I think quite successfully in the way, if I may add, that we've approached our Jansen development; the careful way which we're thinking about Olympic Dam; we have similar ideas around how we might develop Trion; and clearly, we would hope to see a similar approach at Resolution.

Ultimately, this means that we spend a lot less capital. It may not make optimal sense from an overall NPV, but the flexibility you give yourself to take account of what's going on in the marketplace, what's going on in the ore body, what's going on in the politics, what's going on in the technology. It's something I've been pushing for some time, and I think we now see it in the way we do capital in BHP. And which is why we have a much lower spend, yet still can grow this company with a high level of capital efficiency because, ultimately, that flexibility is worth a lot more than it might seem if you did this -- just did a simple NPV.

It's also about going slow. I always say there's value in delay. Take your time, study, reflect on these things and, ultimately, you'll find a better way of doing it.

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Operator [12]

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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 [13]

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Look, my first question's just on Jimblebar. At around 60 million tonnes, it's a sizable asset but doesn't appear to be delivering the grade that you were hoping for. And I'm just wondering whether you could sort of fully explain what's happened there? Are we behind on stripping? Or is there some other issue around why the grades are underperforming, and how they're affecting the broader portfolio? And the second question is just on the FY '21 CapEx guidance. At around $8 billion, it's quite a bit higher than consensus. I mean, just wondering if you could maybe break it down a bit, what projects are in there? How much is in there for Jansen, et cetera?

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Andrew Mackenzie, BHP Group - CEO & Executive Director [14]

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Okay. Peter may have the FY '21 numbers in detail in front of him. I don't. But other than that, the whole Jimblebar thing, I think, has been a slight misrepresentation. We've known through the mine plan that the grade was going to decline. And we've been signaling to our customers -- I certainly have, and through our marketing organization, for the better part of a couple of years, that the grade in Jimblebar was going to change. Everyone hopes that's not going to be the case, particularly if you're a steel mill. You think -- or maybe it will be all right, and it will be more consistent than they say. Well, it's turned out pretty much as we predicted, and so it's fully accounting -- fully included in the way that we handle our marketing plans. And we provided for it, and we're ready for it.

So this idea that there's something that's underperformed has taken us by surprise is just not right. And I could -- yes, I've said I can say, hand on heart, that I've had discussions with customers. I've been there with (inaudible) where we've talked about that for the better part of 2 years and to prepare them for that. But sometimes when that happens, even though we've prepared people for it, people would rather it hadn't. Of course, I understand that.

Now about -- now I've forgotten your other question, which was maybe...

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Peter Beaven, BHP Group - CFO [15]

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It was on the $8 billion.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [16]

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On the $8 billion, I just wanted to say something on that. I think what we're signaling, as I've been signaling for some time, been going around, is that we have a very attractive suite of growth options that we can consider. And we strongly believe for -- actually, for the foreseeable future that we can do them. And my follow-on -- my answer to Paul McTaggart applies, in a disciplined way and grow this company in a very capital-efficient way, but also run our capital allocation framework fairly so we get decent. Today, there are, of course, record cash returns to our shareholder. And the capital bill is likely to be in single-digit billions.

And what we're saying today is that, as far as FY '21, that's around $8 billion. And that does include an assumption that we continue with the Jansen project.

This is a project that's relatively back-end loaded in terms of costs, which gives us some of the flexibility I've been speaking about. But it's in there, and it's within the $8 billion. I don't absolutely have the breakdown for FY '21, but I do know that Jansen's in there. I don't know if, Peter, while I've been talking, he's been able to flip through his notes and give you a bit more.

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Peter Beaven, BHP Group - CFO [17]

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Look, I'd say, FY '21, we've probably got -- there's obviously pluses and minus, but [minor] sustaining is probably relatively stable, probably a little bit will add in a bit for things like autonomy and so on, which are coming through. So that's a good thing.

And then on the major project side of things, obviously, there's a bunch of things which are underway today, which includes Spence, which are still going to be in that -- in those numbers, so there's Spence, you've got Mad Dog 2, the Atlantis Phase 3, Ruby and so on. There is also some potential for some projects, which haven't been sanctioned at this point in time, maybe a bit for BFX, a bit for Trion and so on. And as I've just mentioned, yes, there will still be some spend on -- relatively small spend in the scheme of things on Jansen. So that's more or less what makes up the $8 billion. And obviously, I wouldn't comment. I have no idea what consensus looks like and, but anyway, it is what it is.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [18]

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Yes. So just so you're aware, and at FY and this year, we expect to spend about just over $2 billion on what we'd call maintenance capital, which is about asset integrity, reducing risk, compliance requirements. And of course, normally, roughly 1/3 to 1/2 of that is normally taken up by some form of capitalizing of deferred stripping. And then the balance, if you like, is all on inorganic growth.

And the kind of -- the major projects typically take up about $2 billion. Exploration, of course, is there. That typically takes up about $1 billion. These are round numbers. And the balance is generally a bunch of smaller projects, infill drilling and latent capacity work which we, of course -- and iron ore work to just sustainably be at 290 million tonnes a year, and there's some small projects in there as well. And we would actually put South Flank into that category as well. That'll be well advanced by 2021 but still underway.

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Operator [19]

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(Operator Instructions) Our next question comes from Hayden Bairstow from Macquarie.

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Hayden Bairstow, Macquarie Research - Analyst [20]

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Andrew, just a couple for me. Just on the cost outlook again. Obviously, the $8 assumption has been low. You'd assume that, that would have normally delivered you some wins. So I just want to get a better feel for, yes, number one, Queensland Coal and sort of where you think the risks are of not achieving those medium-term targets, which obviously it's a wider range now that the $8 is certainly higher now than what it was? I don't know if you effectively then sort of backed away a little bit from that medium-term cost guidance? And then also, just on the ROCE target, I mean is there any impact to think about there? Or are you having a few wins elsewhere that some of these cost pressures that we're seeing have offset that?

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Andrew Mackenzie, BHP Group - CEO & Executive Director [21]

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Well, I mean longer term, we have quite ambitious plans to continue to improve on our cost base. I kind of covered in the presentation that we'll continue to grind down on our kind of core functional costs, and they were $3 billion back in 2014. They're now sitting at about $1.5 billion. We reckon we can take them to about $1 billion. And there's been a wave of activity going on around that. The simplification, things like South32 have helped, the way we've pooled our functions together on a more global basis, but now we have major kind of benchmarking underway and real changing the way in which we work to get there. So that -- and that, of course, is in all of our numbers as well because they are allocated.

And then beyond that, we continue to work on our transformation programs and lifting our workforce's capability, for which with productivity or efficiency and effectiveness is part culture. It's part also, I think, the new ways of doing our business and it's part automation and it's part technology. And who knows where that will take us as we drive forward, but we are very ambition (sic) [ambitious].

On coal, and I think as I said earlier, roughly speaking, we see an additional $10 a tonne of inflation, and that's -- and to a large extent, labor-related. And then we have 2 offsets: one is the dilution of -- as we spoke earlier, of getting more volume because we have increased stripping, and that starts to come through in a year or 2's time. That effectively consumes the inflation, then everything else is then -- is a net negative, if you like, or reduction. And that's [what's done] to all those productivity measures, including improved mine planning, which leads to less shorter cycle times for our fleet, which means that we can just move more dirt at less cost than would be the case today. And the rest of all the other things that I've spoken about, including the reliability and throughput of our wash plants and also just the inexorable improvement in both the number of hours that a truck is running and, therefore, less time in the shop, less cost in maintenance through a lot of our pressure on maintenance, making sure the trucks are always fully loaded with better and better sensors to tell us that's the case and so on.

And so I guess if we do it more than that, we might improve on our targets beyond just the $10 billion, but that kind of breaks it down in an order-of-magnitude way.

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Operator [22]

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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 [23]

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Andrew, so 2 questions. Firstly, just to understand your thoughts now around your steam coal business. I mean, previously, you had the tax losses in New South Wales, which you wanted to work through. And you said selling Cerrejón was always -- were never going to get a good price given the arrangement with your joint venture partners. So just wondering, why the change of heart? That appears to be being put through the market. And then secondly, Olympic Dam. If I'm right, it looks like you still made an EBIT loss despite the insurance recovery. So I was just wondering, how long do you persist with this? And do you think you can actually get a decent return out of Olympic Dam sort of in line with your group target?

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Andrew Mackenzie, BHP Group - CEO & Executive Director [24]

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Okay. Right. Just sorry, I just was thinking about that -- the Olympic Dam question. One word for your first question, then it'll come back to my head.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [25]

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Steam coal and the portfolio.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [26]

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Steam coal, yes. Okay. Got it. I don't think it's been quite the kind of dramatic shift in views that you're seeing, Glyn. And as we've done the portfolio work, we increasingly have concluded that this is not a business that is going to offer the prospects for growth, and will compete for capital within the capital allocation framework compared to our other businesses. I mean we obviously see a more modest outlook than perhaps some [see in] demand, particularly for the very long term because of the world's concerns about global warming. But we don't expect that to manifest itself quickly. In fact, we've advocated that coal needs to be part of an orderly transition. But the -- if you like, the plentiful supply of energy coal, combined with a somewhat dampening in demand, as it's going form a smaller part of the market share going forward, means that this is a less interesting asset than others for us to invest in. It's only 3% of our revenue. I mean we're good at it, I mean both of our businesses are right at the bottom of the cost curve. And so even in relatively difficult circumstances, they do okay. And when we've had higher prices over the recent past, they've been good earners for us, 30% returns, so we're not embarrassed by having them. But as we seek to shape our portfolio going forward, I think we've been clear that this is something that is less critical to us than some other things. But we're not in a hurry. And some of the other issues, I think you summed up quite well.

I think on Olympic Dam, the way to get appropriate returns out of Olympic Dam, as we've said, is barring a dramatic shift upwards in the copper price, which we're not predicting, and maybe helped by the uranium prices, which will not help predicting either, it has to be ultimately about growing volume. But before we can grow volume, we have to get -- really convince ourselves year after year that we can stabilize production at 200,000 tonnes of copper per year. And how far we're doing that, just eat away a bit at our cost through all the productivity actions that I've kind of talked about in the answers to some of our other questions.

This year just passed, front half of the year, of course, we took a bit of a hit with the acid plant outage. We continue to work on retooling a lot of our detection systems, so we get early warning of a temperamental nature in our operations. It is a difficult sort of kit to run. It's been around a long time. It wasn't -- it was put in relatively inexpensively. And you'll be aware that the system has to work perfectly because, unlike almost any other business in the world, we can't buy and sell intermediates. We've got to take everything from the mine to finished products, copper cathode and yellowcake, and any disruption anywhere along that chain, unlike, say, something like Nickel West, where we can buy and sell matte, we can buy and sell concentrate. We just don't have that optionality. And so getting that stable operations is absolutely critical as a platform for growth.

But again, in line with what I answered to Paul McTaggart's question, we've been careful about that. We initially thought that we might put in a materials handling system and refurbish an old shaft in order to develop the Southern Mine Area. We decided against that to save capital costs and really to just push and understand better what the Southern Mine Area can deliver. We've got a better handle on that now, and that will lead to more optimal projects in the future once we can get on top of the stabilized base going forward. And you've seen our plans as to how we could do a major expansion.

In the long run, South Australia is a great place to do business. Adding lots of new copper is not easy, which should ultimately be good for price, as we've said. And this is something that we still cherish. We have -- we know what we're doing here. The kind of performance you're getting out of Escondida today is because we took that same attitude to crushing and conveying. Likewise, iron ore, what you're seeing today, this deliberate attempt to stabilize everything, it's coming to coal in the way I've just described in the answer to your question. And increasingly, therefore, we're able to develop more and more of our people resources and our ideas and our experience onto Olympic Dam, which yes, has been the last one to move. But everything else has moved, and I'm confident we'll do the same for Olympic Dam.

I don't know if you wanted to add anything on...

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Peter Beaven, BHP Group - CFO [27]

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No.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [28]

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Okay.

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Operator [29]

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(Operator Instructions) And our next question comes from Sam Webb from Crédit Suisse.

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Sam Webb, Crédit Suisse AG, Research Division - Associate [30]

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Circling back very quickly, just following up on Glyn's question. Is there an active sales process underway for the energy coal business at the moment?

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Andrew Mackenzie, BHP Group - CEO & Executive Director [31]

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We're considering a number of options for it, and I'm not prepared to comment to you on that.

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Operator [32]

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Our next question comes from Paul McTaggart from Citigroup.

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Paul Joseph McTaggart, Citigroup Inc, Research Division - Metal and Mining Analyst [33]

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I just want to follow up on Iron Ore. So you've given us guidance for year ahead. Potentially, we might get somewhere near the 290 million tonne. But are you confident that, that's a realistic achievable year and year-end target? Or is that sort of a stretch target that possibly we're not going to meet? I'm just trying to get a sense of, in terms of how I should think about my iron ore supply-demand modeling in the years ahead.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [34]

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Okay. Well, I mean there's 2 questions in that. I mean, of course, we always stretch ourselves. This is an organization which thrives on stretch targets. And in general, we try to offer guidance and what we think is reasonably certain. And you will have seen that this year, apart from 1 or 2 of the incidents and some of the weather issues, we actually have hit our guidance pretty well. So is 290 million a stretch or is it guidance? I mean the reality is in the last quarter of the year, if you take out the effects of Cyclone Debbie, we sort of are at 290 million at iron ore, which as you know, is 50 million tonnes above its nameplate capacity, which is a real tribute to some of the things I was talking to in terms of operational excellence that we want to transfer more and more to Olympic Dam when I was speaking to Glyn.

And so weather-free and incident-free, for sure we could do that. Now we can't completely weatherproof things. That would be -- it entails a ridiculous cost. But we'll do our best to be more weatherproofed in the future. And in everything we're doing, in pushing asset integrity, in pushing better and better routines for maintenance and the motivation of our people is designed to actually get rid of operational incidents, and albeit that we are working even in Iron Ore with relatively [old kit]. But it's better that way rather than completely razing and rebuilding, that would be a crazy financial decision. And I would say, yes, 290 million is a little bit of a stretch, but just sort of slightly out of reach rather than out of sight.

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Peter Beaven, BHP Group - CFO [35]

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Maybe just, I think, Paul, we will be able to debottleneck the rail lines through the RTP, new signaling technology, so that'll add capacity on the rail. We'll obviously be adding capacity via South Flank, so that'll also take care of business on the mine side. And that bottleneck will continue to be somewhere in between the car dumpers and the stockyard. And so I think we've got that reasonably in hand, and we'll be there and thereabouts over the next few years. But as I say, once RTP and South Flank come in we'll be -- it'll give us a lot more opportunity to be stable at that 290 million.

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Operator [36]

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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 [37]

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Just a follow-up question on the market. Obviously, a strong year of Chinese steel production this year with a lot of growth. Just wondering if BHP is predicting further growth in 2020 in -- for the Chinese steel production.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [38]

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Not really.

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Peter Beaven, BHP Group - CFO [39]

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No.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [40]

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Not really. But of course, it's hard to foresee. And part of the growth this year has come about by a bit of a stimulus on the infrastructure side, which the Chinese probably did as a defense against the impact of some of the trade restrictions. And of course, that's coincided, as you know, with outages in both Brazil and in Australia that's led to the high prices, for which, of course, we've now come off quite dramatically.

There is some indication now coming from our markets that, that strength in demand is not as it was through the peak period in China. And of course, we are seeing poorer macroeconomics, particularly in Europe now and some of the more developed markets of Asia. But having said that, I mean the price corrections that we've seen in iron ore and met coal are sort of the ones we would have expected. And so that's -- a lot of that is already in the market. And so we'll obviously watch with interest the inevitable development of these trade tensions and what is the likely Chinese response.

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Operator [41]

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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 [42]

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I guess maybe a question for Peter. It's a question on the balance sheet and capital returns. Peter, you said you wanted to -- you want to maintain the net debt at the bottom end of the range, which is quite prudent. You're a bit cautious on pricing, it appears, on -- maybe in the near term. The question is actually around the potential off-market buyback and -- versus investing in your business. I know we've had discussions around this -- on this topic over the years, but you completed a $5.2 billion off-market buyback last December. Is that something that you'll consider? And I know you can't always speak for the Board, but is that something you'll consider again in December, January? And if so, could you actually announce, in theory, a buyback before the February results, say, post the -- or around the AGM?

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Peter Beaven, BHP Group - CFO [43]

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Yes. I guess, Paul, I mean we -- every time we go to speak to the Board, we inevitably speak to them about where we see our funding and so on. So I suppose, hypothetically speaking, yes. No doubt that the Board can -- or we just showed that we can announce capital management initiatives at any time. But really, I mean I think we -- again, as we've discussed for quite a few times in the run-up to the shale -- distribution of the shale proceeds, we go through the capital allocation framework, and we do it every time we think about the dividends. One of the thresholds -- the issues that you have to parse through is materiality. This time out, obviously, we've got 50%, which is locks -- the payout ratio locks in the cash amount. What's left over this time was quite very helpful, $0.25, but it's $1.3 billion. So we just -- that's in the scheme of the size of this organization, that's probably a little on the smaller side of things. And that's pretty much where it is. So I think it was the right decision for this go-around, obviously. We made the recommendation. The Board has accepted it. That's good.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [44]

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I don't think there's any questions pending, so we'll just maybe call it a day. And look forward to -- I do, anyway, look forward to seeing many of you who've been on the line, I think that's on Thursday in Sydney. And until then, thank you very much.

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Presentation

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Andrew Mackenzie, BHP Group - CEO & Executive Director [1]

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Hello, everyone, and thank you for joining us. And by us, I mean Peter, Peter Beaven, along with me to discuss BHP's results for the 2019 financial year. I'm also joined in the room by Tristan Lovegrove, who's our new Group Investor Relations Officer. And some of you, I think, know him already from his previous jobs, but many of you will get the opportunity to meet him again in the next few weeks.

In the 2019 financial year we're reporting on today, we delivered record cash returns to shareholders. The Board declared a final dividend of USD 0.78 per share, and that's approximately $4 billion in total, and that's on top of the $17 billion that we returned to shareholders this year. Both higher prices and a solid underlying performance contributed to an EBITDA of USD 23 billion at a margin of 53%. And of course, that flowed through to strong operating cash flows, which after disciplined investment, we converted into a free cash flow of $10 billion.

Over the year, our return on capital employed, excluding shale, was 18%. Operationally, strong results in petroleum and iron ore were offset from lower contributions from copper and coal.

So taking a longer-term view, over the past 5 years, BHP's volumes are up 10%, and our costs are down by over 20% across our major assets. In the same period, though, our Iron Ore business in Western Australia has increased its production by 20% and reduced cost by 50%, and that makes us now the lowest-cost iron ore producer in the world. And we achieved these results very much through the hard work and ingenuity of our people. And so their health, safety and well-being is and always will remain our highest priority.

And to this end, it was tragic that last December, our colleague, Allan Houston, died at BMA Saraji Mine in Queensland. We held a lengthy and thorough investigation, but we simply could not determine the direct cause of the incident. Nonetheless, we have identified several areas that are worthy of improvement and, of course, we've redoubled our commitment to safety.

So we enter the 2020 financial year with a positive outlook for our business. We have a simplified portfolio of our world-class assets and a strong balance sheet. We have 6 major projects on track and on budget to expand our business, and they are spread across iron ore, copper, oil and potash.

We have exploration licenses in some of the world's top basins for oil and copper, and we've already made some discoveries, and we have options for future development sitting alongside them as well.

And we have an even greater focus than ever on our -- the capability of our workforce, its culture to make it fully empowered and getting access to the technology and the ways of working that can further transform our business. The kinds of improvements that are coming to fruition this year are certainly far from done. Probably, the better part is yet to come. And I'm confident this is going to deliver value and returns for shareholders for decades in the future.

I think I'll leave it there and open the line for questions. Who's first?

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Questions and Answers

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Operator [1]

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Our first question today comes from Alain Gabriel of Morgan Stanley.

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Alain Gabriel, Morgan Stanley, Research Division - Equity Analyst [2]

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Two questions from my side. Firstly, on the net debt target, clearly, you have increased it by $1 billion at the bottom and the upper end of the range. The increase is less than the impact of IFRS 16. How should we interpret that increase and why have you become more conservative on your net debt aspirations? That's one. And two, on the CapEx budget for 2021, like basically, yesterday, you touched on it on the call. Can I push you a little bit more on the growth spending there? How much of that growth in 2021 is on Jansen? And are you spending any money there on the Olympic Dam expansion?

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Andrew Mackenzie, BHP Group - CEO & Executive Director [3]

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Okay. So look, these are financial questions. I mean, Peter might want to have a go at both of them. But I think I could very simply say about the lower range of our net debt target post-IFRS 16 at $12 billion. That's true, we have -- but we have made about $1 billion lower than it would have been if we simply just added the impact of IFRS 16 and the leases and the various derivatives from the contracts coming, if you like, into the net debt number. And 2 reasons for that. The additions under IFRS are more volatile when they're mark-to-market and so we do want to give ourselves a bit of flexibility given that volatility. But it's also true that the short-term outlook, given everything that's going on in the world, which can be broadly put under the rejection of globalization and free trades and the way it affected, to some extent, the oil price and certainly the copper price, does give us some cause for concern and that's why we've made this change to our, if you like, our medium-term targeting. Peter can talk a little bit more in detail, if you like, about the capital budget and how much of Jansen and Olympic Dam are in the FY 2021.

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Peter Beaven, BHP Group - CFO [4]

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Yes, [as you know] there is more or less -- as you know, we've been spending $200 million or so on Jansen. We would -- we've included an amount in FY '21. You'll have to wait and see really where we get to on the approval and so on. So it's part of the possibilities. And that is the same as Olympic Dam, where we've -- I guess it's a provisional amount that's included for BFX, but again, it hasn't, as you all know, hasn't gone to FID. So just if we get there, then we would spend that money and if we didn't, then we won't.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [5]

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Yes. I think, though, it is worth saying, if I may, that both projects, but particularly Jansen, if you look at the full project, it's quite back end-loaded compared to, say, investing in an oil development or even the more steady state spend or something like a South Flank. But even with that, then we wouldn't in any one year, if the project were to go ahead, be spending more than $1 billion. And that would only be for a few years at that. And I think the same would hold with BFX which, of course, is the much lower cost and it wouldn't be anything like that.

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Peter Beaven, BHP Group - CFO [6]

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Yes. I mean, together they would be less than -- comfortably less than $500 million.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [7]

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In 2021.

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Peter Beaven, BHP Group - CFO [8]

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In 2021.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [9]

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But yes, okay. All right. Who's next?

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Operator [10]

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Our next question today comes from Jason Fairclough of Bank of America Merrill Lynch.

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Jason Robert Fairclough, BofA Merrill Lynch, Research Division - Head of the Developed & Emerging EMEA Metals and Mining Equity Research [11]

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Look 2 quick ones from me. First, Andrew, there's great headline on Bloomberg, which is, "BHP CEO says top miner can still profit in any global downturn." And I'm just wondering, is this how you see it? Are we going into global downturn? And what are the signs that you're looking at? And then second question is just on Samarco. So you've taken another charge here related to the accelerated decommissioning of the Dam. I'm just wondering, is this it or could there be more to come? I'm trying to get a feel for how much of an open-ended liability we have here?

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Andrew Mackenzie, BHP Group - CEO & Executive Director [12]

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Okay. Well, look, I mean I don't write the headlines. I didn't mean to maintain for any second that, of course, a downturn wouldn't result in a decrease in profitability. Obviously, how that shows up will depend on what the impacts are. For first off, of course, we do have a good portfolio and the portfolio at the moment, of course, to some extent, is working and that we're making probably, sort of above average margins in iron ore or have been and to maybe a less extent, in met coal. And probably it would be the other way around for oil, gas and copper. And depending on what causes and triggers the downturn will depend on whether and how that portfolio might rebalance and to what extent it might smooth things. And if there was an oil price shock, clearly we would benefit from higher oil prices, but maybe lower margins in some of our other businesses.

But a general downturn, of course, would bring things down and we would have to respond, as we could, I think, quite effectively now, Jason. I mean we have that pre-IFRS 16, 15% gearing. We have a much more flexible dividend policy now. We are continuing to save money and to cut cost, become more efficient. And we have a -- and there are many ways the way we're phasing our projects and the discretion we've given, you've got an indication of that on the answer on Jansen and OD. We are -- we have a lot of ways in which we can change our uses of cash and also to protect shareholder returns. But I repeat, we don't expect to be immune and to sail through this thing. This is a volatile industry, as you know, and there can be quite big swings, already have been, even just in the start of this financial year, in the revenue line, not all of which can be dealt with by heroics on lower lines.

So whether we see a downturn as a possibility, of course we do. And that kind of gets covered a little bit in the answer to the question of having a slightly lower debt -- lower raise to the net debt -- lower number for the bottom part of the range on the net debt target that we answered a question earlier. I mean the trade tensions around the world, the resistance that is out there to, I think the good things that do you think we can look for from capitalism and from globalization, the existence of many politicians in many countries where votes are for more protectionism, more nationalism and less globalization and the interference in global supply chains, which we of course, fully support. And threats to the independence even of central banks. All things that we think are good for the creation of wealth, for the creation of GDP that ultimately drive the overall growth for our business.

So it's good that we're ready, a lot better ready than the last time. And we can weather a lot of storms probably better than many companies in the sector. And I think the sector itself through having been quite disciplined will actually be able to weather a general downturn better than other sectors, but we're not fully downturn-proof. I've gone on too much. What was your second question again?

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Peter Beaven, BHP Group - CFO [13]

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Samarco.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [14]

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Samarco. Oh, yes. Peter probably should handle that, but the bigger provision is not just for the dam and having to bring forward the decommissioning of the Germano dam, which was the dam that sat behind the Fundão dam, as a result of new regulations post-Brumadinho. It also is that we've got much better line of sight now as to what we think the so likely sort of full compensation that will need to be paid to people who have affected in terms of their living standards or their livelihoods by the dam break. The most serious of those affected have already been paid and, of course, we've invested considerably and to -- with great excess -- success in both the resettlement of people and the larger towns are now being rebuilt. We've got all the permits and I've got pictures in my file in front of me of new houses emerging. In my last visit, the river is looking pretty clean and healthy, but is this compensation side of things that we still have to work away from us. It's not an open liability. We feel we've constrained it quite well. We won't let it run away from us, if we can put it that way, but I can't guarantee this is the end. Anything to add, Peter?

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Peter Beaven, BHP Group - CFO [15]

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No.

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Operator [16]

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Our next question today is from Sylvain Brunet from Exane BNP Paribas.

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Sylvain Brunet, Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research [17]

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Two quick questions on costs for me. First, a few months ago, there were some reports of labor cost pressures in Australia. I was wondering in the outlook you were talking to, if you've noticed these pressures have been receding by now. And the second question relates to costs as well and productivity maybe to give us a feel of how KPIs at all levels in the group are tied up with cost objectives. And my last question, again, related to some press comments in July on BHP’s stance on coal. Wondering if the company is now taking a more active step towards reducing its exposure to thermal coal in particular.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [18]

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Okay. So look -- what was the first question? Labor pressures, that's right. And so I mean there are labor cost pressures around and they're most keenly felt in Queensland, to a less extent, in iron ore and not really seriously in any other part of our operations elsewhere in the world. But the bigger problem that we have is that because labor is a bit more -- in short supply, we have higher turnover. People don't turn up for shifts, particularly people who work for contractors.

We have addressed this via operations services model, where we are actually steadily converting a lot of our more permanently contracted workforce and some not so permanent to our own contracting organization for the whole of Australia. We pay at contract rates, but we also offer BHP terms, in terms of sick pay, holiday pay and a lot more training for them to build mastery because it's worthwhile doing that if they stay in our employment. This has been hugely successful. We've had great uptake of high-quality people. We've slashed the turnover, and so that means that people’s safety culture builds as culture and productivity build. We'll come to that in a moment. And already, we see halving of safety rates and a 20% reduction in costs, or like the 25% increase in productivity. So I think we're meeting this head-on, and otherwise inflationary pressures, other than the ups and downs of things like fuel costs and so on, are manageable. And we believe our transformation programs are designed both to quench inflation, of which there is some, and go on better so we can continue how we have guide to falling unit costs as we go forward. And yes, I mean look, we have unit cost targets increasingly or functional cost targets, which are held at my level with the Board. They are then cascaded all the way through to the frontline and broken down. So on the pure cost side of things, we took around about $1.5 billion of costs out of our functional costs. Such are the things that takes for things like legal, HR, external affairs, supply, marketing, technology and lots of other small functions. They were around about $3 billion in 2014. We cut them to about $1.5 billion through the simplification that came with South32 and the divestment, and also through taking up a global view of excellence across all our -- of all our functions. We had a bit of an asymptote and we launched a new phase called World Class Functions. Rigorous benchmarking down to the level of the sub-function. This requires major reengineering and, indeed, an introduction, in some cases, of new systems and even -- and moving things to lower-cost countries. Those plans have now all been built and are now being delivered. About $200 million are in the $1.5 billion I talked about, but another $500 million to come mainly this year and next, which will take us from a starting point of $3 billion to about $1 billion. And they are cascaded all the way through. And then beyond that, we have people who have targets to input many of the new ways of working that will ultimately result in us being able to extend that and extend that to other parts of our business, which is more to do with maybe our variable cost base, if I could put it that way. Clearly, in order to hit lower levels of unit costs in things like iron ore, coal and copper, you have to break all that down within KPIs to the performance of a concentrator, the performance of the strip program and the costs. You have cutting across all of that a whole bunch of things to do, for example, with maintenance, to do with supply, which is about things happening on time as maintenance costs being lower. The result is that there are higher reliabilities and more truck hours resulting. And that's how it's all broken down. But, again, I can assure you it goes all the way to the front line.

And we set quite stretch targets. So and we don't always hit those stretch targets, but that -- but we don't mind that in some senses. I mean we see huge possibilities there. We commit ourselves to get there. We normally aim off of that in our overall guidance to the market, but underlying that, the targets are much stretchier and that -- and if the stretch targets are not hit, in general, we reduce remuneration. And although we've had a very strong year operationally when we look at our competitors, compared to what we -- the targets we set ourselves, we've slightly underperformed, and so bonuses are pretty low this year right the way across the piece. You can be assured as shareholders or you can assure your readers as shareholders that we do not hang onto extra dollars that we have [in the end] by meeting our stretch targets to pay ourselves. We pass it all the way through to the shareholder or, of course, through our capital allocations framework and reinvest it wisely. So BHP coal, I mean what Peter and I signaled around BAML and our strategy was that we do not expect to invest any more in our energy coal businesses and that's for pure commercial reasons or financial reasons. We do think this is a business whose demand will be under pressure partly because of the transition towards cleaner air and to confront the challenge of global warming, but this is a resource that compared to some of our other commodities is in relatively high abundance and so we see squeezed margins in the future. And -- but we've made a lot of money recently. We're sitting at the bottom of the cost curve. We do not expect our mines, as Cerrejón and that of Mount Arthur are likely to close any time soon. In fact, we think they will probably be around for quite a few decades to come and probably, maybe not as profitable as some of our other operations and other commodities, but certainly decent. Returns of late have been about typically around 30%.

I mean we're not investing, so the denominator is wasting a little bit as well. And we -- but only 3% of revenue at the moment is coming from coal. Given that we continue, we will be investing in other commodities, it will reduce its share of the portfolio. And we will examine other options, which when we have more to say we'll say it.

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Operator [19]

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Our next question today is from Myles Allsop from UBS.

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Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [20]

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Three questions. First of all, on petroleum exploration, you're saying that you expect material production in the mid-2020s. What does that mean in terms of the FID for some of these projects, like Wildling, like Trion, like the Trinidad? Are we -- should we expect some sort of progress over the next 12 months to meet that sort of mid-2020 ramp-up? And then secondly, on Queensland coal, looking at your medium-term cost guidance, I mean there's a big step down. And how achievable is that? Is that only achievable if it delivers the normalized volumes, or are there other factors? What proportion of that $15 a tonne can be delivered without a big step-up in volume? And then lastly, just (inaudible) you have paid out a record dividend, you have delivered a strong balance sheet. What's your top priority now, Andrew, before retiring?

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Andrew Mackenzie, BHP Group - CEO & Executive Director [21]

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Okay. So Peter will deal with the third question, and let me -- I'll handle the first 2. Geraldine Slattery will be going round investors in November, and where she will be laying out our strategy for our whole petroleum company going forward. And she will definitely address some of the emerging development plans for our major gas discovery in Northern Trinidad and Tobago. For Trion, we've announced today that, that's coming in a bit bigger or a bit oilier than we expected, which is good news, and Wildling as well. You have seen that we've sold Samurai, which was the well that we participated in, which is to the north of Wildling. That gave us a better idea of what kind of production we could get out of Wildling and what a tieback would make. And she'll be able to talk to you on all of these going forward. But it's -- obviously, it's going well. And when you combine that with the projects underway at Mad Dog 2, Atlantis 3 and now Ruby, this is going to reverse the decline in our oil and gas production. In the next few years, it's going to start climbing again, which is a good outcome, but of course, one that was fully supported by our decisions in the capital allocation framework. Just as an aside, I meant to say earlier that the discipline we have on KPIs that Sylvain asked about, that pertained very much to the separation of shale. We've taken a business where effectively we've removed about 2/3 of its operating footprint and -- but we've managed to remove it almost without any trailing overheads. We have a smaller business now, but one, which because of the exploration discoveries, has probably gone a long way already to replacing some of the volumes that we actually -- that we sold with the shale business. So that's a very good news story.

But on Queensland coal, it's a bit of both, Myles. There is a bit of inflation there that we spoke about earlier. Take round numbers, at $10 a tonne inflation and we have about $20 a tonne going in the opposite direction. About half of that is from just simply volume dilution. I cannot remember how you described that, but it's -- with the additional stripping we have been doing, it was the greater amount of coal that will be available to mine. That is going to obviously help dilute some of the fixed costs and that will give us $10 a tonne back. And then the remaining $10 is just through all the productivity we're thinking about. About half of that, from memory, comes from just improving cycle times, which is better mine plans and just higher truck hours, and then a range of a number of small initiatives, which round numbers, another 5 to get you, say minus 20, 10, but -- plus 10 and minus 20.

And stretch target to aligns there, and we can possibly do a bit better than that. But -- and we have quite aggressive targets there. We took a slight turn to -- for the worse in having to entertain a lot more stripping, some of which wasn't fully foreseen. But I think we've got a better view of what the mine plans look in the future and we're adding into that now. And I should say that some of the productivity things comes from automation. And we did mention in our talk, our morning here and last night, that we're almost there in getting full approvals to fully automate the truck fleet at Goonyella. And we've got 1 or 2 others lined up as well. We just have to line up partners, we have to line up suppliers before we can tell you the details.

Peter will talk to you about the capital management piece.

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Peter Beaven, BHP Group - CFO [22]

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No, actually, I think Myles asked you what your priority was. Now I'm happy to answer on your behalf, and I am sure I can hazard a guess. Hopefully, after all these years we will more or less answer the same thing.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [23]

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I'm not sure he should take that risk. My top priority for now, I would say, gosh, clearly, I mean I've got a few things that are very important to me. But I do think that just making all aspects of the transformation program stick is critical. This is worth potentially tens of billions of dollars of value to us. It's about 70% of the value uplift. The other 30% comes from growth. And I am very confident in our plans to reduce functional costs and I am equally confident in some of the pushes we have in really getting this kind of step-up empowered culture to the front line. Where I'm perhaps a bit more thoughtful is just the right way to pull through technology to make sure we don't just do technology for technology’s sake, we invest in those which have the -- that includes automation, which have the highest returns and part of our capital allocation framework. And at the back end of that, we are now seeing the availability of enormous amounts of extra data.

When we put in our backbone as a company of a single ERP, we thought we were capturing roughly about 80% of the data of the company and putting it on a common system. Now with the data we're getting from trucks, from engines, from people, from tires, we're probably only capturing about 20% of the data. And how we really use that data in a world of increased sensors and in a world of increased artificial intelligence and indeed, how we do white-collar automation I think is another big prize that is waiting to make another step down in cost or increase in efficiency. And so making sure that all hangs together is important to me. And well, you've heard that how we are part of the global response to climate change is something that has given me a fair bit to do as well. The projects with the growth are all good. And I'm happy with that and they're coming through, but I -- just because I've given you my top priority doesn't mean they don't get a fair bit of my attention. They do.

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Operator [24]

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Our next question today comes from [Renault Gutez] of (inaudible). Our next question is from Ian Rossouw of Barclays.

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Izak Jan Rossouw, Barclays Bank PLC, Research Division - Director [25]

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Just 2 questions for me. The first one just on your dividend policy. I am just curious if you think the payout ratio is still an appropriate one. The sector seems to have lost quite a decent chunk of the income investors [to producers] as they have maintained their progressive dividend policies. So I'm just wondering if you maybe can share your thoughts on the progressive dividend policy now that the business is much more robust than what it was 3, 4 years ago, when you abandoned that policy.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [26]

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You had a second question? You said 2.

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Izak Jan Rossouw, Barclays Bank PLC, Research Division - Director [27]

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Yes, the second one, again to you, Andrew, just on your comments previously, including the conference call overnight that you believe the business can basically grow over time at single-digit billion CapEx figures within the capital allocation framework. So I was just curious or I just wanted to push you on that is, whether you imply then that you can basically not go above $9 billion even if you improve BFX and Jansen maybe over the medium term?

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Andrew Mackenzie, BHP Group - CEO & Executive Director [28]

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Okay, let me have a rest, and Peter can talk to you about dividend policy, and then I will come and talk to you about CapEx.

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Peter Beaven, BHP Group - CFO [29]

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Sure. Well, that -- I think the dividend policy was not put -- we didn't think through dividend policy as some sort of reaction to what was going on at the time. It was -- it is the -- we strongly believe it's a more appropriate dividend policy for companies such as ourselves. I mean, at the top end, as you know, the payout ratio will ensure that there is a healthy payout. At the bottom end, of course, it allows the dividend to flex along with the cycle. We've had it for many years now, quite a few years of experience in deploying it through ups and downs, and I think it's been entirely appropriate. I think most importantly, you think about your capital allocation framework and you think about your balance sheet, you think about your dividend policy, do those, in fact, support the overarching strategy of the company to grow value, and with that, returns and of course, cash returns to shareholders. And so those are why we have the settings on our balance sheet. That's why we have the settings on our dividend policy. Ultimately, those are appropriate and they underpin the overarching strategy. So we're perfectly comfortable with how it's performing.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [30]

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Yes, look, I think it's [horses for courses]. And I'll take the word for it that some investors clearly wants -- want a more of a guaranteed dividends through thick and thin. And maybe they get that with some of our competitors in the oil and gas sector, but I've also met those selfsame investors or maybe not those ones, who've commended our capital allocation framework and bemoaned the fact that the oil and gas industry hasn't adopted what we do.

So maybe there's been a little bit of sorting, but we've had a lot of praise and congratulation for our capital allocation framework, its rigor and its transparency. And it definitely gives me, as we were talking earlier about, possible downturns, a sense that we are much more built to have some protection in the downside, but better than that, to have the ability to do things in the downturn, which are best done counter-cyclically and be on our best behavior and therefore, being more disciplined spenders at the points in the -- higher points in the cycle. I think the sector has become more disciplined, which is why even though we might be facing a bit of a downturn, the impact of that is perhaps more reassuring than it might once have been, and I think, particularly for us. Look, on the CapEx, yes, I think, I mean it's pretty much what I said. We do a lot of forward modeling, 5 years, 20 years. And what we tend to find is that what works well for this company. And as we've become much more efficient in the way we use capital. And that is only going to improve as we take the success we've had in the reliability of our large projects and move them into the smaller projects, get better and better at really sifting and sorting those projects, better and better execution by delaying and studying longer rather than rushing to avoid some destruction because of the time value of money, which is often, actually, less valuable than the time value of delay and thinking things better and doing the right level of de-risking.

Now that doesn't mean that it's going to be flat, because there are lumpy -- there are lumps to our capital projects. So it's going to oscillate around something, which on average, I think for a while, was going to be single-digit billions. And we're going to be able to grow the company. And typically, that growth and for some of it comes from making things more efficient, it doesn't always show up as more volume. But volume is a partial surrogate, and it normally shows up on a kind of -- over a long period. But averaged out, they're, look, again, a bit lumpy. It could be in the order of 2% to 3% copper-equivalent growth per annum.

Look, I mean Jansen and OD fit into that. These are not enormous projects. As I say, we've originally said that when we get going, that the Jansen is going to cost round numbers, I think it's $5 billion, is that right? And -- but it'll be spread out, probably over -- as a lease over many years, and probably in any one year what you wouldn’t anticipate is spending more than $1 billion. And BFX, particularly if we don't go into a material-handling facility or we just use a decline and we don't recommission a shaft, that's going to be much smaller and -- than that, I would think. And therefore, they will fit very well within the envelope of single-digit billions in our capital budget, and in our planning, they do so. I mean some of the things that I talked about includes short and medium and long-term things where we do both of those projects.

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Operator [31]

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(Operator Instructions) Our next question today comes from Christian Georges of Societe Generale.

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Christian Eric Andre Georges, Societe Generale Cross Asset Research - Equity Analyst [32]

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Two questions. Nickel West, I think that in the performance this year, was possibly, again, slightly below your expectations. I mean, would you expect this to be improving gradually? And how would you place this in the current context of rumored reduction of Indonesian nickel exports and the easy outlook for nickel price now? A lot more supportive. Justifying myths of heroics to have investments in Nickel West?

And the second question is, what's your thoughts about what seems to be a renewed interest for the West African iron ore assets in Guinea and so on? I mean is it coming closer to becoming a future source of low-cost iron ore?

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Andrew Mackenzie, BHP Group - CEO & Executive Director [33]

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Okay. So yes, I mean we are a little bit disappointed in the nickel performance. I mean it's not through the best efforts of our team, but they have had 1 or 2 operational hiccups, that I think don't get quite the coverage as when we do things in iron ore or copper [happens]. And yes -- and until recently, the second part of your question, they've been dealing with sort of lower prices than we might have expected, but they have picked up in anticipation into a -- of a quicker renewal of the export of unprocessed laterites from Indonesia.

Of course, why we're holding these assets is because we're anticipating that as we get closer to the liftoff of electric vehicles, that the demand for high-purity nickel that has to be made from sulphides, not laterites, at least that's what it looks like today. And therefore, you will get a different kind of margin for that kind of nickel product.

That's not going to happen until -- for probably another 8, 10 years on our forecast. So we're building slowly for that and therefore, it's an exciting option to hold. The return to fashionability of nickel sulphides means that we're doing more brownfield exploration, with some success. And over time, of course, we will invest in developing those discoveries in maintaining our supply of nickel and probably building its production significantly above its current levels, which think is about 90,000 tonnes a year from memory, yes.

So it's all there. As with everything, it has to pass through our capital allocation framework to compete with the BFXs, the Jansens and the other way around and all these -- all the development projects that Myles asked me about. And -- but certainly, at these prices, it will do a lot better this year, particularly if they can continue on their cost journey and avoid 1 or 2 of the incidents that took it into cash-negative territory in the year just closed.

I don't have a lot to say on West African iron ore. I mean it's been there or thereabout for a long time. Clearly, if Africa urbanizes, it would probably be sensible for it to be developed, and it would certainly provide a competitive supply of iron ore, particularly into the Atlantic market, and against Brazilian iron ore, not that these markets aren't connected in the Pacific to Atlantic, they are well and truly. We've always said that either West African iron ore or the cooling of the steel industry in China, more recycling in China, not immediately replaced be some of the growth in India, it is likely to flatten the iron ore cost curve and take us into price territories where it would be much less attractive business than it is today, which is why we create the options we have in potash, in nickel and in copper and in oil and gas.

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Peter Beaven, BHP Group - CFO [34]

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And I mean just on nickel, I mean we were profitable at the EBIT line. And just -- and yes, we spent some capital there. That was really just on -- with Yakabindie on B11 and Venus, so.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [35]

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Yes. As it's -- arguably with that getting ready for future growth, yes.

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Peter Beaven, BHP Group - CFO [36]

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Yes, that's exactly right. It's very good capital.

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Andrew Mackenzie, BHP Group - CEO & Executive Director [37]

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Yes, that's a fair point, yes.

Okay. If there's no further questions. I don't think that there are. I mean, the guy who didn't come through hasn't come back. So look, well, thanks, everyone. And just to recap over the 2019 financial year, I would say that the disciplined execution of our plans has delivered strong performance, strong cash flows and record returns, to repeat myself, to shareholders. We will absolutely carry this momentum into the coming financial year, but we do expect copper-equivalent volume growth of 2%, despite a 7% decline in petroleum volumes largely due to fuel decline, which the team have done an amazing job arresting this year. Maybe they can -- last year, they'll do it again this year, but it's -- pressure is declining, and we haven't yet invested enough to replace that quickly.

That comes, as I said, in a few years’ time. We will invest less than $8 billion in our quality set options, and the spot price, this will further increase our capital employed or -- calculated at current spot prices to 9%.

Of course, if you had gone a few weeks back, it would have been a bit higher than that, which attests to the volatility and some of the near-term uncertainty we're facing, but we're given comfort from our strong balance sheet, yes. Our flexible dividend policy, even if it has some detractors and are solid and hopefully improving operational performance, bolstered by many of our transformation programs. And we expect, therefore, to improve further on our unit costs to more than, I think, quench inflation. And of course, that additional cash, along with everything else that I've spoken about, will position us well to weather any future uncertainty and to deliver strong returns and grow value through the cycle for decades to come. So thank you for listening.