Edited Transcript of BHPB.L earnings conference call or presentation 18-Aug-20 7:00am GMT

Notwithstanding the near-term uncertainty, our medium- to long-term outlook remains unchanged. We have a confident outlook for continued growth and demand for the commodities we produce. Now we do manage value and returns over multiple time horizons. We’re seeking to grow value and returns in the near term through operational excellence and investing in the options we already have. At the same time, we’re seeking to underpin our ability to continue to grow value and returns in the longer term through ensuring that we have a portfolio with increased upside exposure and with more options in future facing commodities.

Now we’ve made progress in the past year in securing and advancing future

(technical difficulty)

in copper and nickel. And today, we’ve also been clear about our intent to focus our coal portfolio on higher-quality hard coking coals, and to instead divest BMC, New South Wales Energy Coal and Cerrejon. These are some great assets. They’ve got embedded growth options, but they’re unlikely to compete for capital within BHP. Their value is more likely to be realized through a different ownership structure. And we’re looking at a range of options, demerger, trade sales, and we’ll pursue whichever one best allows us to maximize shareholder value.

In Petroleum, we’ve been clear that we intend to continue to invest in this business, and what we see as an attractive opportunity to grow value and returns for the foreseeable future. However, we’re going to be balanced in our approach, and we’ll look to divest assets that are less long life and which have less upside in BHP. And in that regard, today, we’ve announced that we intend to divest our nonoperated interest in Bass Strait. So we’re focused on creating value in the near term through being great operators and stewards of capital, and in the long term, from actively managing the portfolio for long-term upside and growth opportunities.

Finally, today, we’ve announced a couple of new roles and appointments. 2 of those appointments are part of a natural transition of the lead team, the 2 new roles are aligned with the intent that I’ve outlined, Chief Technical Officer, which will ensure operational excellence is front and center for the company and a Chief Development Officer, reflecting our priority on managing the portfolio and creating and securing options in future facing commodities.

So just to close out, as I said, in FY ’20, we were safer, more reliable and lower cost. We’ve got great performance momentum. And we’re taking further steps to further enhance performance and to build options in a portfolio for the future. And we’re building on such strong foundations, and I’m really quite excited by what the future holds.

With that, I’ll open it up to questions for Peter and I.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Alain Gabriel from Morgan Stanley.

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

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2 questions from my side. So firstly, on Jansen, the delay in the final decision was somewhat expected given your earlier comments, however, have you learned anything new about the project parameters that will help you with the decision? Trying to get some color on how your thinking has evolved around Jansen over the last 6 months at least? That’s the first question.

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

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Okay. Thanks, Alain. So the delay, as you said, is something that we had flagged earlier. In terms of what we’ve learned about the commodity. One, we continue to like the long-term fundamentals for [class], so no change. I explained previously that I was going to be getting into the detail on the project to get myself personally satisfied with the assumptions that we’ve made. I continue to do so and spent quite a bit of time looking at the project in recent months. And so far, no red flags. There’s a few other things that I’m working my way through, and I expect to do them in the next few months. But we do have the luxury of some time before we take a final investment decision, which we’ve now said will be mid-2021.

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Alain Gabriel, Morgan Stanley, Research Division – Equity Analyst [4]

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Very clear. And then second question is, has it changed your capital allocation framework on the cards? And specifically to your dividend payout level, given that you are close to the bottom end of the net debt target range and given that your portfolio appears to be cash generative almost under — almost any realistic commodity price scenario.

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

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Yes, Alain, so the — you’re right, the portfolio is very resilient. But our current capital allocation framework caters for that. And where we have had strong results like we’ve had in the past year, gives us the ability to top things up as we’ve done with the incremental amount of $0.17 we’ve paid at this point in time. So I’m not feeling like there’s any change needed to the capital allocation framework in spite of this very strong performance that we continue to demonstrate.

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Operator [6]

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Our next question comes from Jason Fairclough from Bank of America.

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Jason Robert Fairclough, BofA Merrill Lynch, Research Division – Head of the Developed & Emerging EMEA Metals and Mining Equity Research [7]

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Just a couple of quick ones for me. First on met coal. So we’ve got the announcement today on BMA. I’m just wondering if we think into the medium term, do we think about a more complete exit of all met coal at some point and with that, I suppose, all hydrocarbons.

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Mike P. Henry, BHP Group – CEO & Executive Director [8]

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Jason. So just to be clear, what we’ve announced today is BMC. So the less high-quality hard coking coal, and — no, no. I tried to be very clear today that we see this as being a — the core that we’ll now focus on, we see those as being attractive assets, including in a decarbonizing world. And you know all of the effort that we invest in running different scenarios, thinking about how the world could play out. And in a decarbonizing world, we see there being upside for those assets. So certainly, a full step out isn’t on the cards for us. And on the basis of value, we see there being great value continue to be generated in those remaining assets.

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Jason Robert Fairclough, BofA Merrill Lynch, Research Division – Head of the Developed & Emerging EMEA Metals and Mining Equity Research [9]

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Just a second one, if I could follow-up, Mike. And I guess maybe taking it to another level. Before Peter and I have talked about potential asset redundancy risk on up to 70% of your portfolio, if we look back 20 years. And I guess the question is, does this speak to a shrinking BHP? Or do you actually see markets where you can recycle and redeploy this capital? On bottom line, we all like these future facing commodities, but the markets are just not that big.

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Mike P. Henry, BHP Group – CEO & Executive Director [10]

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Well, so we definitely see further potential in copper, nickel. We’ve been clear on that. We’re making some progress on it, Jason. Potash decision yet to come for the prior discussion. But no, I wouldn’t say that this foreshadows a shrinking BHP. But at the end of the day, it’s all about value. In all circumstances, we’ll continue to grow value through this focus on being really good operators through maintaining financial discipline, through bringing innovation to bear, to unlock more from the resources that we have. And I remain confident that through this focus on exploration, early-stage entry — and early-stage entry that we’ll be able to secure more options that allow us to deploy capital in quite a disciplined way to continue to grow value. And let’s face it, the commodities, oil, the remainder of the high-quality part of the met coal portfolio, these are decades of opportunity ahead. In the case of Petroleum, we’ve said that we see this commodity as attractive for at least the next decade, likely beyond. And certainly, in the near term, we have some great options to be able to invest in, that will allow us to grow value and returns. Even as we work our way through, securing more of these options will underpin the portfolio on the 20- to 30-year horizon.

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Operator [11]

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Our next question comes from Liam Fitzpatrick from DB.

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Liam Fitzpatrick, Deutsche Bank AG, Research Division – Head of European Metals and Mining [12]

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2 questions for me. First one on coking coal, somewhat following on from Jason’s question. As — in terms of the decision to sell the BMC assets, has there been a shift in your long-term outlook for coking coal that has led to this decision to exit? And then second question on Petroleum. The new guidance is effectively flat volumes over the next 3 to 5 years. Is this effectively a move away from the growth plans that you outlined late last year? Or are you still committed to those growth options just with the delay given the market backdrop at the moment?

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

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Okay. Thanks, Liam. Look, I’ll comment on met coal. I’ll say a few comments on Petroleum, but I might ask Peter to comment on that as well. With — so the way you should see met coal is, this is consistent with our prior strategy. In fact, all of what we’ve spoken about on the portfolio today is consistent and this is us simply continuing to tend to the portfolio and to ensure that we’re focused on those assets that are highest quality with longest lives. Now what we’ve continued — we’ve gained even greater confidence around is the long-term upside associated with the higher-quality hard coking coals in a decarbonizing world. So as we see steel mills becoming firmer in their commitments to reduce their emissions footprint, and knowing that some of the — one of the key levers they have to pull on that front is improve blast furnace productivity, that bodes well for higher-quality hard coking coal. Also as we continue to look at the remainder of the coal portfolio then and we think about what’s required to unlock the inherent value of those assets, the assets that we’re electing to divest today are more of — more of the value on those assets will be realized through capital investment. And given the BHP portfolio, given what we want to achieve over longer term and the options that we have available to us, those assets aren’t going to compete well for capital within BHP. So best that we move them into a different ownership structure that allows us to realize value.

Now in the case of Petroleum, I’ve tried to be clear today that we do see there being value growth opportunities in Petroleum, we’ll continue to invest in. We have deferred some of that for value reasons because with market — with prices having fallen and curves being in contango, that was the smart thing to do. But we do intend to continue to invest in Petroleum, both in projects that will come online and replace some of the decline that will otherwise happen. And we’ve also been clear that we will look for other opportunities to secure producing assets or near-producing assets. But Peter, perhaps you want to add a few thoughts on this as well?

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Peter Beaven, BHP Group – CFO [14]

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Yes. I think to the question, do we still like our projects? Yes very much so like still in the portfolio and then on the runway, absolutely. There is — Scarborough is a big part of that and it flips the other side of the 5 years, because of the delay. And I think it’s just absolutely justified delay. Trion probably also a little bit. And those are 2 big moves that is really to drive the really big outperformance in terms of growth. But just to come back to why do we like these projects? Well, because they are great breakevens, they’re going to make money in almost any circumstances.

Certainly, the infills are $30 and even — and maybe in the low $40s and so on and even — and LNGs are in the $60s. These are good projects by anybody’s standards and they’re big and they can really drive some significant free cash flows and returns in the latter part of the (inaudible). I think everybody is going to have a view on price, but I think it’s safe to say the price is going to be higher in the future than it is today. And you can think — obviously, we are big believers in decarbonization, electrification and so on. On the other hand, let’s not forget that in the last 2 months, 1/3 or so of all the CapEx is just tumbling out of this industry is going to take a bunch of time to get it back in again. Not just the usual suspects in oil and gas, but even Saudi Aramco, which has its own dividend policy now and even that’s created a sense of discipline. So lots to play for in — as Mike was saying earlier, lots to play for in the commodity itself and lots to play for in our portfolio. So I think we’re still feeling very good about this.

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Operator [15]

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Our next question comes from Tyler Broda from RBC.

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Tyler Anson Broda, RBC Capital Markets, Research Division – Director, Global Mining Research [16]

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I guess just on oil and gas, so you mentioned about the Bass Strait investment, potential acquisitions if they come along. How do you — how do you sort of see the ideal Petroleum portfolio in 5 years? Is it — do you think we need to add more growth to the portfolio? And I guess my second question is just on iron ore, with that being 60% of your EBITDA, did the Simandou development change your thinking on — in terms of what the longer-term shape of BHP needs to look like?

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Mike P. Henry, BHP Group – CEO & Executive Director [17]

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So I’ll address those in reverse order, Tyler. Did Simandou change our view as to the portfolio and the things we focus on? Absolutely not. Whilst we don’t think that Simandou tonnes are needed in the market, base is our outlook for iron ore, our strategy remains exactly the same as it was pre the likelihood Simandou tonnes — before Simandou became more likely. And that is the strategy of continuing to focus on reducing costs, becoming more reliable in iron ore and lifting quality initially through the South Flank development, which is going to help lift Fe and the proportion of 1 from the portfolio. So that’s kind of a strategy for all seasons. Given where we’re positioned on the cost curve, given the high-quality nature of our product, we’re going to compete well with Simandou in the market — Simandou in the market or without Simandou in the market. But we’ve also been clear, again, earlier in the year, and in fact, as part of our ongoing strategy, that we do — because we think in multiple decade terms, that we do see us as desiring more options for growth in other commodities than the iron ores or the coking coals. And those are in copper, nickel, possibly potash. We have a decision to take on that next year, so that strategy remains unchanged. And I think in some way is may — perhaps maybe further validated by the potential for what was otherwise going to be a plateauing and then the declining iron ore market to be exacerbated by Simandou.

If I turn then to oil and gas and what we want the portfolio to look like in 5 years’ time. I’ll start with the fact that we already have, and Peter referenced some of them earlier, some great growth options or options to invest for good value and returns in the Petroleum portfolio today. Of these projects that are coming on, Atlantis Phase 3, Mad Dog Phase 2, there’s further infill drilling opportunities. And then we have projects like Scarborough and Trion, that we’ll continue to bring through — and Trinidad and Tobago, that we’ll continue to bring through the development curve. But yes, would we like to have more options to be able to grow value in Petroleum? Yes, for the right options. And we’ve made reference today to near or already producing or near-producing assets when it comes to acquisitions, if we can secure them at the right value. So whatever further options that we pursue in Petroleum, they have to be giving us returns in the period that we’re most confident in, which means closer to us than some of the things that we could look at in copper and nickel, where we believe we’ve got greater confidence around the long, long run attractiveness of those markets.

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Operator [18]

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Our next question comes from Richard Hatch from Berenberg.

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Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [19]

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And first question, just a point of clarification on the medium-term met coal guidance. Does that include the assumption that the BMC assets are sold or not? And if it doesn’t, what is reducing in terms of the BMA production? And then the second question is just on Olympic Dam. Negative 1% return on capital employed, again, it continues to underperform. I mean how long are you going to give this asset the leads that it — what are the plans for this asset to try and improve the return on capital employed for it to make it a BHP asset?

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Mike P. Henry, BHP Group – CEO & Executive Director [20]

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Okay. Thanks, Richard. So medium-term guidance for met coke, that does not — and this is standard practice for us. It does not include the assumption around the divestment. As to the round number figures to — if we’re — when we’re successful in divesting, it’s around 10 on a consolidated basis for BMC, but please don’t read that, Richard, as being just take that number and that’s the new guidance. We provided guidance on the basis that BMC continues in the portfolio. If and when we’re successful in divesting it, then I’m sure we’d provide updated guidance at that point in time.

If I turn to Olympic Dam, yes, it’s not where we want it to be, and it’s not generating the returns that we need for a BHP asset at this point in time. But we’ve been clear about the plans at Olympic Dam. And those plans have been a multi-year program of asset integrity, some of which have been catch-up and developing into the Southern mine area given that the northern mining area was in permanent kind of decline. We’ve been successful in getting into the Southern mine area, seen great lift, and it’s the highest grade that we’ve had since BHP has owned it. We’re seeing production become more reliable. So it was up a bit last year, albeit I acknowledge it wasn’t up by as much as we intended it to be up by, but we’re continuing to progress this plan. And that really comes to — we get through the bulk of that plan in FY ’21. We then have a further major campaign — maintenance campaign on the smelter. And after that, we’re expecting to be up at the kind of that 200,000 tonnes per annum production level plus/minus. And that combined with a stronger price environment for copper and reduced CapEx as we get through some of the development work into the SMA and the asset integrity catch-up, that’s going to help us generate healthier returns kind of in the mid- to high single digits.

Longer term, we do — we’ll continue to look at options around expanding Olympic Dam. It’s a great resource. Of course, one of those options that we’re continuing to work through is BFX, the refreshed understanding of the resource clearly provide some challenges for BFX, but in terms of long-term opportunity for Olympic Dam (inaudible) change. First, focus, secure reliable operations, through that lift returns to a more acceptable level and work the expansion options in parallel.

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Peter Beaven, BHP Group – CFO [21]

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Richard, it’s Peter. Were you asking on the Q coal question, what the drivers were for our reduced guidance? Is that actually where the question is coming from?

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Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [22]

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Yes. It was just if the — what gives in BMA that reduces the medium-term production?

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Mike P. Henry, BHP Group – CEO & Executive Director [23]

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Great. Okay. Sorry, I misunderstood the question, Richard. So it was — it’s simply markets. So as we’ve — clearly, coal markets are under pressure currently. We think that some of that pressure will extend on for a period of time. So what I — I mentioned earlier that we expect it’s going to take about a year for the global economy to recover to pre-COVID levels. We think it’s going to take about 3 years to get back on to the trajectory that the world would have (inaudible) otherwise. So as we step back and look at that, we want to be market responsive in our plans for production. And so on that basis, we’ve elected to pull back in some of those plans. Particularly around some of the BMC coals and the Blackwater coal, where we see there being less upside, unlike the higher-quality hard coking coals. And the result of that is that we — the production growth will be a little bit less than we were previously planning, one; and two, because those were our lower cost, but lower-margin mines, we’ll also see an upwards revision in the medium-term guidance on unit costs.

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Operator [24]

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Our next question comes from Carsten Riek from Crédit Suisse.

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Carsten Riek, Crédit Suisse AG, Research Division – Director & Co-Head of the European Steel & Mining Research [25]

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2 questions from my side. The first one is on the iron ore business in the Pilbara, given the Yukon issue we had earlier, do we expect actually any mine plan adjustments post 2020? And is that part of your guidance already? And the second question is, we’ve learned now that you might actually dispose BMC, Bass Strait and some other assets. What happens to the proceeds? Could we expect some special dividends? Or do you need to have the balance sheet prepared to grow into future materials such as copper or nickel, as you mentioned before?

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Mike P. Henry, BHP Group – CEO & Executive Director [26]

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Okay, Carsten, thank you. So I’ll talk about [Whale]. I’ll make a point on the asset disposal. So I think it would be worthwhile Peter as well just talking to how we think about capital allocation more broadly, Carsten, which obviously — which sits behind the question that you’ve asked. In the case of iron ore, we have a process of — so whilst I know that the Juukan Gorge incident has caused all of this to come into the public eye in recent times, our focus on indigenous heritage is deep and ongoing. It didn’t start with Juukan Gorge. And part of that process sees us in constant engagement with traditional owners and as new information comes to light, that helps to inform the decisions that we take at any given point around the mine plan. So we’re confident that we’ll be able to continue to manage the business in the way that we’ve been managing it previously because we give so much attention to protecting indigenous heritage and engaging with traditional owners. And so I don’t foresee any change to iron ore guidance as a result of that ongoing focus.

In the case of the divestment question you’ve asked, we’ve said today, and this applies to the coal assets, we’ve said that we’re exploring different options. One of those options is trade sales of these assets for value. Another one is demerger. Depending on which 1 of those 2 is better value for shareholders. Now one of those options, the divestment for value obviously gives rise to cash, the other one wouldn’t or less so. In the case of Bass Strait, that’s more likely or almost — the focus there is on a trade sale. But we’ve also been clear today that conceptually, because keep in mind that sometimes the proceeds from divestments and the investment opportunities don’t quite marry up. But we do conceptually look at this as a bit of recycling out of assets that have become more mature, have less long life to then be able to invest in assets with a longer future and more value upside, and that could be in Petroleum in the first instance or in these other future facing commodities. But Peter, I know you’ll have a few things to say from a capital allocation perspective as well.

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Peter Beaven, BHP Group – CFO [27]

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(inaudible)

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Mike P. Henry, BHP Group – CEO & Executive Director [28]

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Well, it’s a great color, Peter. And it really points to the resilient — part of our resilience on a whole range of fronts comes from the nature of the portfolio and the assets that we have.

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Operator [29]

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(Operator Instructions) Our next question comes from Sylvain Brunet from Exane.

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Sylvain Brunet, Exane BNP Paribas, Research Division – Head of Metals and Mining Equity Research [30]

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My first question is on the unit cost at Western Australia Iron Ore, where you [gained] up 6% going into next year, if I take the midpoint. Besides ForEx, could you guide us through some of the items where you are experiencing some cost pressures there, please? And my second question is on the Petroleum footprint. Should we read into your commentary that you’d have a more balanced approach that 100 million BOE should be — would be kind of a cap on your production and you replenish assets which are depleting? Or is it not how you think about it?

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Mike P. Henry, BHP Group – CEO & Executive Director [31]

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Sylvain, great. Thank you. So in reverse order, no, please don’t see that we’re signaling 100 million BOE cap on production. Peter has referred to some of the projects, Scarborough, Trion, projects just outside the 5-year window. We’ve also been clear today that we’re open to looking at acquisitions, of course, acquisitions that meet the test of the capital allocation framework, but for near or already producing fields. So we will — it’s certainly not a cap at 100 million BOEs. But whatever investments we make have to generate great returns. And that has to happen within a time frame in which we still see the commodity as attractive. On [Whale], cost pressures. I mean what a good news story, if I’m going to start with that, Sylvain, because this is a business where we certainly weren’t at the front of the pack a number of years ago. But the way that the team there has been able to just focus on, day in, day out, focus on kind of reliability, asset integrity, engineering, and they’ve just been able to eke out this incremental improvement. Now do we see some cost pressures in the year-end? Yes, you’ve called out one, which is ForEx.

Ongoing maintenance as well. So the teams called out the fact that we have a big campaign maintenance, somewhat of the car dumpers, which is all about increasing reliability. But at the [Whale port] and Yandi is in decline as South Flank ramps up. So I think there’s — from memory, there’s a bit of an increase in strip ratio as well. So a few pressures, but I’d just like to ask that everybody look to the underlying results and the performance of this team to give you confidence that whatever the circumstances, this team is going to be delivering absolutely the best result possible for shareholders.

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Peter Beaven, BHP Group – CFO [32]

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(inaudible)

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Operator [33]

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Our next question comes from Amos Fletcher from Barclays.

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Amos Charles Fletcher, Barclays Bank PLC, Research Division – Director [34]

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Just a couple of questions. First one on FY ’22 CapEx guidance of $8.5 billion. Can you talk through what’s allocated within that Jansen, Scarborough and any the other major unallocated projects as yet? And then secondly, on Jansen, you mentioned that we’ve lost 2 to 3 years’ worth of commodity demand, and it seems in the outlook statement, your conviction on timing of supply deficits for potash is a little bit low, you only delayed the FID by about 4 months. Can you explain the timing mismatch there?

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Mike P. Henry, BHP Group – CEO & Executive Director [35]

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Okay. So I’d like to ask Peter just to talk to the CapEx question that Amos had on FY ’22, and then I’ll comment on Jansen.

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Peter Beaven, BHP Group – CFO [36]

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Sorry, Amos, just repeat your question again, sorry, just — my line broke up.

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Amos Charles Fletcher, Barclays Bank PLC, Research Division – Director [37]

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Sure. It was just regarding the FY ’22 guidance of $8.5 billion. I just wanted to find out what’s allocated within that to Jansen, Scarborough and any other major projects that you have in FID yet?

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Peter Beaven, BHP Group – CFO [38]

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(inaudible)

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Mike P. Henry, BHP Group – CEO & Executive Director [39]

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Amos, if I just turn to Jansen. So you’re right, we have talked about in the near term, there being kind of a year to get back to pre-COVID levels of economic activity. And therefore, commodity demand, another couple of years before the world’s back on the trajectory that it otherwise would have been on, we have to keep in mind here the time frames for Jansen. So it’s about 5 years from the point of starting of construction through to first production. Another 2 years in which to fully ramp up. So that time frame is well outside of kind of the COVID period and the COVID recovery period, where we expect the world to be back on track again. And we think the underlying thesis (inaudible) potash remains strong. Decarbonization, land use, population growth, all bode well for potash demand. Now the reason for the delay, so the delay that we’ve made hasn’t been about markets or trying to time the market perfectly. The delay has just been a function of COVID in the first instance. We needed to move down to 1 shop rather than 2 for a period of time. And then the second thing is, as we discussed earlier in the calendar year, there were some challenges on some of the shaft lining work since rectified. But the combination of those 2 things has seen us just push it out by a few months.

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Operator [40]

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Our next question comes from Richard Hatch from Berenberg.

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Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [41]

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So I’m going again. Just a couple of questions. First one is on Escondida in your medium-term production guidance of 1.3 million tonnes. Can you just remind us what the steps are to get to that? And then the second one is just on decarbonization and the cost of that. Some of your peers have talked to investment of some capital just as they invest in various technologies to reduce the carbon footprint and can you just remind us where you’re at on that? And how much you’re planning to spend if you can give any kind of guidance on that?

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

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Sure. So Peter, why don’t you take the Escondida one and I’ll speak to decarbonization.

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Peter Beaven, BHP Group – CFO [43]

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(inaudible)

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Mike P. Henry, BHP Group – CEO & Executive Director [44]

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And on your question, Richard, around decarbonization. Look, it’s — we get the headline numbers around the climate investment program, which was $400 million. But that’s all about how we go about working with others and coming up with innovative technologies to reduce carbon footprint and so on. But that’s a small drop in what is a much larger bucket of effort around decarbonization. So you look at what Danny and the team have done in Chile, with the move to fully renewable power. And those power contracts have been entered into on a value-accretive basis. They actually end up paying lower cost. What’s been brought to bear there is some good commercial and strategic thinking. You look at what we’re doing right now around the world’s first tender for LNG fuel bulk carriers. Again, the premise that we’re bringing to bear on that is how can we get that done for similar rates to what we would otherwise be, I think — and we’ll pursue renewable power contracts here in Australia as well.

So long way of saying that there’s specific things that we can track, which do cost more — where we’re investing more money towards decarbonization, but as much of our ability to decarbonize comes through ingenuity, commercial focus and so on. Now as time goes on, some of these things will become hard. So for example, replacing all diesel in our fleet of equipment. That is less straightforward, much more challenging, will likely require a move to other technologies like in-pit crushing and conveying or trolley assistant and so on. But that — those are still things that we’re looking at. In the near term, there’s a ton of opportunity to be unlocked through the sorts of things that I spoke about earlier.

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Operator [45]

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Our next question comes 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 [46]

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Great. Sorry if asked — if these questions have been asked. I joined the call a bit late for technical issues. But first of all, just on the sort of climate change targets. Give us a bit of a taste for the 10th of September. And are you concerned that you are kind of in a losing battle here. Until you exit all your coal assets and petroleum, you’re going to be on the wrong side of ESG line. And will you could be thinking about taking further action in due course, if that is the way the market is and your shareholders are thinking? And then secondly, just around the coal assets that you’re looking to exit. Can you give us a sense of the book value of the assets, would you be prepared to sell below book value? Is spinout really the most likely option for those?

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Mike P. Henry, BHP Group – CEO & Executive Director [47]

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Okay. So on climate change, Myles, the — we will come forward on September 10 with renewed Scope 1 and Scope 2 target, tangible actions on Scope 3, a renewed scenario around a well below 2-degree world and strengthen linkage between executive REM and climate change action. Now as I see it through the investors’ eyes, that workaround scenarios, I think, is really important because if you stand back and believe that the world will accelerate even further on actions to address climate change. So beyond the current actions that are in place, that it is important you understand how our portfolio plays out in that world. But all of the scenario work that we’ve done today demonstrates that our portfolio is resilient to different climate change scenarios. Now the coal asset announcement that we’ve made today isn’t for — it’s not being driven by ESG reasons, it’s being — not directly by ESG reasons, it’s being driven by where we see upside and how best to unlock value.

And in this case, the broad trend towards global decarbonization, we think, is going to mean greater premiums for higher-quality hard coking coals, as steel makers seek to reduce their carbon footprint. So that core of assets that we will continue to own and operate we think are — have upside exposure in a decarbonizing world. For the other assets, they have upside, but more of that upside is going to come through capital investment, including in growing new options, maybe like (inaudible) well, potential expansions in that business. And given where we’re at with our portfolio and the other opportunities that we see ahead of us, they’re not going to compete well for capital within BHP, so best to move them out. Now as to how we move them out, coming back to your point on that front, the short answer is we don’t know yet, which option that we’ll land on. We’ve said 2 years in part because that gives us time to get out there and explore the different options, engage with various parties, including shareholders, to then land on the option that is — the preferred option that’s going to generate greatest value for shareholders.

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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 [48]

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There haven’t you been exploring the sale of the South Wales coal assets for quite a long time already, and did not have much interest?

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

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Well, we’ve been exploring it for some time, Myles, but we have to — all of our commodities, as we know, are cyclical. We’re at a point in time right now where coal markets are at a low or what we believe to be certainly at the low end of the cycle. In the case of New South Wales energy coal, we’ve had the further complication of currently having rising costs as we move through a kind of a geological structure. But we expect to be able to bring costs down over time. And so over a 2-year time frame, in volatile markets, we could see a better price environment for coal full stock. And we’ll also be clear on the efforts that we have underway to reduce costs. So I don’t want to — I don’t want anybody to take away a view that says that the likely option or the default option here is demerger. That’s not the case. We’re genuinely exploring all different options. At a high level, we’ve got potential for trade sale and potential for demerger, both — and we’re wholly agnostic as to which of those we end up with. The only consideration is which is going to give rise to greater value for shareholders. But Peter, was there anything you’d like add on this?

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Peter Beaven, BHP Group – CFO [50]

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Yes. I think, Myles, I mean, I think it isn’t any secret to think that it is kind of hard to sell some of these assets at this point in the market (inaudible). And so you know we’re very disciplined about this, both on the acquisition as well as on the disposal side. (inaudible) So we should take our time and figure out what’s the best for (inaudible). I have to admit to you that there is — that we’re opening ourselves up a little bit here, a little on BHP (inaudible). How do you get value for these things? It’s complicated, right? And so let’s open this thing up. Let’s have a dialogue with potential buyers. In fact, when you think about it, there’s a bunch of these sort of assets wandering around, right? Is the market giving (inaudible)? Possibly no. Isn’t there an opportunity for a consolidation play here? Somebody should stand up and potentially get on with this and why wouldn’t it be like that? Is that, well — if you think that’s a good idea, then why don’t you do it. But that’s where the capital allocation thing comes in. Because if you’re going to really consolidate all, then you have to put a lot of management time and energy into something which does not really — from a commodity perspective, it’s not really on strategy. And of course, you have to put some capital in some form in that thing. Or again give an opportunity in the next couple of years, we then come up with a bunch of other people who will come up with some good ideas here. And let’s see how we go. But it’s certain to say, it’s not all perfectly in a box, wrapped up (inaudible). And I don’t think that’s the way — way the world has to be every single time.

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Operator [51]

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Our next question comes from Edward Sterck from BMO.

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Edward Christopher Sterck, BMO Capital Markets Equity Research – Analyst [52]

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So 2 questions for me. Firstly, just a point of clarity on Olympic Dam. The plan that’s in place there, I think, Mike, you said, is expected to deliver mid- to high single-digit returns. If I heard that correctly, I just want to — could you expand a little on how that fits within the capital allocation framework? Because the number just looks a little bit low, really?

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Mike P. Henry, BHP Group – CEO & Executive Director [53]

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Well, yes. So certainly, we wouldn’t want to stop there. Edward, yes, you heard it correctly. Obviously, with all the caveats around what happens with copper price and so on. But that’s why I quickly followed up with. We will continue to explore opportunities to expand production at Olympic Dam. But none of that happens unless we’ve got a reliable foundation of — or foundation of reliable operations at Olympic Dam. So that’s been the biggest focus and it’s been the plan that we’ve been pursuing for a few years. Now having secured that then, we’ll then look to opportunities to further expand production. And given the nature of that operation, expansions will result in — or will lead to higher returns and double-digit returns over time. But what we have in line of sight right now is this near-term asset integrity remediation program and the improved ore that we get out of the Southern mine area. We’re not going to stop.

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Edward Christopher Sterck, BMO Capital Markets Equity Research – Analyst [54]

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Okay. Great. And then just 1 follow-up just on the growth options and areas in terms of commodities. You highlighted copper, nickel and potash and the potential for — if I understood correctly, the potential for acquisitions, was that — to look for acquisitions, is that just in copper and nickel? Or is it also including potash?

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Mike P. Henry, BHP Group – CEO & Executive Director [55]

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So I want to be very clear here. We’re not pursuing a strategy that is predominantly focused on acquisitions. In fact, if I think about the likelihood of the sorts of assets that we like coming up at the right time at the right price, it would be silly for us to bank on that as our core focus. Core focus is on exploration and early-stage entry, and we’ve seen success on that front. And certainly, in copper, we also secured some further nickel resource. We’re now the world’s second largest holder of sulfide resources. But we will be open to opportunities in copper and nickel. And if right assets came up at the right price, of course, we’d explore those. In the case of potash, we’ve got lots of resource. So we’re not going to be looking at acquisitions to secure more resource. Whereas in the case of nickel and copper, we like more resource. Although one of the other things that Peter often talks passionately about is the potential for us to unlock more options within the resource that we already have as well through a focus on innovation. So that’s going to be front and center for us as well.

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Operator [56]

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Our final question comes from Sylvain Brunet from Exane.

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Sylvain Brunet, Exane BNP Paribas, Research Division – Head of Metals and Mining Equity Research [57]

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Just a follow-up for me, please, actually related to your Slide 22 when you’re talking nickel, which features on the growth map again. How? Given the difficult history for greenfield project in this commodity, which clearly will be needed in the future, how do you think about managing those risks, if you start to accumulate more resource? And could you give us some hints at what the technical innovation you have in minds? And if you have this knowledge internally?

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Mike P. Henry, BHP Group – CEO & Executive Director [58]

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Sure, Sylvain. So thank you, and yes. Nickel, it’s both — one of the things that makes nickel hard, but also one of the things that makes — that means it’s got a lot of potential. And that is that the new high-quality nickel sulfides are hard to find. We do have some further exploration work underway in Western Australia. We’ve had success in proving up more reserves in proximity to existing operations. In fact, we increased reserves by circa 90-some-odd percent in recent times. So our first focus is really around how do we go about liberating more of the — we already have doing some other exploration in Western Australia. But we’ll also consider potential opportunities elsewhere around the world, but it’s not the first one. First focus is in Western Australia. Now when we talk about technical innovation, that is perhaps even — well, it’s most relevant to our nickel story because if we can find means of liberating more of the nickel from existing sulfide resources that — we’ve got lots of resource. And so the sorts of things that we’re looking at, one of them is high pressure oxidized leaching. So what’s called HPOX for nickel, which would help us to liberate more of the oxide resources that we have a lot of in Nickel West. But again, kind of like some of the early responses, we won’t stop there. We’ve got a team that demonstrated a lot of ingenuity in the past, really smart people, and they’ll continue to focus on other means of unlocking resource there. Peter, was there anything you wanted to add?

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Peter Beaven, BHP Group – CFO [59]

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No, Mike. I think it was (inaudible) well.

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Operator [60]

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That’s all the time we have for questions today. I’ll pass back to Mike for final comments.

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Mike P. Henry, BHP Group – CEO & Executive Director [61]

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Thank you, everybody, for joining. I hope that you can see the strength and resilience showing through in the results that we’ve managed to achieve last year with this very strong underlying cash flow, continued strong return on capital employed, earnings up and, of course, the dividend, USD 0.55 dividend, third year running at greater than $6 billion. That’s the foundation. We think that there’s a lot more value to be unlocked through tending to the current (inaudible) but also to this focus on continuing to drive operational excellence and securing more options in future facing commodities. And we’ve announced today not just tending — a couple of actions related to tending to the portfolio, but also a team and structure that will carry this business forward. And that team has the operational experience, technical depth, financial acumen and commercial perspective that’s going to help us realize on these ambitions. Thank you.

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Operator [62]

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