BHP Group Limited (ASX:BHP)

Andrew Mackenzie
CEO
Market Cap (AUD): 122.96B
Sector: Materials
Last Trade (AUD): 41 -0.73 (-1.77%)
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1. About

BHP is a world-leading resources company. BHP extracts and processes minerals, oil and gas, with more than 62,000 employees and contractors, primarily in Australia and the Americas. Its products are sold worldwide, with sales and marketing led through Singapore and Houston, United States. BHP's global headquarters are in Melbourne, Australia.

BHP operates under a Dual Listed Company structure with two parent companies (BHP Group Limited and BHP Group Plc) operated as if it were a single economic entity and is run by a unified Board and management.

BHP's corporate purpose is to create long-term shareholder value through the discovery, acquisition, development and marketing of natural resources. It does this through a strategy to own and operate large, long-life, low-cost, expandable, upstream assets diversified by commodity, geography and market.

BHP is among the world’s top producers of major commodities, including iron ore, metallurgical coal and copper. It also has substantial interests in oil, gas and energy coal.

2. Business model

 

The Company operates in the following divisions:[1]

 

Divisions

Revenue (US$M)

% of total Revenue

% of Profit (before Int, Tax, Dpn & Amt.)

Profit drivers[2]

Petroleum

$5,408

12.39%

14.41%

Underlying EBITDA for Petroleum increased by US$224 million to US$3.3 B. Price impacts, net of price-linked costs, increased Underlying EBITDA by US$975 million. During the period, Underlying EBITDA decreased by US$256 million due to the impact of Hurricane Harvey and Hurricane Nate on US assets and natural field decline. Controllable cash costs increased by US$64 M reflecting higher exploration expenses, due to expensing the Scimitar well (including sidetrack) and increased planning activities in Mexico, partially offset by the impact of wells expensed in the prior year, coupled with US$100 M unfavourable fixed cost dilution from declining volumes. Profit on sale of assets decreased by US$142 M reflecting the sale of 50 per cent of BHP’s interest in the undeveloped Scarborough area gas fields in FY2017. Revaluation of embedded derivatives at Trinidad also negatively impacted Underlying EBITDA by US$117 M

Copper

$13,287

30.45%

28.13%

Underlying EBITDA for Copper increased by US$3.0 B to US$6.5 B. Price impacts, net of price-linked costs, increased Underlying EBITDA by US$2.3 B. Higher volumes increased Underlying EBITDA by $1.6 B mainly driven by a full year of production at Escondida following the industrial action in the previous year, supported by the ramp-up of the Los Colorados Extension project and record production at Spence. Controllable cash costs increased by US$924 M, mainly due to a US$288 M change in estimated recoverable copper contained in the Escondida sulphide leach pad which benefited costs in the prior period, a US$176 M increase in labour and contractor costs at Olympic Dam, to support operating stability projects and expansion plans, a US$126 M planned drawdown of mined ore inventory at Escondida ahead of the commissioning of the Los Colorados Extension project and US$89 M unfavourable fixed cost dilution at Olympic Dam as a result of lower volumes due to the smelter maintenance campaign. Non-cash costs, which includes net development stripping, decreased by US$417 M, reflecting higher capitalised stripping at Escondida and Pampa Norte and increased underground mine capitalisation at Olympic Dam as mining expands into the Southern Mine Area

Iron Ore

$14,810

33.94%

38.52%

Underlying EBITDA for Iron Ore decreased by US$147 M to US$8.9 B. Price impact, net of price-linked costs and higher other non-controllable costs including fuel and energy, decreased Underlying EBITDA by US$614 M. Higher volumes and cost efficiencies reflecting continued reductions in labour and maintenance costs through improved equipment productivity and maintenance strategies increased Underlying EBITDA by US$568 M

Coal

$8,889

20.37%

18.97%

Underlying EBITDA for Coal increased by US$613 M to US$4.4 B. Prices, net of price-linked costs, increased Underlying EBITDA by US$1.1 B. Controllable cash costs decreased Underlying EBITDA by US$430 M, driven by US$150 M unfavourable fixed cost dilution from reduced volumes at Broadmeadow and Blackwater, US$109 M additional contractor stripping fleet costs and debottlenecking activities, US$63 M increased maintenance costs due to a higher number of planned shutdowns and major component replacements and US$45 million increased contractor costs from the re-opening of the Ayredale Pit at NSWEC

Group and unallocated items/ eliminations

$1,244

2.85%

(0.03%)

N/A

3. Strategy

 

Key strategies include:[3]

 

Cost efficiencies: Focused on further gains

Since 2012, the Company’s annualised productivity gains exceed US$12 billion. The combination of its simplified portfolio, streamlined systems, large-scale, and connected workforce ensures the Company is well positioned to deliver approximately US$1 billion in additional productivity gains by the end of FY2019, with strong momentum carried into FY2020.

 

Technology: Improves safety, costs and unlocks resource

The Company will continue to integrate and automate its value chain to unlock resource and drive a step change in safety, volume, and cost. The Company has accelerated high-value initiatives across mine autonomy, decision automation, and precision mining. The Company has proving grounds to de-risk and trial technology solutions in real conditions. The Company’s diverse portfolio allows it to adapt technology developed for one commodity to other areas of the business. For example, the Company’s integrated remote operations centres were first deployed in Western Australia Iron Ore, providing an advanced control room that allows the Company to optimise its production supply chain. The same approach has now been established (or is in the process of being established) at its other operated Minerals assets, such as coal and copper.

 

Latent capacity: Attractive returns, limited risk

The Company’s latent capacity options are about unlocking untapped production with minimal risk. The Company has replenished its suite of latent capacity opportunities to optimise and debottleneck its existing mine, rig, port, rail, and processing facilities. That means the Company can achieve more production, or replace production from its existing infrastructure, for lower cost. The Caval Ridge Southern Circuit (CRSC) project in Central Queensland’s Bowen Basin is a good example of a latent capacity project that is starting to take shape. The CRSC will effectively link the Peak Downs Mine to the coal handling preparation plant at the neighbouring Caval Ridge mine with a new conveyor system, and in doing so, take advantage of unutilised capacity at the prep plant. The plant uses the latest coal processing technology to run very efficiently, and by linking the plant to the mining fleet at Peak Downs, will enable the business to maximise the effectiveness of both operations. The Company is able to do this with minimal risk as the Company is able to draw on its knowledge of other BHP assets in designing and building the conveyor system.

 

Future options: Worked for value, timed for returns

The Company has a pipeline of potential growth projects that could create significant shareholder value over the long term, in particular in conventional oil, copper, and coal. This includes the Mad Dog Phase 2 project, which has the potential to produce up to 140,000 gross barrels of crude oil per day, and the Spence Growth Option. In the first 10 years of operation, incremental production from the Spence Growth Option is expected to be approximately 185 kilotonnes per annum (ktpa) of payable copper in concentrate and 4 ktpa of payable molybdenum, with the first production scheduled for FY2021.

 

Exploration: Focused on petroleum and copper

The Company is focused on finding new oil and copper deposits through targeted exploration. Production of these commodities is declining, while demand is forecast to increase. In Petroleum, the Company has made discoveries in four out of the six prospects tested over the past two years, across two key basins. The Company has also secured more than 100 highly prospective blocks in the Gulf of Mexico and acquired the Trion discovered resource in Mexico after a competitive process.

 

Onshore US: Exit to maximise value and returns

On 27 July 2018, the Company announced that company had entered into agreements for the sale of its entire interest in the Eagle Ford, Haynesville, Permian and Fayetteville Onshore US oil and gas assets for a combined consideration of US$10.8 billion payable in cash (less customary completion adjustments). Both sales are subject to the satisfaction of customary regulatory approvals and conditions precedent. The Company expects completion of both transactions to occur by the end of October 2018. The effective date at which the right to economic profits transfers to the purchasers is 1 July 2018.

4. Markets

 

The Company operates in markets including:[4]

 

Industry (Australia)

Industry Revenue (2018)

Growth Rate (annual 13-18)

Iron Ore Mining

$63 billion

(1.1%)

Silver, Lead and Zinc Ore

$4 billion (2017)

(2.0%)

Uranium Mining

$636 million

(6.2%)

5. Competition

 

Major competitors include:[5]

 

  •  Rio Tinto Limited (ASX:RIO)
  •  Arconic Inc (NYSE:ARNC)
  •  Vale S/A

6. History

 

1885[6]  

BHP was incorporated

 

1890  

Smelting commenced at Port Pirie, South Australia

 

1891  

First export market transaction occurred, with lead sold to Fuzhou, China

 

1915  

Began operations at Newcastle steelworks on 2 June

 

1923  

The Australian Wire Rope Works Limited incorporated, with BHP holding 22% equity

 

1925  

Acquired 100% of Rylands Bros (Aust) Pty Limited

 

1927  

The Titan Nail & Wire Pty Limited incorporated, with BHP holding approximately 50% equity

 

1929  

Acquired 75% of Lysaght Bros & Co Pty Limited. Achieved 100% ownership by 1957

 

1931  

Purchased Hannan’s North Gold Mine

 

1932  

Purchased Burwood and Lambton Collieries from the Scottish Australian mining Company

 

1935  

Acquired 100% Australian Iron & Steel Pty Limited (AIS)

 

1936  

Commonwealth Aircraft Corporation incorporated, with BHP holding 33% equity

 

1939  

Acquired 50% Rheem Australia Limited

 

1942  

First shipment of limestone from Rapid Bay, South Australia

 

1958  

Australian wire Industries Pty Limited incorporated with BHP holding 100% equity

 

1963  

Equal joint venture with Esso for exploration/ production in Bass Strait, offshore Victoria, Australia

 

1965  

Commercial discovery of natural gas in Brass Strait, offshore Victoria, Australia, by Esso and BHP

 

1966  

Commenced lime sands mining at Coffins Bay in Southern Australia

 

1967  

Commercial discovery of crude oil in Brass Strait, offshore Victoria, Australia

 

1974  

Acquired Australian Industrial Refractories

 

1977  

Commissions BHP-Newmont-Telfer gold mine in western Australia BHP (33%). Became a part of BHP Gold mines Limited in 1987

   

1979

Purchased remaining 50% shares in John Lysaght Australia Limited from Guest Keen & Nettlefolds (GKN)

 

1981  

Commissioned Carnilya Hill nickel mine, Western Australia (BHP 44%)

 

1982

Commissioned Saxonvale coal mine, New South Wales, Australia

 

1984  

Acquired 100% of UTAH International Inc

 

1986  

Became the first Australian company to declare A$1 billion net profit

 

1987

Acquired an initial 49.9% of Hamilton Oil Corporation, and increases the holding to 50.7% by the end of year. 100% equity achieved in 1991

 

1991  

Acquired 100% of Supracote Inc in California, USA. Name changed to BHP Coated Steel Corporation; operations at Rancho Cucamonga in California, USA

 

1994  

Acquired Tintaya copper mine in Peru

 

1996  

Acquired 100% interest in Magma Copper Company

 

2000  

Completed spin-out of One Steel Limited

 

2001

Reached agreement with Billiton Plc to merge. BHP Billiton was dually listed on the London Stock Exchange and Australian Stock Exchange on 29 June 2001

 

2007

The North Shelf Venture participants and Korea Gas corporation have signed an LNG sale and purchase agreement for the ongoing supply of liquefied natural gas from Australia’s largest resources project

 

2011  

BHP Billiton is proposing further diamond drilling under a Farm-in and Joint Venture covering the Altia Silver-Lead-Zinc- deposit, located approximately 70 kilometres south east Cloncurry in North Western Queensland

 

2015  

Demerger of South32 in 2015

 

2016

St George finalises acquisition of 75% interest in the high-grade nickel-copper sulphide Mt Alexander Project from BHP Billiton

 

2017  

BHP Billiton launches Bond Repurchase plan

BHP Billiton approves investment in MAD DOG PHASE 2 project

 

2018  

BHP has entered into an agreement with Guyana Goldfields Inc. (Guyana) to acquire its 6.1 percent interest in SolGold Plc(SolGold)

7. Team

 

Board of Directors[7]

 

Ken MacKenzie

Andrew Mackenzie

Terry Bowen

Malcolm Broomhead

Ian Cockerill

Anita Frew

Carolyn Hewson

Susan Kilsby

Lindsay Maxsted

John Mogford

Shriti Vadera

 

Executive Leadership Team

 

Andrew Mackenzie – Chief Executive Officer

Arnoud Balhuizen – Chief Commercial Officer

Peter Beaven – Chief Financial Officer

Geoff Healy – Chief External Affairs Officer

Mike Henry – President Operations, Minerals Australia

Diane Jurgens – Chief Technology Officer

Daniel Malchuk – President Operations, Minerals Americas

Steve Pastor – President Operations, Petroleum

Athalie Williams – Chief People Officer


read more

8. Financials

 

2018 Full Year Results Presentation

   

Financial Year 2016/17 (ended 30 June)[8]

 

Division

Revenue (US$M)

% Change

Profit (before Int, Tax, Dep & Amt.) (US$M)

% Change

Petroleum

$5,408

14.53%

$3,341

7.19%

Copper

$13,287

59.41%

$6,522

83.98%

Iron Ore

$14,810

1.27%

$8,930

(1.62%)

Coal

$8,889

17.30%

$4,397

16.20%

Group and unallocated items/ eliminations

$1,244

42.01%

($7)

95.95%

Total

$43,638

20.76%

$23,183

19.81%

9. Risk

 

Major risks include:[9]

 

External risks

  • Fluctuations in commodity prices (including sustained price shifts) and impacts of ongoing global economic volatility may negatively affect its results, including cash flows and asset values
  • Its financial results may be negatively affected by exchange rate fluctuations
  • Reduction in Chinese demand may negatively impact its results
  • Actions by governments, regulation, political, community or social events, judicial or community activism or unrest in the countries where its assets are located could have a negative impact on its business

   

Business risks

  • Failure to discover or acquire new resources, maintain reserves or develop new assets could negatively affect its future results and financial condition
  • Potential changes to its portfolio of assets through acquisitions and divestments may have a material adverse effect on its future results and financial condition
  • Increased costs and schedule delays may adversely affect its development projects

   

Financial risks

  • If its liquidity and cash flow deteriorate significantly it could adversely affect its ability to fund its major capital programs
  • The Company may not fully recover its investments in mining, oil and gas assets, which may require financial write-downs
  • The commercial counterparties the Company transact with may not meet their obligations, which may negatively affect its results

   

Operational risks

  • Unexpected natural and operational catastrophes may adversely impact its assets, functions or people
  • Information technology and operational technology services are subject to cybersecurity risks and threats that may materially affect its business and reputation
  • Its potential liability from litigation and other actions resulting from the Samarco dam failure is subject to significant uncertainty and cannot be reliably estimated at this time, but could have a material adverse impact on its business
  • Cost pressures and reduced productivity could negatively impact its operating margins and expansion plans
  • Non-operated assets have their own management and operating standards, joint venture partners or other companies managing those non-operated assets may take action contrary to its standards or fail to adopt standards equivalent to BHP’s standards, and commercial counterparties may not comply with its standards

 

Sustainability risks

  • Safety, health, environmental and community impacts, incidents or accidents may adversely affect its people, assets, and reputation or licence to operate

   

Market risk

The Group’s activities expose it to market risks associated with movements in interest rates, foreign currencies, and commodity prices.    

Interest rate risk

The Group is exposed to interest rate risk on its outstanding borrowings and short-term cash deposits from the possibility that changes in interest rates will affect future cash flows or the fair value of fixed interest rate financial instruments. Interest rate risk is managed as part of the portfolio risk management strategy.

 

Currency risk

The US dollar is the predominant functional currency within the Group and as a result currency exposures arise from transactions and balances in currencies other than the US dollar. The Group’s potential currency exposures comprise:

  • translational exposure in respect of non-functional currency monetary items
  • transactional exposure in respect of non-functional currency expenditure and revenues

     

Commodity price risk

Contracts for the sale and physical delivery of commodities are executed whenever possible on a pricing basis intended to achieve a relevant index target. While the Group has succeeded in transitioning substantially all of the Group commodity production sales to market-based index pricing terms, derivative commodity contracts may from time to time be used to align realised prices with the relevant index. Contracts for the physical delivery of commodities are not typically financial instruments and are carried in the balance sheet at cost (typically at US$ nil); they are therefore excluded from the fair value and sensitivity analysis. Accordingly, the financial instrument exposures set out below do not represent all of the commodity price risks managed according to the Group’s objectives. Movements in the fair value of contracts included are offset by movements in the fair value of the physical contracts; however, only the former movement is recognised in the Group’s income statement prior to settlement. The risk associated with commodity price.

 

Credit risk

Credit risk can arise from the non-performance by counterparties of their contractual financial obligations towards the Group. To manage credit risk, the Group maintains Group-wide procedures covering the application for credit approvals, granting and renewal of counterparty limits, proactive monitoring of exposures against these limits and requirements triggering secured payment terms. As part of these processes, the credit exposures with all counterparties are regularly monitored and assessed on a timely basis. The credit quality of the Group’s customers is reviewed and the solvency of each debtor and their ability to pay on the receivable is considered in assessing receivables for impairment.

 

Liquidity risk

The Group’s liquidity risk arises from the possibility that it may not be able to settle or meet its obligations as they fall due and is managed as part of the portfolio risk management strategy. Operational, capital and regulatory requirements are considered in the management of liquidity risk, in conjunction with short-term and long-term forecast information.

References

  1. ^ Annual Report 2018, P. 161, 162
    https://www.listcorp.com/asx/bhp/bhp-billiton/news/bhp-annual-report-2018-1975171.html
  2. ^ Annual Report 2018, P. 84-92
    www.listcorp.com/asx/bhp/bhp-billiton/news/bhp-annual-report-2018-1975171.html
  3. ^ Annual Report 2018, P. 9
    https://www.listcorp.com/asx/bhp/bhp-billiton/news/bhp-annual-report-2018-1975171.html
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=65
    http://www.ibisworld.com.au/industry/default.aspx?indid=71
    http://www.ibisworld.com.au/industry/default.aspx?indid=1852
  5. ^ http://www.hoovers.com/company-information/cs/competition.bhp_billiton_limited.a42f7036da64140c.html
  6. ^ http://www.bhpbilliton.com/~/media/bhp/documents/aboutus/ourcompany/our-history/150702_ourhistory_shortbooklet.pdf?la=en
    http://www.asx.com.au/asxpdf/20070119/pdf/310ksfy7q86wyk.pdf
    http://www.asx.com.au/asxpdf/20110708/pdf/41znysylfssgvz.pdf
    http://www.asx.com.au/asxpdf/20150610/pdf/42z3j3cdnzfpnm.pdf
    http://www.asx.com.au/asxpdf/20160129/pdf/434nc2dnl9xkv0.pdf
    https://www.listcorp.com/asx/bhp/bhp-billiton/news/bhp-billiton-launches-bond-repurchase-plan-1532515.html
    https://www.listcorp.com/asx/bhp/bhp-billiton/news/mad-dog-phase-2-project-investment-approval-1524117.html
    https://www.listcorp.com/asx/bhp/bhp-billiton/news/copper-update-agreement-with-guyana-goldfields-1967270.html
  7. ^ http://www.bhp.com/our-approach/our-company/leadership-team
  8. ^ Annual Report 2018, P. 161-162
    https://www.listcorp.com/asx/bhp/bhp-billiton/news/bhp-annual-report-2018-1975171.html
  9. ^ Annual Report 2018, P. 27-33, 175, 186, 188-189
    https://www.listcorp.com/asx/bhp/bhp-billiton/news/bhp-annual-report-2018-1975171.html