BHP Billiton 1H14 Earnings Call Notes

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A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Maintaining production guidance

“We have retained full year production guidance for all our major commodities: Iron ore, of 192 million tonnes, our share; petroleum, of 250 million barrels of oil equivalent; metallurgical coal, of 41 million tons; energy coal, of 73 million tonnes; and copper, of 1.7 million tonnes.”

Brownfield expansion projects to generate 16% production growth through 2015

“We project that over the 2 years to the end of the 2015 financial year, our low-risk, largely brownfield projects and productivity-led gains will deliver production growth of 16%.”

Rebound in metallurgical coal output

“A strong rebound in metallurgical coal supply lead to an 18% fall in our average realized price, and this reduced underlying EBIT by $520 million.”

Focused on productivity

“A strong rebound in metallurgical coal supply lead to an 18% fall in our average realized price, and this reduced underlying EBIT by $520 million.”

Measure capital efficiency in terms of return on net operating assets

“Our productivity agenda has delivered an increase in return on net operating assets, which is a true measure of our capital efficiency.”

China growth stable but strong

“China remains the primary driver of demand. In the 2013 calendar year, its rate of growth has stabilized but still remains strong. It’s expected to remain above 7%. The government continues with its reform agenda, which will move China towards a mature consumption-led economy.”

Iron ore cost curve to flatten. Lower prices.

“in iron ore, we expect significant growth in low-cost supply that will exceed increases in demand from China and elsewhere. The cost curve, as you see, will flatten, as higher-cost margin supply is displaced, and this will lead to lower prices and lower volatility.”

Copper fundamentals remain attractive

“In the near term, copper inventories are expected to remain at reasonable levels. But in contrast to iron ore, the long-term fundamentals are attractive. Rising strip ratios and grade decline and the lack of high-quality opportunities ready for development now will steepen the cost curve.”

Focus efforts on fewer basins

“We will focus our efforts with greater force on fewer basins, on those basins where we can generate our highest margins and greatest value: iron ore in the Pilbara, metallurgical coal in the Bowen basin, copper at Escondida and the Andean copper belt, Petroleum in the U.S., and potash in Saskatchewan.”

We’re not going to keep investing in Met coal, but we will maximize production

“as you’ve heard me talking about it, because of the margins in coking coal and the returns, we’re unlikely to invest in further increases in production, but we’ll complete those underway, and we’ll ramp them up to the maximum extent possible.”

Things may start to get better for Met coal though

“I don’t have quite such a negative outlook going forward. I would like you to think more positively about our results…There has been a lot of recovery in the market — or in the production I should say, from Australia because of the recovery from things like floods. That’s coming to an end. And as we look forward, there’s less growth in the next few periods. We’ve seen some announcements just overnight about some of the cost challenges that we’ve faced [ph] from competition in North America. Some evidence of that slowing. The pickup in markets, particularly in the developed economies and the growth in their demand for steel will almost certainly benefit metallurgical coal. And we started to see some quite good steel numbers coming out of India, which in the long term has no metallurgical coal and will have to import.”

Near term iron ore price risks to the upside

“I think we would say, if anything in the next quarter, probably the risks or maybe slightly to the upside”

Unlikely to be big shocks from China to iron ore. Longer term, managing the economy

“A lot of things go on in China at the moment that don’t always eventuate in quite the same reduction in steel production that you think — I mean, there’s a lot of work that the government is doing, in some cases, using their control of the debt markets to lead to some form of restructuring of both the iron ore and the steel industry, but ultimately we think will actually improve the move towards being a middle-income economy, more competitive and more growth, and will therefore attract, in the medium-term, more iron ore from us and other suppliers outside of the country, which means that — I don’t think we’re looking at big shocks, if you like. ”

We’re not at the top of the cycle

“Can I just jump in? We’re not actually at the top of the cycle. Andrew, this result that you’ve seen is primarily driven by our own self-help and our own productivity…we certainly don’t feel that as things sit at the moment, we’re finished with our productivity gains and — or that we’re operating at the top of the cycle. “