BHP Billiton (BHP) FY 2016 Earnings Call

posted in: Earnings Call, Notes | 0

Andrew Mackenzie – CEO

Safety first

“…I have to acknowledge the tragic events at Samarco, which to some extent casts a cloud over much of what I have to say about the rest of our operations. You know this led to the loss of 19 lives, and it has deeply affected me personally and all of us at BHP Billiton…While it is hard to be positive about the performance in the rest of our businesses in the shadow of Samarco, it is worth noting that we completed the year at our operated sites with no fatalities and with a significant reduction in significant injuries.”

A tough financial year

“During the course of the year, we also recorded three exceptional charges in relation to the Samarco dam failure, the impairment of our onshore US petroleum assets and some ongoing global taxation matters, which contributed to a statutory loss of $6.4 billion. We are clearly disappointed with this result – really disappointed. However, our EBITDA has remained healthy at 41% and we are pleased by the strong cash generation of our assets, which has resulted in a free cash flow of $3.4 billion.”

Outlook: Near term continued uncertainty that will rebalance in the medium term

“In the near term, we expect a continuation of the economic uncertainty, the political instability and the well supplied markets that we have seen of late. That is going to prolong commodity price volatility, but within more recent ranges. However, in the medium term, we feel that as markets begin to rebalance – and they are starting to – the risks to the downside of those ranges should reduce.”

They are bullish on Oil and Copper

“…we are particularly positive about the outlook for oil and copper, which is because field and grade decline drive the sharpest reduction in base supply and they will pull the markets back into balance more quickly than other commodities.”

Solomonic judgment in deciding whether to deploy cash on debt reduction or dividend payment

“We acknowledge that although we feel our balance sheet is strong and very much fit for purpose, reducing debt from its current level will be an important priority for us when we are able to do so…To some extent, we took a Solomon-like judgment: we put some on the balance sheet and some on the dividend.”

They are trying out gas hedging to good results

“We are doing a relatively small amount of gas hedging at the moment. We are only doing it with existing production, and we are doing it because in this very tight US domestic market, we see patterns in the way the price varies because so many of the players are hedging that we need to be part of as well…We have observed that we can actually lock in a decent margin through hedging both our prices and the majority of our costs through this small trial..the first trials have been good and we seem to be achieving returns in excess of 30%.”

They are only hedging gas not oil

“What I want to make clear is that the hedging is very specific to US domestic gas, where there are a couple of factors that suggest that we would be foolish not to consider this as a commercial opportunity. One, it is a very flat cost curve and therefore the possibility of losing exposure to the upside is quite a small loss of exposure compared to, say, something like the oil cost curve, where we would be very much more reluctant, to the point of no, at this point, of ever hedging…It is very specific to gas and it is one of those things that we are going to approach reasonably slowly.”

Fierce competition in the race to the bottom of the iron ore cost curve

“…We sit pretty close to the bottom of the cost curve on iron ore and although there is going to be fierce competition to claim the bottom of the cost curve crown between ourselves and the other three low-cost operators, we will be playing that game to win. Therefore, even in, as you say, reduced demand out of China, we still see this as potentially being a business with a very high margin and a big cash generator going forward.”

Restoration process continues in Samarco as part of their moral obligation

“Now to Samarco, shortly after the tragic events at Samarco’s iron ore operations in November of last year I went back in June. On both occasions, I remained deeply saddened but, on my second visit, I was also inspired by what I was able to see for myself on the ground. I took the chance to speak to representatives of the local communities and to some of the most affected families. Thankfully, quite a few of them were in their recently restored homes and businesses…the disaster in {Samarco} Brazil is terrible. No matter how you examine what caused an accident, we were part-owners of that and we have, I think, a moral obligation to make good the environmental damage and the humanitarian disaster that has resulted from that. In order to do that, I think we have to stick around for a while. ”