BHP Billiton (BHP) FY 2016 Earnings Call

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. ”

BHP (BHP) CEO Andrew MacKenzie

BHP (BHP) CEO Andrew MacKenzie says it will be another 10 years before the iron ore market comes into balance 

“There are some commodities, like oil and copper, where there is a natural decline because pressure drops off, grade drops off.  One of the markets that will take longest to come back into balance is the iron ore market.  The reality is we’ve settled down now to a price that we would say is more realistic on the basis of fundamentals of supply and demand.  We’ve had such a long boom. To walk that through, in my view, may take another 10 years.”

So you’ve got to keep your cost structure lean 

“Consolidation, particularly of the high-cost producers, it will carry on much longer than you think they humanly should.  In the meantime, you’ve got to be at the bottom of the cost curve, you’ve got to be doing everything I’ve said, running things in the most productive way possible, or your hedge funds won’t want to invest in us.”

 

 

Source: Bloomberg Interview http://www.bloomberg.com/news/articles/2016-06-21/bhp-chief-says-iron-will-take-longer-to-balance-than-oil-copper

BHP Billiton FY 2Q16 Earnings Call Notes

Andrew Mackenzie

China’s transition from an investment heavy to services economy has been faster than anticipated

” China’s economic growth is slowing as it matures. And although, its headline GDP growth is consistent with our expectations, its composition has changed more quickly than most anticipated. We see signs of a faster transition from an investment and heavy industry-wide economy to one led by services. And the strength of the service sector creates employment, which allows acceleration of important structural reforms including the State-Owned Enterprises. But in the near-term, as industrial over capacity is reduced, this will further constraint demand for commodities and these near-term changes have been amplified by disruption to the oil markets and broader global uncertainty.”

We see significant upside especially in oil and copper

“the bottom chart here illustrates the significant upside, we see particularly in oil and copper longer term. Because although these markets are currently well supplied, we expect demand to continue to grow, while well decline in oil and grade reductions in copper erode supply.”

An environment where buy is better than build

“this is an environment where in many respects buy rather than build is more attractive and I think doubley [ph] so, one because buy is potentially cheap and Peter referred to that a little bit and saying it’s not quite a war chest, but who knows what might come under distress in this sort of environment. ”

Long term price assumptions haven’t changed much

“We update our price estimates every year. And sometimes, when we feel things have moved. We might do a little bit more frequently, as we did recently to look at the valuation of our petroleum business. But I would say that, our long-term prices haven’t changed much, with the exception of oil. And I talked about that earlier. Just trying to understand the transition period, that is more difficult.”

As we get out a year or two we start to see markets coming back

“What I’m trying to say, we as a company I think are reasonably sure that we’re in a for period of sustained lower prices with volatility. Potentially for some years and we have built the company that’s able to handle that. but as we go through some of our commodities and we’ll see how that turns out, we do as we get out of year or two, start to see markets coming back into balance domestic gas then oil, then copper and longer term, potentially potash.”

BHP Billiton 1H14 Earnings Call Notes

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. “

BHP Billiton 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“there has been a sharp decline of major mining equipment — sales of major mining equipment, which is one of the best indicators of future supply. In the medium term, this will inevitably lead to lower growth in supply and to more balanced markets. And the companies that will prosper are those able to invest prudently throughout the cycle.”

“And the expansion of Jimblebar to 55 million tonnes, together with broader capital efficient growth, will deliver annual capacity between 260 million and 270 million tonnes. With our major-enabling projects in iron ore now largely complete, we are focused on maximizing throughput and utilization to extract significantly more value.”

“Okay. Well, we would put manganese along with aluminum and nickel because it’s predominantly a processing business as opposed to a straight or pure geological business”

“So in terms of steel and iron ore in China, Glyn, the steel production has been running above where we thought it would be running at this time of year. We think we understand why, and it comes down to strong investment and strong construction”

“We think that in our long-run view around China, China steel demand and iron ore demand hasn’t changed nor has our view around long-run fundamentals for iron ore. Now in terms of the short-run outlook for iron ore, I can probably couch it best by referencing back to meetings directly with customers. And when I was there a few weeks ago, there was a quite confidence on the part of customers. So what we’re seeing there right now is an indication of relative health in the Chinese economy and much less concern around the potential for hard landing now than there would have been a few months ago.”

[analyst question] “Can you tell me how much that relates to the Permian and when we’re likely to see more information about the potential of the Permian given that a lot of the peer group in the Permian, there seems to be a fair bit of excitement about the potential in the drilling and the activity there in the U.S. at the moment?”

[BHP response] “I don’t have that number. I mean, I’ll ask our Investor Relations team to figure out whether that’s something we’d like to share. It’s not a big part of our capital investment. We’re taking things slowly and deliberately with the Permian. It’s a very large area with a very thick, many hundreds of meters, I think almost 1 kilometer in places of prospective shale. There’s a lot of variation, and I think we’re all — all the operators are figuring out, which are the more prospective areas given current prices, current understanding and is to focus. And so we’re playing the long game in the Permian.”