BHP Group Limited (NYSE:BHP) BofA Securities Global Metals, Mining & Steel Conference May 16, 2023 3:00 AM ET

Company Participants

Mike Henry - CEO

Conference Call Participants

Jason Fairclough - Bank of America Securities

Jason Fairclough

Okay. So I'm very pleased to introduce our next company, BHP is the largest mining company in the world. One of the largest iron ore miners, one of the world's largest copper miners, largest steelmaking coal producer and also an emergent producer of potash in the next few years.

Presenting for BHP, we have Mike Henry, I think when I first met Mike, it was nearly 20 years ago, and he was the Head of Marketing for BHP. Now he's the CEO, so it's great to welcome you here. Mike has chosen a presentation format, and then I'll have a couple of questions at the end as well.

So Mike, over to you. Look forward to your remarks.

Mike Henry

Thanks very much, Jason, and good morning, everyone. It's great to be here in Barcelona and obviously to see a mix of both new and familiar faces in the audience. I'll be catching up with a number of you one-on-one in the coming days. And Jason, thank you to you and the Bank of America for once again hosting the conference.

Today, I'm going to be talking about the opportunities we at BHP are pursuing to grow value for shareholders and why we believe our portfolio, focus on operational excellence and approach to social value present an attractive and differentiated investment proposition.

Before I talk about any of that, though, I really do need to acknowledge the tragic fatality that occurred at Olympic Dam at the end of April. And that follows on the heels of a fatality earlier this year at Port Hedland. And as far as we've come in recent years, we've now had two colleagues who haven't made at home at the end of shift to family and friends. And that really does tell us that we're not yet getting the most important basic right.

So we need to shift gears yet again. We're going to be determining what went wrong, and we'll share our learnings widely. We'll also be seeking to learn from others as to how they're handling safety in our efforts to become safer. The macroeconomic drivers of growth in our sector and our business remain favorable. In the near term, as we've been saying for some time now, we see China being a stabilizing factor in global economic growth and commodities demand. China, coupled with India is expected to provide roughly half of all global economic growth this year.

Others are progressively arriving the same view on China with the consensus forecast for 2023 having been revised upwards in recent months. We do expect the second half of the calendar year is going to be better than the first, especially for construction and therefore, the steel value chain. I recently visited China for the first time post the pandemic and I left feeling confident, both because of an upturn in the leading indicators of resource intensive activity, and simply because of the conversations I had there and the level of confidence that I was able to sense from our partners and others in China. So that's the near term.

But the long term also remains very positive. The global economy is expected to be 2.5x larger by 2050, with the biggest contributions coming from China, where the economy is expected to double in size and India where a fourfold expansion is anticipated. And in capital investment, which is the most resource-intensive segment of the economy, China is expected to provide the most significant change, obviously coming off a large base, with India also expected to grow.

Our work to date on the potential physical impacts of climate change across the world also implies that the global economy could become even more capital intensive going forward with increased capital stock turnover and more defensive investments to mitigate climate risk. In addition to these investments in adaptation, significant infrastructure will also be required to facilitate decarbonization, and I'm going to be returning to this theme in a moment.

By 2050, the global population is expected to increase by around 25% while the urban population is expected to go from 4.4 billion today to 6.6 billion, and that's an extra 2.2 billion people who are all going to be enjoying a significant uplift in incomes, in their consumption patterns and diet while bringing additional demands for housing, commercial floor space, transport and logistics infrastructure, power and utilities. And these forces together will drive increased demand for many of the products we produce.

The mega trend of decarbonization is likely to amplify that demand and combined with the challenges of bringing on new supply, this indicates a positive outlook for the commodities that we're in. And this is what I want to spend some time on now.

Through BHP's efforts of recent years, we now have a portfolio comprised of large assets in commodities, which have upside in a faster decarbonizing world. That's the BHP portfolio. In our 1.5 degree scenario, we expect that the world will need almost twice as much steel, twice as much mine copper, twice as much potash fertilizer and 4x as much primary nickel over the next 30 years as the past 30.

Other scenarios from organizations like the UN Intergovernmental Panel on Climate Change, the International Energy Agency and a number of others, all confirm that a significant uplift in the supply of metals is going to be needed for the -- for a successful energy transition. Now the questions are, where is the supply going to come from? Will it arrive on time and what's it going to cost?

We take copper as an example. As we sit here today, there is simply not enough capital being deployed in the industry to meet expected demand. Based on our estimates of a plausible upside case of a 1.5 degree scenario, the industry could require around $0.25 trillion in growth capital by the end of the decade. $250 billion over the next six or seven years. And yet currently committed projects over this period only amount to around $40 billion or $50 billion, so a significant shortfall.

Ultimately, higher prices will induce further investment and more supply, but this takes time. Governments have it within their control, the levers needed to accelerate the pace with which fresh supply is brought on and to ensure it's as economic as possible. They can make permitting processes clearer, faster and more certain. Importantly, they must also maintain stable fiscal settings. Otherwise, investment risk increases, required returns increase, projects take longer to come on, if at all, and supply becomes more costly.

So beyond this, another challenge the industry has is the lack of economic discoveries. The scale of new copper discoveries has decreased since the 1990s, which was the heyday of the South American copper belt. Many of the major operating assets that form the backbone of supply today were discovered 20, 30, 40 years ago. They're now mature and facing grade decline headwinds such that a considerable amount of capital is going to be -- need to be deployed in the coming decade merely to stand still.

And whilst discovery of new copper mineralization does continue, discovery of large economic deposits is becoming rare with new greenfield discoveries tending to be deeper and more complex. Beyond this, some of the most technically attractive deposits. So with higher grade closer to surface, are increasingly skewed towards difficult operating jurisdictions.

Greenfield projects are there accordingly becoming some combination of harder to come by, more technically challenging, more expensive, riskier all of these leading to longer development time lines. Now projects around existing operations, so brownfield expansions or proximate new developments can also be difficult to develop because of permitting challenges, local stakeholder opposition and in today's inflationary and labor market climate, higher cost.

The industry has seen project after project after project run over on time and over on budget in recent years. While operational disruptions have roughly doubled from where they were in the late 2010s. BHP's strategy is designed to allow it to win against the backdrop of exactly these sorts of challenges. Our portfolio of leading base employees is unique, paired with our operating system and our capital allocation framework, this represents competitive advantage.

Our first advantage is our incumbent position in large resource base. We have the world's largest endowment of copper including significant undeveloped resource at Escondida. And this is at around the highest average grade of the competitor group. We have the world's second largest nickel sulfide resource, and we're developing our large-scale potash resource in Saskatchewan in Canada. This is all in addition to our significant and world-class iron ore and higher quality metallurgical coal positions.

I should note that our first focus for growth is to enhance productivity from our existing assets. This is by far and away the largest value opportunity, and it's the one that's most within our control. At the same time, we are looking for new agile and innovative ways to grow our resource base and production.

Our metals exploration team has recently had technical success discovering new copper mineralization at Oak Dam in Australia and more recently and also at in Arizona, United States. In terms of greenfield exploration, we continue to search in the most prospective geological environments globally, leveraging innovation to give us new insights, and our Explorer and Ventures teams are building partnerships with companies across a range of jurisdictions and technologies. So lots happening.

Now at BHP, we're already a significant producer in many -- of many of the commodities we mine. And whilst we're always looking for ways to grow our production, we're not focused on growth at any cost. We will only pursue growth where we believe we can deliver long-term value for shareholders. We recently completed the acquisition of OZ Minerals and have accelerated studies on a number of brownfield projects across our efforts in a better -- in an effort to better understand the options that we have available to us.

Looking out to 2030, we do have a number of organic options to add meaningful volume growth even after factoring in mine depletion and grade decline. Beyond these near-term opportunities, we have a substantial pipeline of long-term options we're actively considering. And these could provide even greater growth and upside. We also have a proven track record of delivering projects in recent times, and that's on time and on budget. But I do want to close this part by saying that we are very focused on productivity. This is our largest opportunity to grow value and our BHP operating system is key to that.

Now two of the near-term growth options were -- specific growth options we're currently advancing are in iron ore and potash. Our industry-leading Western Australian iron ore business sets us apart as the lowest cost iron ore producer globally. This business -- just for your reference, this business was designed with an initial capacity of 240 million tonnes per annum. It's currently producing at around 280 million to 290 million tonnes per annum. And that's all been through a focus on productivity and incremental debottlenecking of the business.

We're now looking at initiatives to grow our production to 300 million tonnes per annum over the medium term. And this low capital intensity volume increase involves further debottlenecking of our port and rail systems, the rollout of autonomous haulage trucks and ongoing productivity enhancements.

Beyond that, we're studying options to grow our annual production to 330 million tonnes as well. Some of the alternatives that we're assessing are a further debottlenecking of our port and rail systems and adding a six card number.

Now these are studies that are currently underway. They will be concluded in 2025. They will have to compete against other options in the BHP portfolio for capital and growth. We'll make a decision at that time as to whether or not we pull the trigger and elect to proceed. And then potash. We are really excited about the pipeline of growth projects that we have ahead of ourselves in potash. The long-term fundamentals for the market are compelling and have improved further, in fact, since we sanctioned Jansen Stage 1.

Now Jansen Stage 1, the first stage of Jansen remains on track and on budget. And in fact, we've been able to accelerate first production from 2027 into late 2026. We've recently started blasting and excavation works at the bottom of the shaft, and we're looking forward to a productive summer construction season with a continued focus on civil and mechanical construction activities on the surface and underground.

In parallel, we've accelerated studies on Jansen Stage 2 and expect to have the option to trigger an investment decision on that second stage within the 2024 financial year. All of the major permits that we need are in place for Stage 2, and we have the necessary port capacity. And while our studies are not yet complete, we now expect capital intensity for Stage 2 of between USD 1,000 to USD 1,200 per tonne, which is lower than Stage 1.

Should we proceed, Stage 2 will add an additional 4 million tonnes per annum of potash capacity with possible first production estimated to be in the 2029 financial year. And that's around the time that Jansen Stage 1 will be finishing its ramp-up. So we'd see Stage 1 ramp up starting in 2026 through 2029, and then we'd be able to roll Stage 2 on to the back of that.

On May 2, we successfully completed the acquisition of OZ Minerals, which brings the opportunity to unlock synergies and further grow copper and nickel production. Combining Olympic Dam, Carrapateena, Prominent Hill and Oak Dam will create a Tier 1 copper province in South Australia. And as we've demonstrated at Western Australian iron ore and BMA, having operations in close proximity to each other brings substantial benefits, including the leveraging of shared infrastructure and relationships towards better productivity and long-term growth.

Our focus is on building scale and optionality across this new province. And while OZ directly adds about 120,000 tonnes of copper production, now it also brings further copper and nickel growth in both the near and longer term. Studies are underway to evaluate the next steps for Olympic Dam as we integrate the OZ assets and continue our exploration program at Oak Dam. And we will share further details on this in due course on what the growth in South Australia could look like.

Conceptually, though, our aspiration is for our South Australian copper assets to grow over time to 500,000 tonnes per annum of copper cathode or more. Now of course, our ability to grow is supported by being a reliable operator, which gives us higher margins and earns us the trust of shareholders.

We've demonstrated this over the last few years in the face of COVID and other disruptions, our production guidance has been markedly better than the competition. We have also done better than most of our competitors on cost guidance as well.

It was really pleasing to see our approach to operational excellence, recognized recently by the Shingo Institute. And some of you may be familiar with the Shingo Institute, but it's an organization which helps companies achieve operational excellence through the principles of the Shingo model, cultural enablers, continuous improvement and enterprise alignment. And the cathodes team at Escondida was awarded the prestigious Shingo Prize for operational excellence.

In addition to being a very good operator, we must also be good at building -- designing and delivering major capital projects. And we've demonstrated our projects capability with our recent success in Australia at South Flank, and in Chile, a dispensed growth option, both of which were delivered on time and on budget in spite of the challenges presented by COVID.

Learnings from these have positioned us well to deliver Jansen and on our future growth. In fact, we have the individual who led the South Flank project also building Jansen for us and when we've been able to replicate learnings from one to the other.

So in short, we continue to execute the strategy that we've laid out. We're doing what we said we would do. We are delivering consistent, strong performance and attractive returns. We're increasingly well positioned for the megatrends of decarbonization, urbanization and population growth and the future for us really couldn't be more exciting. We have a portfolio of world-class assets.

They're low cost with options to expand. We operate them very well, and we're delivering well in a disciplined way on cost and capital while at the same time, continuing to deliver on social value. The commodities we're focused on are vital to the world's future. And governments around the world are finally increasingly alive to their essential nature and are working to speed up approvals processes, provide fiscal certainty, improve competitiveness and attract investments from the right like-minded businesses like BHP.

Our focus not only on what we do, but how we do it is making BHP a preferred partner to governments and other stakeholders. We aim to manage our business responsibly and more sustainably and in a way that creates enduring benefit for all of our partners and stakeholders, of course, shareholders front and center in that. We are strongly positioned to deliver value and returns both now and well into the future. Thank you.

Question-and-Answer Session

Q - Jason Fairclough

Okay. Thanks for those opening comments, Mike. I think there's a killer to -- a killer slide or two in there. So -- we'll be -- I should borrow those. Look, Mike, since you assumed the role of CEO, you really hit the ground running, right? So you've collapsed the DLC. You've exited oil, you're selling down some lower quality oil -- coal assets. You bid for OZ Minerals. I guess the question is, to what extent are you just executing to a plan that you came up with years ago versus just reacting to the market and the opportunities that you see?

Mike Henry

Right. I hope I'm not disappointing you Jason, but no, it's not a random walk. There actually is a method to the madness. And there's been a -- and in fact, if we go back to some of what I attempted to, when I first became CEO back in early 2020, just before COVID hit, everything is very well aligned with that of course.

So the plan is very clear. I think it's a pretty simple plan in terms of the focus on operational excellence, social value creation, reweighting the portfolio over time to ensure that we've got maximum leverage to the upside and the faster decarbonizing world where we're seeing continued global economic growth and rising of living standards. So everything is in line with that.

However, of course, we need to be cognizant of what's happening in the world around us and be quite deliberate about when we choose to act on certain aspects of the strategy. And you've certainly seen that with the OZ Minerals transaction with a few of the other things that we've done.

Jason Fairclough

Okay. So our conference theme this year is the pivot to growth. You've got your acquisition of OZ, you've got your commitments to delivering Jansen Stage 1, bringing forward Phase 2. But I guess what I was struggling with BHP is that it's so big. It's big. You've got these giant assets to just crank out the cash and what a thing to have. But ultimately, they do create this base effect that makes it difficult to deliver meaningful growth relative to your size. So I guess the question is, do the cash cow businesses do they really go with the growth businesses?

Mike Henry

So the -- maybe if I just take a step back, Jason, I think that people would have said that about BHP a decade ago, two decades ago, three decades ago. And yet if you look at the value that we've generated for shareholders over that period of time, I think it's something that certainly within the company we can be pretty proud of.

And so yes, I acknowledge the fact that we're a big company, but being a big company also means that we have big resources, which provide you a lot of optionality to grow and they also provide us with the -- I called out in my presentation, when we talk about growth inside the company, we always come back to the first and most important thing that we need to focus on is running the business that we already have super well and improving productivity.

If you think about our cost base, circa, let's say, a 10% sustained improvement in cost over time, that alone will add $15 billion to $20 billion of value. And so there's all these other things that, of course, we're focused on doing -- looking at where we can create more by way of greenfield or brownfield expansion opportunities to grow the underlying base, but that has to come in tandem with ensuring that we're getting maximum value for the capital that we already have deployed in the business.

And with this big business where we've got these base in place, you've got something like iron ore, which has many similarities to metallurgical coal with some similarities to the big bulk or the kind of Escondida and Spence, for example, where we're running large fleets of trucks moving a lot of material.

Being a big business, we can learn in one of those businesses and replicate quickly into others, which allows us to unlock that big productivity benefit or value that I spoke to. So we're doing both focus on productivity. You can see that of the resources that we have, we've got more options that we can develop for growth. And we're not standing still in terms of seeking to bring into the portfolio more resources through greenfields exploration.

We've shown some technical success on that front, through early-stage entries, so becoming a little more commercially agile in terms of gaining toehold positions and new resources and then in the case of OZ Minerals, an acquisition where we believe that through the acquisition, we can create more value than would have occurred with just as a stand-alone company.

Now on the final part of your question around the cash cows makes sense with the rest of the business, we believe they do. It's a discipline that we hold ourselves to a regularly testing that. But again, once we term them cash cows, it's not just set and forget, there's still a ton of value to be unlocked out of iron ore, a lot of value to be unlocked up on the metallurgic coal business even as we grow further in copper, nickel and potash.

Jason Fairclough

We've got time for a couple of questions on the floor. Anybody wants to ask one? All right. People are shy. Another one for me. I mean you alluded to this a little bit in your presentation, Mike. The world needs more greenfield and brownfield investments. And yet at the moment, I think we have all this focus on M&A, right? How do we think about buy versus build? And I guess, more generally, if all mining companies are doing is buying each other, are we actually sort of delivering the metal that the world needs?

Mike Henry

Well, great call out. And I gave the one example of copper. But of course, copper is one of many. There are some freakishly large numbers in terms of the capital required to be invested in this industry over the coming decade, over the coming two decades. And so now if I bring it back to what are the implications for us. One, we obviously have a constructive outlook on many of the -- on the commodities that we've chosen to be in.

But we always have to test where is BHP going to add incremental value for shareholders and any opportunities that we pursue have to be in the commodities we've chosen to participate in. They have to be the sort of assets that we've elected to hold this BHP large, long-life, low-cost. And we have to see that through the capital that we invest, be it an acquisition or a project that we're creating value for shareholders.

More often than not, that's going to drive us towards the build be it brownfield or greenfield, but there will be discrete acquisition opportunities where through synergies or through our better ability to unlock growth in that portfolio where we can add value. What we're not going to do is simply go out and buy a stream of copper or buy a stream of nickel or by a stream of potash because all we're doing is calling the market.

And that is the thing that's going to be leased in our control at the end of the day. Of course, we need to have a view on the market. But I'll always feel safer. We'll always feel safer in addition to trying to get the timing right, there's something intrinsic to bringing that business into our business that allows us to unlock more value than if they had remained standalone.

Jason Fairclough

Understood. Give you guys one more chance. Any questions on the floor? There's one there, please.

Unidentified Analyst

Lithium is not part of your portfolio at the moment. What are your thoughts on that?

Mike Henry

Yes. So we've elected not to participate in lithium. And there's probably two strands to the response. So the fundamental -- as we go about testing which commodities we want to be in, we want to ensure that the industry is large enough to make it meaningful for BHP. And I think in the case of lithium, it is or it will ultimately be.

Two, we have to believe that the shape of the cost curve long term is steep enough such that if we have the right assets, we can generate very high margins eye at the low end of the cost curve. The assets have to be individually large and aligned with our capability set. And our belief in lithium is that over the long term, the cost curve is more likely to flatten out, therefore, not give us the margin potential that we'd normally be looking for.

The second strength of the response is we have to be focused. If there's one thing that we've learned at BHP over time is that if we allow our focus to get too dispersed, we do a lot of things not well. And so we made deliberate choices about which commodities we want to be in, and those are -- in terms of the future-facing commodities, copper, nickel and potash whilst continuing to grow value in our iron ore and metallurgy coal businesses.

Jason Fairclough

Thanks. Any other questions from the floor? Got one right here at the front.

Unidentified Analyst

Francisco [indiscernible] with Bank of America. One question on dividends. So industry is delivering pretty large dividends. But at the same time, we've heard from Jason in the morning that there's a huge need for investment. Does it make sense to keep paying these high dividends.

We think about dividend growth medium term. And is this an industry where shifting to focus a little bit to use some of this capital for growth as opposed to paying it out to shareholders?

Mike Henry

And so I think the reality is that there is a period of time where through the players right across the sector having not done a good job with capital allocation, not having been demonstrated a track record of reliable operations that we all needed to rebuild.

Well, one, we needed to focus the business so that we've got the basics right, and we need to build -- rebuild trust with shareholders. And as a result of that, over a period, you've seen probably lower capital investment, then we'll need -- the world will need to see over the medium to long term if the world has continued to grow and to decarbonize.

Having said that, at the end of the day, it's -- I don't think it's one or the other. And we need to be very cognizant of the interest of shareholders as we seek to grow value. Now the better job that we do in being productive, which will improve underlying project economics. And the more that we're able to advance work in developing options off the base of the current portfolio, the more optionality we'll then have as to where we deploy that capital, too.

So it's all like we've said, we've taken a deliberate decision not to invest in growth and just return all cash to shareholders, at least not as BHP. The reality is that we haven't had the shovel-ready projects to bring forward the more that we bring those forward. And if -- as we maintain the trust of shareholders, if we've got great projects with good returns, idle that we'll have the backing of shareholders, but at the end of the day, it's going to be a balance.

And we've tried to backstop that balance at BHP by saying that we have a 50% minimum payout ratio, and that states. So that's -- I think that's a really good discipline. It instills a competition for capital internally and having personally lived through a period where we were -- BHP spending double or triple what we're currently spending.

It just got -- it comes back to the point I made in response to the earlier question about focus, if we try to do too much at once, we do a lot of it badly, whereas by constraining ourselves 50% minimum payout ratio, it forces the competition from capital, which ensures that each of the individual projects is better and higher returning than if we didn't put that constraint on ourselves.

Jason Fairclough

Okay. Thanks a lot for that, Mike.

Mike Henry

Jason, thank you.

Jason Fairclough

Yes. And folks, we're out of time. So could you join with me please in thanking Mike for his presentation.