BHP Group Ltd. Q2 FY2020 earnings call

Management Statement and Operational Highlights

• Purpose and Vision: Mike Henry emphasized BHP's purpose, focus on improvement, and social value, aiming to be the industry's best operator (safer, lower cost, more reliable, more productive).
• Financial Results: Underlying EBITDA up 15% to USD 12 billion, margins expanded to 56%, return on capital employed increased to 19%. Free cash flow was USD 3.7 billion. Interim dividend of USD 0.65 per share announced.
• Operational Performance: Maintained production and reduced unit cost despite challenges. Progressed major projects like Spence Growth Option and Atlantis Phase 3, expecting first production in 12 months.
• Safety: Total recordable injury frequency reduced by 2%, but high potential injuries rose 5% in Minerals Americas. Focus on safety as top priority.
• Sustainability: On track to meet 2022 GHG emissions targets; signed contracts for 100% renewable power at Escondida and Spence.

Segment Performance

• Western Australian Iron Ore: Generated EBITDA of $7 billion, with a margin of 69%. Lowered C1 unit costs to $12.75. Revenue contribution significant due to strong performance.
• Copper: EBITDA increased by 22% to $2.4 billion, driven by a 7% increase in production. Unit costs better than full year guidance. Contributed a notable portion to overall revenue.
• Met coal: Contributed EBITDA of around $1 billion at a margin of 37%, impacted by price drop and major planned wash plant maintenance, but stronger second half expected.
• Petroleum: Achieved EBITDA of $1.6 billion at a margin of 65%, affected by lower realized prices and natural field decline, but reduced unit costs by 14%.

Guidance

• Capital Expenditure: CapEx guidance unchanged at below $8 billion for the full year.
• Dividend: Announced interim dividend of USD 0.65 per share, second highest ever. Confident in achieving 2020 financial year guidance despite near-term uncertainties like coronavirus.

Risks

• Key uncertainties include coronavirus outbreak, debate on Chilean constitution, trade policy, and geopolitics.
• Potential demand loss on oil and deferral in steel and copper; supply disruptions in iron ore, met coal, and oil.

Question and Answer

• Q: Comments on divesting thermal coal assets and outlook for petroleum and met coal A: Thermal coal is a small part of the portfolio, with downside scenarios considered; petroleum and met coal fit strong industry fundamentals with steep cost curves and good asset capabilities.
• Q: Evolution of Operations Services business model A: Focus on increasing permanent BHP employees, better leadership spans (8-15 vs. 25-40), and skills building to improve productivity and reduce costs.
• Q: Cost side of renewables at Escondida and future CapEx for Escondida A: Renewables are cost beneficial with lower power prices; Escondida has been recapitalized, with no big new capital soon but grade profile will be managed through ongoing efforts.
• Q: Scarborough FID and strip ratio in Queensland Coal A: Scarborough contracting strategy is in progress; strip ratio in Queensland Coal will decline gradually, with autonomous trucks at Goonyella Riverside to be deployed.
• Q: Petroleum division demerger and Jansen Project A: No plans for demerger of the petroleum division; Jansen Project will proceed if it meets capital allocation framework and investment case criteria.
• Q: Future-facing commodities and DLC A: Future-facing commodities must move the needle, focusing on copper, nickel, potash; DLC business case not stacking up in the near term due to impediments.
• Q: Chinese iron ore demand and Escondida costs A: Impact of coronavirus on Chinese demand depends on containment; Escondida costs driven by factors like deferred stripping, byproducts, and grade decline.
• Q: Impact of coronavirus on BHP and Hunter Valley EBITDA A: No major impact seen yet; Hunter Valley EBITDA impacted by lower prices, strip ratio, and fires, but productivity is improving.
• Q: WA Iron Ore car dumpers and Trinidad and Tobago gas A: Port reliability program for WA Iron Ore is progressing; positive view on long-run gas in Trinidad and Tobago despite spot price weakness, with contracting strategy to mitigate downside risk.