BHP Group Limited (BHP) on Q4 2022 Results - Earnings Call Transcript

Mike Henry Hello, and thank you for joining us today to hear about BHP's results for the 2022 financial year. I'm joined by our Chief Financial Officer, David Lamont, who will take us through the financial details shortly.First, though, I'd like to mention some highlights from the year. BHP delivered a record set of results for the year, continuing our track record of strong performance. Our assets overcame multiple challenges to deliver solid operational performance demonstrating the resilience of our business. Most importantly, we had another fatality for a year. And we did what we said we would do making significant progress on reshaping our portfolio to deliver value now and into the future. We merged our Petroleum business with Woodside, capturing value and providing choice for shareholders. We completed the sales of our interest in Cerrejon and BMC, further focusing our coal portfolio on higher-quality coals for steelmaking.We unified our corporate structure, making us simpler and more agile. We approved the Jansen Stage 1 potash project in Canada, giving us a pipeline of high-quality growth in what is an exciting future-facing commodity. We're accelerating studies for growth, including Jansen Stage 2 and Western Australian Iron Ore to 330 million tonnes per annum. And we continue to take action on climate.We have a differentiated proven approach to growing value. This is reflected in the quality of our portfolio that saw a rise in earnings in the second half of the financial year, unlike many others in the sector as well as our approach to social value and how we bring together our people and culture, systems and processes and ways of working.We remain unwavering in our efforts to improve safety and protect our people, and it is thanks to that clear prioritization and its application by our workforce and leaders that we have now gone more than 3.5 years without a fatality. We are also experiencing fewer high-potential injuries, those that could cause significant injury or fatality, which is a leading indicator of our safety performance. Our strong focus on safety and health includes our work towards the elimination of sexual harassment, racism and bullying from BHP. We have continued to take strong action, making upgrades to security and accommodation villages, enhancing training programs including for both leaders and bystanders, and improving support services.I want to take this opportunity to thank our people and our stakeholders for their ongoing feedback and recommendations. Their insights continue to inform our approach. We know we have more work to do, and we are determined to make continued progress and ensure BHP is safe and inclusive for everyone.I mentioned the challenging circumstances of the year. To be specific, we continue to experience the disruption and uncertainty of the pandemic. We saw the Ukraine crisis exacerbate global supply chain pressures, and we experienced inflation impacts across our portfolio. Managing uncertainty and risk is a core part of our business, and our people and approach have allowed us to address these additional challenges in a disciplined way. This, along with our focus on operational excellence, the quality of our assets and our leading approach to social value means that we remain better positioned to protect and consistently deliver strong results through the cycle.We've delivered well against production and unit cost guidance. We achieved record shipments from our Iron Ore business in Western Australia for the third year running, and we remain the world's lowest cost major producer.In copper, Escondida in Chile had record material mine and near record concentrator throughput while Olympic Dam in South Australia performed strongly in the fourth quarter after planned smelter maintenance.I'm very proud of the way people across BHP have united to deliver such a strong safety and operational performance in the face of the challenges in the external environment. Our sector-leading performance confirms my belief that our people and the way we work are a defining feature of our business and a substantial competitive advantage. This strong and reliable performance enabled us to capture the benefits of high commodity prices and deliver record underlying EBITDA of almost $41 billion. This has allowed us to return a record $16.4 billion in ordinary dividends to shareholders over the past 12 months.Now these are important figures, but they are only one part of our overall contribution to the lives and livelihoods of people around the world through employment, through supplier relationships, through community support and through royalties and taxation. The scale of our contribution supports economies, power small and large businesses and helps to fund services and infrastructure in the nations where we operate.During the year, BHP's total economic contribution was $78 billion, which includes a record $17.3 billion paid to governments, up over 50% year-on-year and more than our dividends to shareholders.BHP continues to deliver social value where we operate. Creating social value isn't a byproduct of our business. It's a core aim, planning and operating in a way that delivers long-term sustainable value and opportunity for BHP, our shareholders and the broader community. We see it in our commitment to the environment. We've lowered our operational greenhouse gas emissions by 24% over the past 2 years, mostly through increased uptake of renewable energy. And we've built on our research and development partnerships in steelmaking and maritime. This works towards the goals and targets detailed in our climate transition action plan, which received strong support from shareholders at our last AGM. And we've reduced our reliance on freshwater. Through efficiency initiatives and desalinization, freshwater withdrawals are down almost 30% since 2017, nearly double our target.We also continue to make strong progress on making our teams more inclusive and more diverse because we know these teams are stronger performing. Our workforce is now over 32% female, and that number continues to rise.I'll hand over to David now to detail our financial results.David Lamont Thanks, Mike. This was a very strong result, even more so given the backdrop of the challenging operating environment.Excluding Petroleum, underlying EBITDA was up 16% to $40.6 billion and at a record margin of 65%. After an effective tax rate, including royalties of 38.5%, underlying attributable profit was $21.3 billion. And underlying earnings per share increased by 25% to a record $0.0421 per share. Our total attributable profit was $30.9 billion, including petroleum and a net exceptional gain of $7.1 billion after tax, comprising a gain on the merger of our Petroleum business with Woodside of $8.2 billion, a gain on the disposal of BMC of $840 million, partly offset by a charge for the Samarco dam failure of $1.1 billion plus unification-related transaction costs and an impairment of U.S. deferred tax assets of $851 million.To ensure shareholders again benefited from our strong performance, we've announced a final dividend of $0.0175 per share, taking our full year ordinary dividend to a record $0.0325 per share.EBITDA benefited from higher prices for most of our core commodities. Metallurgical and energy coal prices were more than triple that of last year. Copper and nickel prices were up by 9% and 43%, respectively. These were partly offset by lower, although still very healthy iron ore prices.The favorable impacts of the weaker Australian dollar and Chilean peso against the U.S. dollar helped to offset general inflation and commodity input cost pressures. It's worth noting that the transition towards fully renewable power at Escondida and Spence generated more than $100 million in cost savings this year.On the controllable side of the ledger, volumes were lower, driven by the planned smelter maintenance at Olympic Dam, lower copper grade at Escondida, significant weather impacts at BMA and the impacts of COVID across the group, partly offsetting by ongoing strong operating performance at Western Australian Iron Ore and the ramp-up of the new concentrator at Spence.On the cost front, we continue to perform well. Controllable cash costs increased by just $540 million, with more than 50% of this associated with COVID, which were treated as exceptional in the prior year. The $1.7 billion increase from ceased and sold operations primarily reflects the strong performance of BMC until the completion of the sale.These results continue our track record of strong and consistent performance. We have again delivered margins above our peer group, giving us greater through the cycle resilience and producing a high baseline of cash flows. We've delivered net operating cash flows of more than $15 billion again this year, extending this track record to all but one of the past 13 years. We've achieved this due to the quality of our portfolio and our focus on operational excellence and cost discipline, despite market and operating conditions varying greatly over these years. This stability is a hallmark for us with few businesses in our sector having delivered this consistently.Across the portfolio, our underlying operations performed well. We delivered well against the production and unit cost guidance despite the COVID and inflationary impacts. And all of our segments, except Nickel West, delivered EBITDA margins in excess of 50%.Western Australian Iron Ore continued to perform strongly with EBITDA of $21.7 billion at a 71% margin, underpinned by record sales volumes of 284 million tonnes. The ramp-up of South Flank to full capacity is ahead of schedule with, on average, a rate of 67 million tonnes delivered in the June quarter.In copper, the increase in EBITDA to $8.6 billion was driven by higher realized prices, partly offset by lower volumes and inflation. Despite significant wet weather impacts and labor constraints, BMA achieved a $5.8 billion increase in EBITDA and a 62% margin with average realized prices more than 3x the prior period.And New South Wales Energy Coal generated record EBITDA of almost $2 billion as it increased its proportion of washed coals to capture record price premiums. Higher quality coals now make up almost 90% of sales compared to approximately 60% last year. So we continue to perform well overall, both operationally and on the cost front. That said, we're acutely aware that the lag effects of inflation and labor availability are challenges we continue to deal with. While we anticipate higher unit costs across our major assets over the next 12 months, we expect to maintain our advantaged cost position, aided by our world-class assets, differentiated approach to operational excellence and continued relentless focus on cost discipline.Now turning to capital expenditure. As Mike spoke to, we are accelerating growth. CapEx is expected to increase over the medium term as we said it would, and about 60% of that will go towards future-facing commodities namely copper, nickel and potash. One of the great strengths of BHP is our ability to invest through the cycle.Over the next 2 years, the majority of funds will be allocated to maintenance and improvement capital. Maintenance capital will increase by around $1 billion by 2024 as we invest to continue our reliable operational performance. This includes over $500 million of operational decarbonization capital. Improvement capital includes projects that enable improved productivity, quality facilities and organizational culture.In terms of major projects, spend at Jansen will increase near term to approximately $740 million in 2023. Other projects across the group include capital-efficient debottlenecking works in iron ore, plant modifications at Spence and studies on options at Escondida.As we look to the medium term, the increase in spend relates to future-facing commodities. This includes continued spend on Jansen Stage 1 and potentially Stage 2, and growth options in copper at Escondida, Spence, Olympic Dam as well as in Nickel. Mike will touch more on these projects we are looking to study and looking to accelerate later on.We will also spend on our steelmaking commodities, which remain important for the energy transition. Getting Western Australian Iron Ore to 300-plus million tonnes per annum in the medium term will require an acceleration of sustaining mine development and continued capital-efficient debottlenecking works. Studies are also underway for our 330 million tonne per annum option. Combined, we expect annual capital expenditure and exploration expenditure of around $10 billion over the medium term. Of course, all investment decisions will be subject to our capital allocation framework, which has served us well since it was put in place in 2016. We have built a very strong balance sheet that can withstand external shocks and market volatility while reinvesting in the business to accelerate future options and deliver very substantial returns to shareholders.Reflecting our strong performance, we generated record operating cash flows of more than $29 billion for the year. Our balance sheet is in an outstanding position with net debt of $333 million.Off the back of our strong results, we have announced a final dividend of $8.9 billion, which takes our full year dividend to more than $16 billion. In addition, we distributed $19.6 billion as an in-specie dividend through the merger of our Petroleum business with Woodside. All in, we distributed over $15 billion in franking credits this financial year.With that, I'll hand back to Mike for an update on the business.Mike Henry Thanks, David. Amid the complexity and volatility of the external environment, we see significant opportunity for BHP. In the year ahead, China's stimulus policies are expected to contribute positively to growth. Infrastructure in the automotive sector are already responding. However, a rebound in housing activity is expected to take longer. The potential for further lockdowns, of course, remains a source of uncertainty. Outside China, the conflict in Ukraine, the unfolding energy crisis in Europe, high inflation and policy tightening in response to this are expected to result in an overall slowing of global growth. The effects of inflation are expected to continue through next year as well tightness in labor markets and challenging supply chain conditions.While the external environment is complex, BHP is well positioned to outperform in these conditions. Our ongoing focus on productivity and continuous improvement stand us in good stead.Over and above this, our experience and capability in managing through previous cycles and track record of early and decisive action gives us confidence we can successfully navigate current market volatility. As David has explained, we have done well to minimize the effects of inflation this last year, and we intend to do better than others going forward. And as inflationary pressures continue to lift and steepen operating cost curves, low-cost operators like BHP stand to capture higher relative margins. And our scale, global procurement function and network of trusted partners means that with supply chain disruptions occur, we can quickly adapt and continue to prosper where others may not.None of these complexities alter the positive fundamentals that underpin our business. The realities of climate change remain. The world still needs to decarbonize, and the infrastructure requirements for that are immense. The world's population will continue to grow, urbanize and demand higher standards of living, and that means the demand for our commodities will continue to grow. Under BHP's Paris-aligned 1.5-degree scenario, our modeling shows considerable growth in global demand for the commodities we produce.BHP has some of the best assets in the world to meet that demand: Escondida, the world's largest copper mine, providing BHP with the world's largest copper endowment when taken together with our other copper assets; Western Australian Iron Ore, the world's lowest cost major iron ore business; Nickel West, the second largest nickel sulfide resource in the world; BMA, a leading supplier of higher-quality coals for steelmaking; and Jansen in Canada, which marks our entry into the world's best potash basin and opens up significant growth potential. These assets provide a strong platform for growth. But for us to fully capture this, it's essential we also create mutual value for the communities, governments and partners that support us.In June, we released our new social value framework to help guide our actions for the greatest mutual value. Our aim with social value is to be deliberate and proactive in taking into account social and financial impact in the choices we make. By prioritizing both, we can create mutual benefit for our stakeholders and deliver long-term value for our shareholders.In doing so, we build better relationships that help us gain insight to better understand, manage and avoid risks. These relationships bring opportunities to work creatively and collaboratively, which unlocks different ways of thinking. And through this, we increased the resilience of the business and create new opportunities along the way. Doing this well is essential and will create a competitive advantage. It will influence our access to resources, to partners and markets, to the best talent and to capital. And we're embedding it into every level of the business from strategy and capital allocation to everyday processes and decisions at our sites.We've also introduced a new social value scorecard with 2030 goals, metrics and milestones. This provides clarity to our teams and our ambitions, and allows us to measure progress, transparently report and hold ourselves to account. The scale and longevity of our resources bestow on us a big responsibility to get this right. They also provide significant and numerous pathways for organic growth. At Escondida, we still expect production to average 1.2 million tonnes per annum over the medium term as we mine higher grade areas.Looking further forward, we've accelerated studies to potentially grow production through our concentrator strategy and leaching opportunities. At Olympic Dam, our recently completed maintenance campaign has raised baseline production rates. We're progressing drilling at Oak dam, and we're studying 2-stage smelting as a way to de-constrain operations.One of our most exciting growth pathways comes from our entry into potash. We see huge potential in Jansen, and we are looking to bring forward first production from Stage 1 into 2026 and have started Stage 2 studies. And at Western Australian Iron Ore, our success in debottlenecking our supply chain gives us confidence we can get to over 300 million tonnes per annum over the medium term, and we're studying options to increase this up to 330.The quality of our assets and the organic opportunities embedded within them are incredibly valuable today. However, in a world where high-quality development options to meet growing demand are limited, the value of incumbent producers with existing world-class resources like BHP will only increase further.On top of these organic opportunities, we have many levers to deliver value growth. We are being more agile and commercial and building our capability to add to our options through exploration, innovation and technology, early-stage entry or mergers and acquisitions. We are also growing value through how we bring together our people and culture, systems and processes, technology and innovation.So let me be clear. This is a mutually reinforcing system. It's the way we bring these together, the way they amplify, support and drive each other that unlocks the true potential of each and sets BHP apart. These things take time to embed in the business. We have been laying the foundations across each for the past decade.First and foremost, people and culture. We have an inclusive performance-oriented culture. Our teams are increasingly diverse, which, as I said earlier, we know drives better outcomes. We've reduced frontline supervisor spans of control and are enabling our supervisors to spend more time above 90% in field with their teams. We're bringing more people in-house through operation services and investing in their training as well as developing the next generation of talent through our FutureFit Academy.Our people are engaged and empowered through the BHP operating system, our way of working that creates a culture and capability where we make continuous improvement central to everyone's role. Our common enterprise-wide systems allow us to identify and lock in best practice. And our Centers of Excellence encourage deep technical capability, bringing best practice from other industries and enable fast deployment of improvement ideas around the business.When we combine these with the power of data, of which we have a lot, we accelerate improvements across our value chain from the geoscience required in exploration through to the marketing of our products. Our holistic approach is delivering safer, lower cost, more reliable and more productive operations, accelerating value creation.This year's results demonstrate the resilience and strength of BHP. We face challenges, but we've adapted and overcome them. And in doing so, we've delivered a very strong performance while reshaping our portfolio and redoubling our focus on growth. We've done that because of the combination of qualities that differentiates us from our competitors, both inside and outside of the resources sector: Our continuous improvement culture and leading capability; our portfolio of world-class assets, low cost and with expansion options because of the discipline we apply to capital allocation; and through our efforts to lead on social value.Our ability to consistently deliver strong returns year in and year out is what sets BHP apart. We have done so for many years, and our assets, our portfolio and our growth options position us to continue to deliver for our shareholders and society into the future.As the world moves to decarbonize, as our population continues to grow and as the demand for the commodities that we produce continues to be driven by those persistent trends, BHP is strongly positioned for ongoing success. Thank you.Question-and-Answer Session End of Q&A
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Goldman Sachs Reinstates BHP Group with a Neutral Rating

  • Goldman Sachs analyst Paul Young reinstated  BHP Group with a Neutral rating and a price target of $49, indicating a potential downside from its current trading price.
  • The ongoing government-mediated talks to avert a strike at BHP's Spence copper mine are critical for maintaining uninterrupted operations and could significantly impact global copper prices.
  • BHP's stock performance and market valuation are closely watched by investors, with its current price reflecting the market's assessment of the company's value amidst operational challenges.

On Wednesday, June 5, 2024, Goldman Sachs analyst Paul Young reinstated NYSE:BHP, a leading global mining company, with a Neutral rating and set a price target of $49. This announcement came at a time when BHP's stock was trading at $58.62, suggesting a potential downside of approximately 16.41% from the target price. BHP Group, known for its significant contributions to the mining sector, especially in commodities like copper, iron ore, and coal, plays a pivotal role in the global supply chain of these essential materials.

The timing of Goldman Sachs' rating is particularly noteworthy as BHP and the union representing workers at its Spence copper mine in Chile are on the brink of government-mediated talks. These discussions, aimed at averting a strike, are critical for BHP to maintain uninterrupted operations at one of its key copper mines. The outcome of these talks is not only vital for BHP's production capabilities but could also have a broader impact on copper prices worldwide, affecting the company's financial performance and stock valuation.

BHP's current stock price of $58.62, which has seen a slight increase of $0.55 or approximately 0.95%, reflects the market's ongoing assessment of the company's value in light of these developments. The stock's performance, with a year-to-date fluctuation between a low of $54.28 and a high of $69.11 and a market capitalization of about $148.52 billion, underscores the company's significant presence in the mining sector. The trading volume of 2,448,458 shares indicates active investor interest in BHP's financial health and operational stability.

The potential strike at the Spence copper mine and the subsequent government-mediated talks are crucial events that investors and analysts, including those from Goldman Sachs, are closely monitoring. These developments could influence BHP's ability to meet its production targets and affect its overall financial health. The Neutral rating by Goldman Sachs, with a price target that suggests a downside, may reflect concerns about these operational challenges and their possible impact on BHP's future performance.

As BHP navigates through these talks with the union, the company's ability to avert a strike and ensure steady operations at the Spence copper mine will be key factors influencing its stock price and market valuation. Investors and market watchers will be keenly observing the outcome of these discussions, given their potential to impact BHP's production capabilities and, by extension, the global copper market.