Mike Henry has given us a taste of what to expect at the new-slimmed down BHP as he positions the cash-rich miner right in the middle of the green investment revolution.
And he is in a race against time as the commodity super cycle starts to flame out, with more than $23bn of investment spending planned over the next two years to help it get there.
BHP’s latest blockbuster $US30.9bn ($44.8bn) attributable profit for the past financial year more than doubled from last year.
While the flagship iron ore business continues to outperform, BHP shareholders are also getting a windfall from their exposure to coal, which emerged as the second biggest driver of earnings and helping to fund the green investment spend.
The cash machine was on full show when BHP also delivered a better-than-expected full year dividend per share of $US3.25, representing more than $US16.4bn in ordinary dividends sent back to shareholders during the year.
An additional $US19.6bn in dividends is part of the windfall through the demerger of its massive oil and gas business with Woodside.
Incredibly, the miner has next to no debt on its balance sheet, with a net debt position of just $US333m, down from $US4.1bn last year.
Few inside BHP will admit to it but it was the dogged pursuit by activist hedge fund Elliott Management five years ago that set BHP along its “road to Damascus” moment of showering shareholders with cash.
A then 2017 presentation prepared by the New York-based Elliott called on BHP to collapse its dual-listed structure, demerge and separately list its US petroleum business, and operate under a consistent policy for returning excess cashflow to shareholders.
BHP added its own individual touches to the ideas along the way, including this year’s blockbuster $40bn merger of petroleum with Woodside and at the same time has sharply ramped up the return of funds to investors.
It is the first full year that BHP has stepped forward without its oil and gas business, meaning investor fortunes will rise and fall on its existing mix of commodities: Iron ore, coal, copper, nickel and, over time, potash.
But Henry, who is staking his CEO tenure on operational discipline, sees the transformation of the current portfolio as having greater leverage to a world quickly moving toward a greener footprint.
A recent joint report from National Australia Bank and Deloitte forecast that about $20 trillion would be spent shifting Australia to a net-zero carbon economy over coming decades.
This figure will be multiplied many times around the world and BHP wants to play a part in supplying the raw ingredients for the green conversion.
Specifically for copper, nickel and potash, BHP regards the longer-term demand and supply fundamentals as being the strongest – and Henry wants at least half of BHP’s earnings coming from these three products by the end of the decade. Today it is closer to 20 per cent.
Copper and nickel are key “future facing” commodities for BHP. Copper in particular is a major ingredient in battery production which will be used for grid energy storages and powering electric vehicles. Nickel-rich chemistries are also emerging as the leading technology that powers them. Millions of EVs sold in China, Europe and North America last year required thousands of tonnes of nickel. This is where the electrification of transport megatrend is a major stimulant for nickel.
Meanwhile, the huge Jansen project in Canada, which is at least five years out from production, is being dubbed as the new petroleum inside BHP. That is, it will be the new income stream that can act as a hedge against short-term swings in commodity prices.
Potash is not highly correlated with broader economic and commodity cycles, and once development costs are factored in, requires very little ongoing capital investment.
Petroleum, on the other hand, requires billions of dollars in cash to be spent just to stand still – which, for BHP, made it an increasingly neutral proposition when it came to capital returns.
BHP’s shareholders shouldn’t be thinking of a windfall now that those investment dollars no longer need to be spent on petroleum.
The funds have been earmarked for developing BHP’s footprint across its existing operations with $US16.6bn still to be spent over the next two years.
Waiting game for OZ Minerals
One swing factor in this cap-ex is OZ Minerals, and Henry kept his poker face on as he talked about the mining giant’s discipline following its spurned $8.4bn merger approach with the mid-tier miner.
To rebalance, BHP needs a longer-term expansion in copper and to a lesser extent nickel. Even with the billions of dollars rolling in from another blockbuster profit, Henry can’t afford to scare investors that signs the old BHP – that had a legacy of overpaying for assets which underdeliver – had returned.
Escondida, Spence in Chile and Olympic Dam in Australia give in-house copper expansion options but each come with significant upfront costs and plans floated to date don’t offer a step-change in output.
That’s why OZ’s two long-life copper mines in South Australia are attractive as they would secure more resources and represent and even lower-cost extraction and processing of the base metal.
There has been no further engagement from OZ’s board, led by Rebecca McGrath, since last week’s BHP approach was disclosed, showing Henry is prepared to play the long game.
The indicative $25-a-share cash offer was “compelling”, says Henry, adding it was disappointing there have been no further talks. Unless OZ can draw out a rival offer, BHP doesn’t intend bidding against itself and has the smaller miner where it needs it. BHP has one foot on the OZ share register with a near 5 per cent stake and is poised to jump on any operational missteps.
Investors have kept OZ’s shares above $25 since the approach but Henry has declared he was committed to discipline in the new BHP when it comes to allocating shareholder funds.
OZ’s major asset is its Prominent Hill copper mine, which is located 130km northwest of BHP’s massive Olympic Dam underground copper mine in South Australia. More interesting is OZ Minerals’ Carrapateena copper mine, 100km southeast of Olympic Dam which has a projected 20-year mine life and the potential to become a mega-copper development. Elsewhere, OZ this week took a step closer to the development of the $1bn West Musgrave nickel and copper project in WA, after securing regulatory approval and advancing talks with the traditional owners.
Henry argues M&A is just one of the levers in front of BHP for growth, but is not the only lever. OZ is “nice to have, but not must have,” he says.
If an OZ’s acquisition proceeds it would potentially have a knock-on effect for expansion around smelting at Olympic Dam.
Queensland swipe
Meanwhile BHP’s reinvention in recent years as the friendly miner doesn’t mean it will be pushed around. Henry used the annual profit briefing to take a strong swipe at Queensland’s Palaszczuk government, saying the miner doesn’t like to be caught by surprise.
He was talking about Queensland’s recent hike to the coal royalty which sees miners paying a progressively bigger proportion of tax for coal sold above $175 a tonne from July.
These changes, outlined in the Queensland state budget in June represented a new layer of “sovereign risk”.
He noted an application for a brownfield expansion of Blackwater South metallurgical coal has been made although any decision to invest has been put on hold amid the royalty changes. Whether the expansion at the coal joint venture is real will largely depend on pricing in coming years and the take-up of hydrogen driven steelmaking, but it’s clear there is nothing planned in the near term.
“(There’s) been a significant increase in the sovereign risk associated with Queensland, which has caused us to say, Well, we really can’t deploy the capital into that business for the time being, and we’ll go back and reassess what the plans for the business are going forward,” Henry says. The royalty changes also have a direct current cost to BHP, forcing the miner to increase provisions needed in the rehabilitation of mines across the state.
johnstone@theaustralian.com.au
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