BHP Billiton continues in its approach to improve productivity

BHP Billiton Plc released its results for the Half Year Ended 31 December 2016.

Highlights:

- Despite improvements in our safety performance indicators, tragically there was a fatality at Escondida.
- Attributable profit of US$3.2 billion, Underlying EBITDA(1) of US$9.9 billion and an Underlying EBITDA margin(2) of 54% for the December 2016 half year.
- Productivity gains(3) of US$1.2 billion achieved for the period, including the benefit from the increase in estimated recoverable copper contained in the Escondida sulphide leach pad. We remain on track for US$1.8 billion of gains for the 2017 financial year, excluding any impact of industrial action at Escondida.
- Unit cash costs(4) declined at our major assets compared to the December 2015 half year. Full year unit cost guidance has been adjusted to reflect unfavourable exchange rate movements.
- Capital and exploration expenditure(5) decreased by 38% to US$2.7 billion. We now expect to invest US$5.6 billion in the 2017 financial year and US$6.3 billion in the 2018 financial year, reflecting an
increase in exploration spend in both years following the successful bid for Trion in Mexico and positive drilling results at LeClerc and Caicos.
-Strong operating performance and improving capital productivity supported free cash flow(2) of US$5.8 billion.
- We strengthened our balance sheet, with net debt(2) of US$20.1 billion significantly reduced from US$26.1 billion at 30 June 2016 reflecting strong free cash flow generation and a favourable fair value adjustment of US$2.0 billion related to interest rate and exchange rate movements.
- The Board has determined to pay an interim dividend of 40 US cents per share which is covered by free cash flow. This comprises the minimum payout of 30 US cents per share and an additional amount of 10 US cents per share.
- Total copper production guidance for the 2017 financial year is under review as a result of ongoing industrial action at Escondida.
- At Samarco, substantial progress is being made on the social and environmental remediation programs. A Preliminary Agreement has been entered into with the Federal Prosecutors’ Office. Restart of operations remains a focus but will only occur if it is safe, economically viable and has community support.

Earnings and margins

- Attributable profit of US$3.2 billion includes an exceptional loss of US$40 million (after tax). That loss related to the Samarco dam failure (US$155 million), which was partially offset by US$115 million related to the cancellation of the Caroona exploration licence.
- Underlying attributable profit of US$3.2 billion.
- Underlying EBITDA of US$9.9 billion, with higher prices, operating cash cost improvements and other net movements (in total US$4.3 billion) more than offsetting the negative impact of currency and inflation movements (in total US$0.4 billion).
- Underlying EBITDA margin of 54 per cent, compared with 40 per cent in the prior period.

Productivity and costs

- US$1.2 billion of additional productivity gains compared to the December 2015 half year, with annualized productivity gains of more than US$11 billion already embedded over the last four years.
- On track to deliver approximately US$1.8 billion of productivity gains during the 2017 financial year, excluding any impact of industrial action at Escondida.
- Unit cash costs declined at our major assets when compared to the December 2015 half year.
- Escondida, Conventional petroleum, Queensland Coal, and Western Australia Iron Ore (WAIO) unit cash costs(4) decreased by 37 per cent, 10 per cent, four per cent and one per cent, respectively, compared to the December 2015 half year. Lower Escondida unit cash costs reflected the benefit related to a change in estimated recoverable copper contained in the sulphide leach pad and favourable inventory movements. In local currency terms, Queensland Coal and WAIO unit costs declined by eight per cent and five per cent respectively.
- Historical costs and updated guidance for the 2017 financial year 

Economic outlook

World economic growth is likely to remain within the range of three to three and a half per cent in the 2017 calendar year. A move above this range will be delayed by rising political uncertainty which has the potential to weigh on international trade and business confidence.

Our view on China remains unchanged. China’s economic growth is expected to moderate in the coming year. The growth rate will remain consistent with official guidance. We anticipate a cooling of growth rates in the housing and automobile markets in combination with a continuation of strength in infrastructure. Manufacturing
investment should stabilise, however exports may be challenged by the rising threat of protectionism.

China’s policymakers will continue to seek a balance between the pursuit of reform and the maintenance of macroeconomic and financial stability. We expect a continuation of efforts to address excess capacity and improve balance sheet health in over-indebted sectors. Longer term, our view remains that China’s economic growth rate will decelerate as the working age population falls and the capital stock matures. China’s economic structure will continue to rebalance from industry to services and growth drivers will shift from investment and exports towards consumption.

The outlook for the US economy is uncertain. The policy platform of the new administration points to a higher inflation environment than previously envisaged. The medium-term impact on growth is unclear, notwithstanding infrastructure related announcements, especially in the context of tighter financial conditions. In Europe and Japan, where the limits of monetary policy effectiveness may have been reached, any upside on growth will have to come from external demand sources. India’s economy should return to a healthy growth trajectory once the demonetisation shock recedes. The stabilisation of commodity prices should help put a floor under growth in resource-exporting emerging markets.


Commodities outlook

Crude oil prices trended higher in the first half of the 2017 financial year, particularly in the second quarter. OPEC reversed course on 30 November 2016 by agreeing to its first production cut since 2008 and the first cooperative deal with non-OPEC producers since 2001. These developments, and improving fundamentals, led to the price recovery. The market is expected to rebalance in the short-term, supporting prices as inventory levels normalise. However, political uncertainty, OPEC compliance rates and rising US output may offer some headwinds. The long-term outlook remains positive, underpinned by rising demand from the developing world and natural field decline.

The domestic gas price in the US strengthened on a combination of winter heating demand, rising exports, and declining production. At the end of the reporting period, natural gas inventories were below the five-year average. This reduction in inventory levels is likely to offer price support in the near-term, notwithstanding the usual seasonal influences. The abundance of lower-cost supply is likely to moderate significant price inflation longer term, however, natural field decline and robust demand growth are forecast to incentivise development of incrementally higher-cost resources.

Copper prices improved towards the end of the first half of the 2017 financial year due to a combination of mine supply disruptions, stronger than expected Chinese demand and an improvement in investor sentiment. In the short- to medium-term, new and expanded production is expected to keep pace with demand and maintain a well-supplied market in balance. In the long-term, the copper outlook remains positive, as demand is supported by China’s shift towards consumption and the scope for substantial growth in emerging markets. A deficit is expected to emerge by the early 2020s as grade decline, water availability and limited high-quality development opportunities constrain the industry’s ability to cheaply meet growing demand.

Global steel production growth gained momentum in the first half of the 2017 financial year, led by a recovery in China. In the short-term, Chinese steel production growth is expected to moderate as the rate of growth in the housing market eases amidst escalating supply-side measures. Steel production in the rest of the world is likely to improve marginally, led by India. In the long-term, the global steel market will grow modestly, supported mainly by incremental demand from India and other populous emerging markets.

Iron ore prices have been highly volatile, starting the 2016 calendar year at low levels before recovering strongly in the Chinese spring. The price reached a two year high in December 2016, on the back of higher-than-expected steel production in China and tight supply of high grade ores. The market is likely to come under pressure in the short-term from moderating Chinese steel demand growth, high port inventories and incremental low cost supply.

Metallurgical coal prices surged in the first half of the 2017 financial year, driven by pronounced shortages in both domestic Chinese and seaborne supply and reflected the impact of China’s 276-working day reform policy and adverse weather conditions in China and Queensland. Prices are expected to return to industry marginal cost once seaborne and Chinese supply constraints are eased. The application of China’s coal supply reform policy is a source of short-term uncertainty. We expect emerging markets such as India will provide long-term seaborne demand growth, while high-quality metallurgical coals will continue to offer steel makers value-in-use benefits.

BHP Billiton Chief Executive Officer, Andrew Mackenzie, said: “This is a strong result that follows several years of a considered and deliberate approach to improve productivity and redesign our portfolio and operating model. Our steadfast commitment to this plan has positioned us to take full advantage in a period of higher prices with Underlying EBITDA up 65 per cent to US$9.9 billion.

The demerger of South32 and over US$7 billion of asset sales have shaped a portfolio that is now true to its strategy. Our assets are large, long-life and low-cost and provide exposure to a diverse mix of commodities with an attractive outlook. Our new operating model has sharpened the focus of our operations on the things that matter most: safety, volume and cost. A decline in unit costs at our major assets supported US$1.2 billion of productivity gains in the half, which follows the US$11 billion of annualised gains embedded over the last four years.

Greater productivity and increased capital efficiency supported strong free cash flow generation of US$5.8 billion. Strict adherence to our capital allocation framework has maximised the use of this cash. We have strengthened our balance sheet, with net debt falling sharply to close the period at US$20.1 billion. As we further strengthen the balance sheet our ability to invest counter-cyclically will only be enhanced. Our minimum 50 per cent dividend payout policy equates to 30 US cents per share. In recognition of the importance of shareholder returns and confidence in the Company’s performance, the Board has determined to pay an additional amount of 10 US cents per share, taking the overall interim dividend to 40 US cents per share.

We are confident in the long-term outlook for our commodities, particularly oil, with markets expected to rebalance in the near-term, and copper where we expect a deficit to emerge in the early 2020s. We have the right settings in place to substantially grow shareholder value.

The health and safety of our people and the communities in which we operate always come first

Health and safety are core to our values and we are committed to providing a safe workplace. BHP Billiton reported a record low Total Recordable Injury Frequency of 3.9 per million hours worked in the December 2016 half year. Despite the improvement in safety performance indicators, tragically one of our colleagues died at Escondida in October 2016.

We remain committed to supporting Samarco with the recovery of the communities and environment

Providing our support for the long-term recovery of the communities and environment affected by the Samarco tragedy on 5 November 2015 remains a priority for BHP Billiton. Substantial progress has been made on community resettlement, community health and environment restoration. The Renova Foundation has been operational since August 2016. Relocation of the communities most severely affected by the dam failure is progressing well. The program of works designed to contain tailings during the wet season was completed, as were improvements to water treatment plants along the Rio Doce.

On 18 January 2017, Samarco and its shareholders, Vale and BHP Billiton Brasil, entered into a Preliminary Agreement with the Federal Prosecutors in Brazil. This outlines the process and timeline for negotiation of a settlement of the R$155 billion (approximately US$47.5 billion) Civil Claim relating to the Fundão tailings dam failure. Under the timeframe established in the Preliminary Agreement, negotiations in relation to a final settlement arrangement with the Federal Prosecutors are expected to occur before the end of June 2017.

Restart of Samarco’s operations remains a focus but is subject to separate negotiations with relevant parties and will occur only if it is safe, economically viable and has the support of the community. Resuming operations requires government approvals, the granting of licenses by state authorities, the restructure of Samarco’s debt and the completion of commercial arrangements with Vale regarding the use of its Timbopeba pit.

In the December 2016 half year, BHP Billiton recorded an exceptional item of US$155 million (after tax) in relation to the Samarco dam failure. Additional commentary is included on page 35. Our diversified portfolio and simplified structure deliver strong financial performance

BHP Billiton is an ASX, LSE and JSE listed petroleum, copper, iron ore, coal and potash exploration and development company with operations in South Africa, Algeria and Mozambique.