BHP Group - Earnings Call - H1 2025

Transcript

Mike Henry (CEO)

Hello, and thank you for joining us to hear about BHP's results for the first half of the 2025 financial year. I'm joined by our Chief Financial Officer, Vandita Pant. This half, we have delivered another strong six months of operational and financial performance. Our focus on operational excellence is part of our simple, clear strategy, and it's a competitive advantage.

Coupled with our distinctive approach to social value, we continue to create enduring value for our shareholders and other stakeholders. We have been executing this strategy for some time. We've built a focused portfolio of the best large, long-life assets in stable jurisdictions, in commodities that the world will need as it seeks to develop, digitalize, and decarbonize. This deliberate reshaping of our portfolio is the latest example of BHP's ability to continually position our business for success in response to the world around us.

It's a feature of our 140-year history. Our focus on operational excellence, underpinned by our BHP Operating System, ensures we unlock maximum value from the capital shareholders have entrusted us with. And our commitment to capital discipline and a resilient balance sheet means we can grow organically while continuing our track record of delivering healthy shareholder returns.

Our results this half continue to deliver on this strategy. We've made an excellent start to the financial year. By the end of the financial year, we expect to have grown copper production by 24% over a three-year period. That includes the 10% growth we've delivered this half. Our ongoing focus on controlling cost escalation contributes to our consistently industry-leading margins. And we're on track to achieve full-year production and cost guidance across each of our commodities.

Despite a number of unforeseen external challenges during this period, our team stepped up to these and overcame them. Our performance has supported an interim dividend of $0.50 per share. We've also continued to advance our attractive organic growth projects, most significantly in copper and potash. And we've added to these through our recently formed Argentinian joint venture with Lundin Mining, Vicuña, to develop one of the most significant copper discoveries in decades.

In October, we signed a comprehensive agreement with the public authorities in Brazil in relation to the 2015 Samarco dam failure. This is a major milestone, reflecting BHP Brasil's commitment to supporting Samarco to do what's right by the communities and environments affected. The agreement provides greater certainty to Brazilian stakeholders and to shareholders. On safety, we continue our efforts to eliminate serious injuries and fatalities at all our operations.

Nothing is more important than the safety of our people. To support this, we have continued to embed our Fatality Elimination Program with a focus on higher-order controls to address our key risks. And we're empowering those closest to the work by harnessing our BHP Operating System to deliver frontline safety improvements.

Our safety indicators, including our High Potential Injury frequency, are trending in the right direction. But when it comes to safety, we must maintain our chronic unease. With that, I'll hand over to Vandita to take you through our financial performance.

Vandita Pant (CFO)

Thanks, Mike. We have delivered a very strong set of results for the December 2024 half-year. We achieved underlying EBITDA of $12.4 billion and a healthy margin of 51%. Our average margin over the past 15 years is more than 50%, an industry-leading performance. After an adjusted effective tax rate, including royalties, of 44%, our underlying attributable profit was $5.1 billion, and our return on capital was a solid 20%.

We have determined an interim dividend of $0.50 per share, a payout ratio of 50%. As you can see on the slide, the 11% decline in EBITDA was due to external drivers. Prices for iron ore and steelmaking coal were both down over 20%. And while we received a net benefit from foreign exchange gains, this was largely offset by the impact of inflation, in particular for labor.

While inflation has eased across our key operating regions, labor costs tend to adjust more slowly. We expect some lingering tightness in the labor market to impact our cost base for the rest of this financial year. Thanks to our relentless focus on operational excellence and cost discipline, we continue to perform well in the areas within our control, hitting our guidance more often than our competitors.

We delivered a very strong half operationally, with copper equivalent volume up over 5%. Despite an increase in productive activity across our portfolio, for example, stripping and material moved, there was only a slight rise in controllable cash costs. This was largely due to increased maintenance at a number of our assets and union end-of-negotiation bonus payments at Escondida. Overall, unit costs at our major assets were almost 4% lower, half on half. Our strong performance was demonstrated across the business.

Western Australia Iron Ore proved once again to be the leading iron ore business in the world. It delivered an EBITDA margin of more than 60%. The successful completion of the port debottlenecking project last year and strong mine performance led to record first-half shipments. With C1 cost of $17.50 per ton this half, WAIO has now been the lowest-cost major iron ore producer globally for five years.

BMA also had a strong half, with production excluding Blackwater and Daunia, which was sold in April last year, up 14%. This was mainly due to improved strip ratios and truck performance. At New South Wales Energy Coal, we continue to generate strong results. Our transition to closure plans are progressing well, and we expect an outcome in relation to the modification to extend our mining consent to 2030 in the coming months.

In copper, which accounted for 39% of our EBITDA this half, our margins remain very healthy at 54%. Escondida delivered a 22% increase in volumes and a 12% reduction in unit costs. This is a tremendous result, given the union strike activity that caused some disruption during the half. Spence also continues to perform well. And in Australia, despite a weather-related power outage in October, which impacted Olympic Dam's operations, Copper South Australia delivered a strong underlying performance.

Overall, our operational excellence and cost discipline continue to deliver value. We delivered net operating cash flow of more than $8 billion this half. On a run-rate basis, this continues our track record of generating more than $15 billion per year in all bar one of the past 15 years. While our industry is cyclical, the stability of our cash flows is a significant differentiator for BHP.

It highlights the quality of our portfolio and how our BHP Operating System supports our ability to consistently deliver high performance. The strong cash generation allows us to both grow our business and deliver attractive shareholder returns. Since the introduction of our Capital Allocation Framework in 2016, we have returned $83 billion in cash to shareholders.

Including the in specie distribution of Woodside shares, we have returned more than $100 billion. As Mike mentioned, in October, we signed a comprehensive agreement with the public authorities in Brazil in relation to the Samarco dam failure.

The total financial value of this agreement is $170 billion in 100% terms, and this includes three main categories: the amount already spent on remediation and compensation programs, an obligation to pay to the public authorities, which is in fixed installments over 20 years, weighted to the early years, and a set of obligations for Samarco to perform. This includes additional compensation programs, which are in the process of being rolled out.

Under the agreement, Samarco is the primary obligor, with BHP Brazil and Vale both secondary obligors in the proportion of their 50/50 shareholding. In other words, BHP Brazil and Vale fund when Samarco is unable to. BHP Brazil's outflows over the next few years without any contribution from Samarco are shown in the chart on the right of this slide. This agreement is a significant and important milestone.

It delivers expanded and additional programs for the environment and people affected by the dam failure, and it provides greater certainty on our future cash flows. In recent years, we have strengthened both our business and our balance sheet. Today, our portfolio is more resilient, with a higher exposure to future-facing commodities. Our cash flows are more consistent, and our balance sheet is strong. In short, we are in good shape.

We ended December with net debt of $11.8 billion within our net debt target range. With our expected cash flows in the second half, we expect this to increase to around the top end of our target range by the end of this financial year. We are very comfortable with this. While we don't have a gearing or leverage target, we certainly consider these, along with net debt, when assessing our balance sheet strength.

Our net debt to EBITDA of 0.4 times is low, both in absolute terms and relative to our competitors, as it has been for most of the last decade. This is a conservative balance sheet, which provides protection at all points in the cycle. Even if in a downturn, our net debt goes above our target range, we remain confident in our position and have levers at our disposal to manage it.

This includes flexing our CapEx, cost reductions, and recycling capital from our assets, amongst others. As we move to delivering the next phase of BHP's growth, our focus will be on maintaining a strong balance sheet while keeping our commitment to deliver attractive shareholder returns. Our capital allocation framework will assist us in delivering these objectives. In terms of delivering this growth, we have a strong and expanding pipeline of attractive organic growth opportunities in front of us.

Mike will take you through some of these shortly. This half, we spent $5.2 billion on capital and exploration, and there's no change to our guidance. The majority of our spend will continue to go towards growth and improvement, particularly in future-facing commodities, copper, and potash.

In the medium term, around two-thirds of our total spend is expected to go towards these. We retain flexibility to adjust our capital spend up or down for value as projects progress through their study phases and as we phase projects to match market conditions and cash flow generation.

As a reminder, our top priorities under our capital allocation framework are to maintain our assets to support safe and reliable operations and progress our decarbonization plans, secure our balance sheet strength to provide resilience at all points in the cycle, and the ability to act when opportunities arise, and to fulfill our commitment to a minimum 50% dividend payout to shareholders.

After that, all other uses of capital compete equally. We can invest for growth, further strengthen our balance sheet, or return more to shareholders through dividends and share buybacks, all in ways that maximize value and returns. With that, I hand back to Mike.

Mike Henry (CEO)

Thanks, Vandita. I want to spend a few minutes on how we see our operating environment in the near term. We expect global economic growth to remain around 3% for 2025 and 2026. Growth in developed economies is expected to gradually recover as interest rates continue to be lowered, with the U.S. economy likely to outperform other developed markets owing to its economic resilience in the post-COVID period.

Central bank rate cuts should translate into a recovery in steel and copper demand across the OECD in the near term, although many advanced economies are starting from a much lower base than the U.S., with not a lot of economic momentum to jumpstart things. In China, we see early signs of recovery. Having recently reiterated a pro-growth policy stance, China is expected to progressively draw on policy support to rebalance its economy and improve domestic demand in the near term.

India, meanwhile, is expected to remain the fastest-growing major economy and a bright spot for commodity demand. However, in the near term, we do expect a degree of ongoing volatility and uncertainty due to potential policies affecting trade flows and inflation. In the longer term, the case for our key commodities remains compelling. A growing population, increasingly urbanized and seeking higher standards of living, more infrastructure, more consumer goods, more and better food.

That demand is expected to be amplified by the energy transition, electrification, energy production, transmission, and storage. The digitalization of our world is also driving demand. Artificial intelligence and other technologies are likely to mean the world will need much more data storage and much more processing power. This dynamic makes BHP's commodities highly attractive.

Not only are they leveraged to these mega trends, they also have large, enduring markets, diverse end uses, and differentiated demand drivers and steep cost curves. It's the combination of these which provide room to grow, resilience in a cyclical industry, and the ability for lower-cost producers, such as BHP, to capture significant value and higher margins.

Within these commodities, the quality of our assets and the way we operate them is a competitive advantage. You can see our focus on operational excellence shine through most clearly in our iron ore business, where we are the world's lowest-cost producer. You can see the way we're actively positioning our portfolio on the best assets illustrated in our coal business, where we've sharpened our focus on higher-quality steelmaking coals.

And in each of our commodities, we have significant high-quality resource positions, including in copper, where we have the world's largest resource, and in potash, where the scale of our holding positions us to be a leading global producer by the end of the decade. Let me explain in a bit more detail. Western Australia iron ore is a great example of what BHP is able to achieve. It's an asset with significant structural advantages: 30 billion tons of Pilbara iron ore, 95% of it within 50 kilometers of existing infrastructure.

That allows us to use fewer processing hubs than our competitors, which simplifies operations and lowers sustaining capital requirements. But most importantly, our people operate well excellently. As you can see in the chart on the right, the combination of these factors results in consistently superior free cash flow generation for every ton we produce.

We also have a great story to tell in copper. We think global copper demand will be over 50 million tons a year by 2050, around 70% higher than 2021 levels. And there's just not enough production planned to supply it. We have the world's largest copper resource. We're productive, consistent, and reliable. And the pathways we have for further growth in Chile and South Australia are compelling.

In Chile, our growth program, which includes projects like an expansion at the Laguna Seca concentrator and a new concentrator at Escondida, are expected to support annual copper production of 1.4 million tons, on average, through the 2030s. That's 500,000 tons per year more than if we did not invest further. And our Copper South Australia business has potential to double its production from the mid-2030s. So an additional circa 300,000 tons per year of copper cathode, 100% BHP.

Combined, we have an aspirational pathway that could produce over two million tons per year of copper from the assets we operate. Just last month, we completed our agreement with Lundin Mining to establish a new joint venture called Vicuña to develop the combined Filo del Sol and Josemaria projects in Argentina.

We believe that Vicuña has the potential to become a world-class copper producer, among the top 10 globally.With the close of the transaction, the JV is now focused on delivering the initial sulfide resource estimate for Filo del Sol and updating the existing oxide resource estimates for both deposits, as well as defining the timing and scope of technical studies for the integrated development,

both of which are expected by June this year. We're pleased to be working with Lundin Mining, a Canadian company with similar values to ours and over 30 years of experience operating in Argentina.

We're also pleased to work with the government of Argentina, who are encouraging investments like ours with tax settings and other incentives. Potash is another commodity with a promising future.

Our Jansen project in Canada is on track for first production by the end of next calendar year. This is a tier-one, long-life asset that's expected to sit in the first quartile of the global cost curve once ramped up, allowing it to generate strong free cash flow through the cycle. It's strategically significant for BHP.

It further diversifies our portfolio, increasing our resilience to market cycles, and BHP will be the only major diversified miner with exposure to this commodity, so you can see that we have an exciting pipeline of growth projects ahead. Our focus is on delivering them efficiently and effectively, and this is an area in which we have a very positive track record.

This slide shows how we compare to industry benchmarks. We execute our projects more closely to plan than the industry average, and our projects achieve what they set out to. This goes beyond cost and schedule.

It includes all key metrics for the business case, such as IRR and NPV, among others. This track record in project delivery, combined with our capital allocation framework, which drives competition among projects and ensures only the best get-through, underpins the competitiveness of our organic growth options.

As an example of this, as you can see on the chart here, our organic Chilean copper growth projects are incredibly attractive in terms of capital intensity when compared with the average market value of listed copper producers, and this is before applying a market premium for any potential acquisition.

So while changes in market conditions mean it's never just buy or just build, investing in our organic copper project pipeline is certainly very attractive. These opportunities are lower risk. We have an in-depth understanding of the resource, and we have the right teams in place with the expertise to deliver them.

Before I close, I'd like to briefly mention our chair succession. Ken MacKenzie's time as chair of BHP has been impactful, marked by disciplined allocation of capital, underpinned by the implementation of our capital allocation framework, value-driven reshaping of our portfolio to build greater resilience and unlock future growth,

and unification of our corporate structure, creating a simpler company. This focus on discipline and value will continue to be a feature and hallmark of BHP. We're fortunate to have someone of Ross McEwan's caliber taking over from Ken.

I look forward to working with Ross as we continue to execute our strategy. BHP remains in a strong position to deliver value to our shareholders and those around us for decades to come. Our strategy is clear, and we've proven our ability to execute it time and again. We have a resilient, diverse portfolio that delivers many of the commodities the world needs now and will need well into the future.

Our assets are world-class, and we're operating them well. But this is just the start. I believe there is still so much further to go here to unlock even greater performance. This powerful combination of strategy, portfolio, and operational excellence is a competitive advantage for BHP. It allows us to deliver great results for shareholders and to create social value for those around us.This is a company in great shape now, and I am truly excited about our future. Thank you.