BHP Shareholder Q&A - September 2023

Hello everyone, I'm Gab Notley. BHP's 2023 financial results were announced a few weeks ago. It's been an important year operationally and for growth for BHP, and we have seen a lot of other factors impacting economies around the world, including inflation that has affected commodity prices and business globally. Shareholders are keen to understand what that means for BHP and how the company is seeing the future. So we've got lots to talk about today. In this session, our Chief Executive Mike Henry, David Lamont our Chief Financial Officer, and our Australian President Geraldine Slattery will answer questions that have been submitted by shareholders and give us some insight into BHP's priorities.

We've actually had a number of questions about dividends, so I might start there. And Mike, perhaps I can put to you a couple of questions. The first is from Don, and he asks: I would like to know why the share price is going backwards when you're bragging about how well the company is doing. The unstable, fluctuating price of the investment I am making, what I get in dividends does not make up for the loss on my original investment. And there's actually a second question from William. He says: With what confidence do you see BHP returning to profit levels of previous years, likewise dividends?

Well, look, thanks Gab. And to answer the question, I'll start by saying that it was a very strong year performance-wise, and you can see that coming through our underlying operational performance, the things that we control within BHP. The team's done a pretty good job of that on both an absolute basis but also relative to the competition. Now, the answer to Don's question depends a little bit on when Don bought his shares. What I can say is that if somebody had bought BHP shares at the start of the last financial year, so July 1st, 2022, by June 30th, 2023, they would have returned 20%. So between share price and dividends, it was a great year. It was a 20% return for shareholders. Over a five-year horizon, so looking at it over a bit of a longer-term horizon, BHP has returned 15% per annum total shareholder return compounded over that period. So again, a strong performance both in absolute terms and relative to the ASX 100. We've been the largest dividend payer as well on the ASX 100 for the past couple of years running. So again, the answer to the question depends a little bit on the specifics of when the investment was bought, but over reasonable time frames like the course of a year or over five years, some pretty strong numbers.

We do have to recognize that we're in a cyclical industry. So coming back to the second question about levels of profitability and so on, key driver of profitability in the company is of course what's happening in commodity markets, and that sits outside BHP's control. What we do try to ensure is we've got assets that are resilient at all points in the cycle, both on a standalone basis but as well as the overall portfolio. And that's one of the things that's allowed us to generate these very healthy returns over an extended period of time and to continue to grow value for shareholders and other stakeholders.

David, is there anything else you'd like to add?

Perhaps just taking a view around the cash flow and the stability of our overall margins. It's important to note that over the last decade, on average, our margins have been 55%, which is ahead of our peers. And if you look over that same 10-year horizon, we've delivered operating net cash flow around about on average 20 billion dollars a year, so fairly stable despite that commodity movement that Mike referenced earlier.

The other thing that I would say is in relation to dividends, we do apply our capital allocation framework which does stipulate that we will pay out 50% of our underlying attributable profit to shareholders as a dividend. Now, if we have excess cash after reinvesting back into the business, we will distribute that to shareholders as well, and our track record has actually demonstrated that.

Thanks David. And the next question comes from Yvonne, and Mike, I'm going to put it to you. Yvonne says: Please outline your company's strategy for the next five to ten years and advise us of new avenues for growth. I would like 100% transparency so I can make informed decisions.

Well, we certainly want to be transparent, Yvonne, and it's a really important question actually, because at the end of the day, our strategy and the choices that we make around strategy are what's going to drive value for you as a BHP shareholder. Now, we have been very consistent in the strategy that we've been pursuing for a number of years now, and that strategy involves us wanting to have a portfolio of assets that are first and foremost in the right commodities. And by right commodities, we mean those commodities that are positively leveraged, so have a positive correlation to some of the big mega trends that are underway in the world around us. And so if we think about what's happening in the world in the coming decades, we'll have ongoing population growth, rising living standards, there's the big shift towards people living in more urban centers which tends to be metals-intensive, and we have the decarbonization thematic playing out as well. And so what we want is to be in commodities that stand to benefit greatest from those trends.

Secondly, we want to ensure that within those trends we're involved in commodities where we can generate significant margins. And David spoke earlier about the very strong margins that we have relative to our competitors. We want to own large assets where we can create value at scale, so for the same management effort we can create significant value for shareholders. And we want those assets to be sitting at the low end of the cost curve to ensure that they're resilient throughout the cycle, which is a point I mentioned earlier.

So against that backdrop, we've had an effort underway in the company to streamline the portfolio, and that's been underway for a number of years now. Most recently, we of course divested the oil and gas business to create a new company in Woodside. We've had an effort underway to optimize our coal portfolio, even as we then seek to grow in what we've termed future-facing commodities. And these commodities are potash, copper, and nickel, which we believe have very strong or stand to benefit strongly from the trends that I spoke about.

That's on the portfolio front. Now, of course, for every dollar that we invest in those assets, we want to ensure that we're returning maximum value to you, our shareholders. And so we do have a very strong and consistent focus on operational excellence as well. And then finally, social value. We believe that one of the things that will allow us to create and sustain high shareholder value over time is the way that we ensure we're creating value for all of those stakeholders who depend upon and support BHP. And so we do have a differentiated approach to social value where we try to embed that thinking into all of the decisions that we make as a company, such that we're pursuing greatest possible value for shareholders as well as in parallel creating value for the other partners that we engage with. And those three things—focus on operational excellence, having a differentiated approach to social value, and growing in future-facing commodities—are the sorts of things that are allowing us to create the strong returns that I mentioned earlier and which we believe give BHP a very strong shareholder value proposition going forward as well.

Geraldine, anything you'd like to add on performance this year?

Thank you. David, I might direct this next question to you. We've had quite a few questions about markets and demand and where they're going. Shareholders are particularly interested in China, so I'd like to read two questions. The first is from Keith. He says: Considering China's domestic financial problems and economic downturn and the resulting situation regarding steel production being reduced, how is this going to affect BHP and our iron ore exports generally for the future? Are you looking at new markets or positions? And a second question: What is your short-term and medium-term outlook on China and demand and what impact on pricing?

So thanks for those two questions, Gab. Firstly, let me just start with the Chinese economy has been quite volatile since December 2022 when the zero-COVID policy was eased, and we did see in the March quarter quite a strong performance. However, that tailed off in the June quarter, and so that volatility is present within the Chinese economy, and we're paying attention to what plays out there. Equally, what is impacting the overall demand side of things is the anti-inflationary pressures and policies that other developing countries have actually put in place as well. So specifically within China, we have seen a tail-off of the real estate sector. Now, that is a sector of the economy that is quite prevalent in the steel usage, but it is important to actually note that that actually is only about one-third of the overall steel demand that actually occurs in China. Outside of the real estate segment, we've actually seen some reasonable positions. That's come in the areas of manufacturing. It plays a little bit into Mike's earlier comment about decarb, and certainly we're seeing good copper usage coming through. Specifically also motor vehicles and particularly electric vehicles have also been quite strong.

So within China, we are seeing the government putting in place policies to revamp the real estate sector. That's across a number of different areas, but at this stage we haven't seen them actually get traction into the economy and have a pull-through effect of the overall steel side of things. So we're watching, but I would also just flag that for the fifth year running, China will actually produce over 1 billion tons of steel. So when people say the steel has fallen off, not really. Look at the last five years. We're certainly seeing it at the present. Actually, the run rate is ahead of last year, so that does play well into our iron ore picture as such. But we are watching it closely. As much as anything, we're also focused on India, which has become another important segment for us and market for us. It's been very good for our metallurgical coal, and we'll continue to focus on that. So China and India do provide some source of stability, but we are cautious on the new Chinese policies getting traction.

Thanks David. The next topic is focused on Australian issues, so Geraldine, I might ask for you to address these. We've had quite a few questions actually from shareholders on BHP's support of the Yes campaign as part of the Indigenous Voice to Parliament referendum in Australia. I'll read one from Elizabeth. She says: Why did the BHP board decide to use shareholder funds to influence an Australian social issue in the outcome of the Voice referendum? Why would BHP move from their core business to a social commentator without any consultation with their shareholders? Many shareholders would be greatly opposed to the use of these funds to influence the outcome of the Voice referendum.

Thanks Geraldine. The next question zooms back out to our view on commodities. And Mike, perhaps I can ask you to respond to Jeff. He says: World markets are predicting a future copper shortage. Is BHP planning any future expansion of copper production?

So as I said earlier, Jeff, copper is one of the key commodities for BHP in terms of growth, and you might be pleased to know that BHP is the largest holder of copper resources globally of any company. We hold more copper units. Of course, that's been enhanced further with the acquisition of Oz Minerals in the year past. This is in South Australia, here in Australia, where we purchased Oz Minerals. Oz Minerals is a company which brought to us further copper assets in South Australia, with the intent there being that we'll be able to combine those assets with the Olympic Dam asset, potential development of Oak Dam, which is a recent exploration play found by BHP, to create a new South Australian copper base. And over time, we aspire to unlock further production growth from that integrated basin as well. Outside of Australia, we have copper assets in Chile. Escondido, we are forecasting a bit of growth over the coming few years, and then we have a lot of work underway to figure out how we can go about mitigating the effects of grade decline over time, which is one of the natural features of many of these copper deposits or copper production. And we have further growth prospects. We're investing on both the exploration front and the early-stage entry front. So it's a key area of focus for future-facing commodities growth for BHP, and I'm happy to say that we're seeing a lot of success and the efforts of the past few years beginning to bear fruit in terms of some early-stage options, both within the existing assets that we have as well as prospective new opportunities in newly found deposits like Oak Dam or Ocelot in the U.S., as well as our early-stage entry options. The most recent one that we've taken a toehold position in being a large potential or large deposit in Argentina. So it's building momentum, but coming off a very strong base with us being the largest holder of copper resources globally.

Thanks Mike. David, this one for you. It's on spending. This is a question from Susan. She says: I noticed capex is forecast to rise over the coming years. What's driving this increase and what do you expect this will do to BHP's balance sheet?

So Susan, thanks for the question, and it's a nice lead-in from Mike's response on the earlier question around copper as well. So you're right, firstly, we spent 7.1 billion in the last financial year on capital expenditure and exploration, and we have forecasts for the next two years for that to increase to 10 billion, and then medium-term guidance is 11 billion from expenditure as such. Now, I will start by saying none of that's set in stone. We will obviously need to assess the opportunities and where the overall prices are at from a commodity perspective and the cash flow that we're delivering. But what we do want to do is lever into the future-facing commodities. So 70% of that capital expenditure and exploration will go towards future-facing commodities. Now, we have Jansen Stage One that is already in execution, and potentially Jansen Stage Two, which brings us into the potash market, which is a great opportunity. Equally, we are looking to continue to expand and optimize our Western Australian iron ore assets through some growth in the Pilbara. And then we're looking to lever into our copper portfolio, as Mike mentioned, with the Oz Minerals assets coming in, how we continue to enhance the South Australian copper province for us, and also look at the opportunities that do exist in the South American operations, most notably at Escondido. So the spend for us is very much about leaning into the demand that we see for our underlying commodities, and we think that investment ultimately will add to shareholder value. Now, all of that will be done on the back of our capital allocation framework, which does say that we'll run net debt between 5 and 15 billion, and we are indicating that with that additional capital expenditure and exploration, we'll be towards the top end of that range as such, but still with a very strong and very healthy balance sheet.

Thanks David. We have a few questions from shareholders around interest in other minerals. Mike, if I can, I might ask you to respond to these together. I'll read three of them out. Jeff asks: Does BHP have any plans to enter the lithium mining production market? And Greg asks: What other minerals are BHP looking to expand into mining in the future? Your recent pathways into expanding the business basis away from being just an iron ore giant is obvious, but also, why would you be looking into rare earths and mineral sands down the track? And then Daryl asks: Is BHP considering diversifying into hydrogen?

So look, great questions. And I'll reference back to the question that Yvonne asked earlier, Gab, in respect of strategy, because I kind of answered in there that one of the things that we focus on is ensuring that we're involved in the right commodities and those commodities that stand to benefit greatest from the big trends underway in the world around us. But in addition, I said that we want to be able to invest in large assets where we can create value at scale in commodities that offer us the opportunity to generate high margins, and the assets have to be expandable. In addition to those points, the other things that we look at are whether the overall industry size is large enough for us to be able to build a substantial BHP business. So if I look at rare earths, for example, very interesting commodities, but the industry size is very small, and so doesn't really offer an opportunity that would be of interest to BHP because we'd be expending a lot of management time and effort on something that would only be a relatively small value business for the company. The other thing that we want to ensure is that any investment that we're making has to be well aligned with BHP's existing capabilities or has to be something where we believe that we can create those capabilities and it's worth us doing so over time. So something like hydrogen, for example, sits out—it's more of a kind of a chemicals processing effort, and it sits outside of BHP's capabilities. That's one of the reasons why we wouldn't pursue hydrogen. Then if we look at lithium, it's a combination of capabilities for certain types of lithium production, so brine lithium recovery from brine, for example. And we also have a belief that the lithium is so plentiful around the world that over time you see a lot more lithium production being brought on, and that the industry structure is such that you have a relatively flat cost curve, meaning the margin opportunity offered up by lithium is less than it will be for some other commodities that we've chosen to invest in. Now, that's not to say that any of those commodities aren't going to be attractive commodities for some players, but we have to be able to ensure that we've got focused management effort, that we're targeting that focus on the commodities we believe give us the greatest opportunity to create value for BHP shareholders at scale. And of course, as David mentioned earlier, we do want to be able to deploy the BHP capital allocation framework, which has stood us in such good stead since 2016, in a way that doesn't see us lose impact through trying to deploy capital into too many differing opportunities or commodities at the same time. And hence this choice around growing in potash, copper, and nickel.

The final point I would make here, because we have spoken quite a bit about growth and we've spoken about the different commodities that we might want to be involved in, the sorts of assets and so on, we always have to remind ourselves, however, that the single biggest growth opportunity still for BHP today is the focus on productivity. And it's something where over recent years we've unlocked a lot of shareholder value through the focus on operational excellence and, as Geraldine mentioned earlier, applying the BHP operating system. That is still the single biggest opportunity that we have ahead of us to create greater value or ongoing value for shareholders before we get to all of these other efforts we have underway around growing production.

Thank you very much, Mike. Geraldine, I have a question from David on safety that I would like to put to you. David says: Having worked 44 years in the oil industry at a major hazard facility, safety had to be front and center in the mind of every employee every minute of every day. What is BHP doing to address incidents in 2023 to ensure a safety target of Goal Zero is entrenched into the mindset of all employees as they go about their tasks?

Thanks Geraldine. Perhaps I could stay with you. This is around an Australian policy issue. The question comes from Michael. He asks: If Federal Minister Burke is locking in 1.3 billion dollars of additional costs under the new employment laws, why can't a matching cost reduction be achieved in your cost base?

Thanks Geraldine. David, anything you'd like to add on the costs?

Yeah, so let me just add, the original estimate that we did have of 1.3 billion, we think now is actually light on. We need to continue to evaluate exactly what the legislation will be, but let me be very clear, this, as Geraldine said, will have a direct impact to our shareholders. That 1.3 billion will come directly off our earnings for the year, that will then flow directly to dividends. We estimate that to be about 30 cents on a dividend payout, and that will, as Geraldine said, impact the 17 million Australians that hold BHP shares either directly or through their retirement savings. So that's a direct impact flowing through. And another way to look at it, that 1.3 billion is equivalent to around about 5,000 jobs in BHP. So direct impact to all of our shareholders, not only in the dividends that will flow but also off the earnings of the organization.

We've had a question on our climate targets. This is from Eileen. She's asked: In recent years you've flagged ambitious emissions reduction targets. How are you progressing against them?

Well, thanks for the question. Progressing really well, in short. We achieved a further 11% reduction in our operational emissions, so scope 1 and scope 2 emissions, last year. That's largely off the back of renewable power purchase agreements here in Australia, because we'd already made significant progress in Chile. Overall, since 2020, which is our baseline here, we've achieved about or just over a 30% reduction. And this is against the backdrop of a 2030 target that we have as a business for a 30% reduction relative to the 2020 baseline. Now, of course, the question might be if you've already achieved 30%, why is the 2030 target still 30%? But I think a really important point here for shareholders to understand is that that 2030 30% is over and above underlying business growth. So we have to grow the business while still reducing absolute emissions by 30% over that period of time. And as I outlined earlier, we are seeing the fruits of our labors of recent years to develop more growth options starting to come to fruition. And so all going according to plan, we'll be growing underlying production through to 2030, but at the same time managing to achieve a 30% absolute scope 1 and scope 2 emissions reduction relative to 2020 baseline. So it's a big achievement, we are on track and remain confident that it will be achieved. And then we have a longer-term goal of being net zero operational emissions by 2050.

And that's for scope 1 and scope 2, of course. For scope 3, we're working with others in the supply chain, including ship owners, our steel mills, customers, and so on, to support their efforts to decarbonize their operations as well. So strong focus on scope 1 and scope 2, the things that we control, but not stopping there, working on some pretty ambitious efforts with customers and suppliers as well.

Moving topics again. This has been in the news lately, and I know Mike, you've been at conferences in Australia on this topic. But it's a question from Vanessa around our gender balance goals. She questions whether we're going to reach gender balance by 2025.

In short, we are pretty confident we are going to achieve our aspirational goal of gender balance by 2025, Vanessa. We've made such remarkable progress since we initially set this aspirational goal in 2016. From memory, around that time, the proportion of women in the BHP workforce was sitting at around 17%. We're now at 35% of the BHP workforce. My direct team is 50%, so 50% each of men and women, and about 40% of BHP leaders are now women. So we're well on track. We've built momentum. Most importantly, as we've done this through this combination of having more diverse perspectives being brought to bear on the challenges and opportunities that the company confronts day in and day out, and through the inclusive culture that it's required us to establish in order to achieve the balance that we've achieved so far, we've seen improving underlying business performance. So hand in glove with this fairly significant transformation of the BHP workforce, we've seen improved safety, much higher productivity, more reliability, and better execution against the strategy that we've laid out. So that gives me great confidence in the journey that we're on, and come 2025, we will have a gender-balanced workforce.

I would also call out that we're also focused on ensuring that we have respectful behaviors throughout the organization, which has much broader diversity and inclusion benefits, and on increasing the proportion of the workforce that is Indigenous. And the South Flank operation in Western Australia, where we recently developed a large mine, that's about 15% Indigenous participation in the workforce. In Canada, at the Jansen project, when it's up and running in 2026, it'll be 20% Indigenous and gender-balanced. So lots of successful examples across the company, and as I said, really helping us drive this industry-leading performance.

That's all we have today. So Mike, David, Geraldine, thank you for taking the time and for all of your updates. A reminder to shareholders that the dividend payment date is 28 September, and coming up later in the year we will have our annual general meeting for shareholders. So please look out for updates on our website. And finally, a big thank you to all our shareholders for your ongoing interest and support.