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BHP Group Plc - Operational Review Half Year Ended 31 Dec 2019

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BHP OPERATIONAL REVIEW
FOR THE HALF YEAR ENDED 31 DECEMBER 2019

  • All production and unit cost guidance(1) (based on exchange rates of AUD/USD 0.70 and USD/CLP 683) remains unchanged for the 2020 financial year. Escondida unit costs tracking below full year guidance at the December 2019 half year largely as a result of higher by-product credits.
  • Group copper equivalent production was broadly unchanged in the December 2019 half year, with volumes for the full year expected to be slightly higher than last year.
  •  All major projects under development are tracking to plan. In Petroleum, BHP and Woodside signed a non-binding Heads of Agreement to progress the Scarborough gas development.
  •  In Copper exploration, the third phase of the drilling program at Oak Dam in South Australia is in progress and is expected to be completed in the June 2020 quarter.
  • The financial results for the December 2019 half year are expected to reflect certain items as summarised in the table on page two.

Production

Dec H19

(vs Dec H18)

Dec Q19

(vs Sep Q19)

Dec Q19 vs Sep Q19 commentary

Petroleum (MMboe)

57

(9%)

28

(4%)

Lower gas sales at Bass Strait and Trinidad and Tobago, partially offset by higher volumes from the Gulf of Mexico following Tropical Storm Barry impacts in the prior quarter.

Copper (kt)

885

7%

455

6%

Strong concentrator throughput at Escondida more than offset the impact from social unrest in Chile. Higher production at Olympic Dam following planned preparatory work in the prior quarter related to the refinery crane replacement.

Iron ore (Mt)

121

2%

60

(1%)

Lower volumes at Western Australia Iron Ore (WAIO) due to completion of a major car dumper maintenance program in October 2019.

Metallurgical coal (Mt)

20

(2%)

11

17%

Higher volumes following completion of significant planned wash plant maintenance activities in the prior quarter.

Energy coal (Mt)

12

(12%)

6

8%

Higher volumes at New South Wales Energy Coal (NSWEC) as a result of a higher average strip ratio in the prior quarter, and higher volumes at Cerrejon due to adverse weather in the prior quarter.

Nickel (kt)

35

(11%)

14

(37%)

Volumes reflected the impact of major quadrennial maintenance activities at the Kwinana refinery and Kalgoorlie smelter.

 

Mike Henry assumed the role of BHP Chief Executive Officer and Executive Director on 1 January 2020.

BHP Chief Executive Officer, Mike Henry, said: "We delivered solid operational performances across the portfolio in the first half of the 2020 financial year, offsetting the expected impacts of planned maintenance and natural field decline. Production and cost guidance is unchanged, and we remain on track to deliver slightly higher production than last year. Our six major development projects are progressing well, and we continue to advance our exploration programs in petroleum and copper."                         

Summary

Operational performance

Production and guidance are summarised below.

Production

Dec
H19

Dec
Q19

Dec H19
vs
Dec H18

Dec Q19
vs
Dec Q18

Dec Q19
vs
Sep Q19


FY20
guidance


 

57

28

(9%)

(6%)

(4%)

110 - 116

Lower end of range

885

455

7%

9%

6%

1,705 - 1,820

 

602

309

4%

9%

5%

1,160 - 1,230

Unchanged

283

147

15%

11%

7%

545 - 590

Unchanged

121

60

2%

4%

(1%)

242 - 253

 

   WAIO (100% basis) (Mt)

137

68

2%

4%

(2%)

273 - 286

Unchanged

20

11

(2%)

6%

17%

41 - 45

 

36

20

0%

9%

21%

73 - 79

Unchanged

12

6

(12%)

(9%)

8%

24 - 26

 

7

4

(11%)

(13%)

5%

15 - 17

Unchanged

4

2

(13%)

(2%)

13%

~9

Unchanged

35

14

(11%)

(24%)

(37%)

~87

Unchanged

(i)     Other copper comprises Pampa Norte, Olympic Dam and Antamina.

Summary of disclosures

BHP expects its December 2019 half year financial results to reflect certain items as summarised in the table below. The table does not provide a comprehensive list of all items impacting the period. The financial statements are the subject of ongoing work that will not be finalised until the release of the financial results on 18 February 2020. Accordingly the information is subject to update.

Description

H1 FY20
impact
US$M(i)

Classification(ii)

Unit costs for Petroleum, WAIO, Queensland Coal and NSWEC expected to be in line with full year guidance

Refer footnote(iii)

 Operating costs

Unit costs for Escondida tracking below full year guidance in H1 FY20 primarily due to higher by-product credits

Refer footnote(iii)

↓ Operating costs

Exploration expense (including petroleum and minerals exploration programs)

231

↑ Exploration expense

The Group's adjusted effective tax rate for H1 FY20 is expected to be at the lower end of the guidance range of 33 to 38 per cent

Refer footnote(iii)

↓ Taxation expense

Application of IFRS 16 Leases, new leases, lease payments, remeasurement of vessel lease contracts(iv) and inclusion of derivatives in net debt

2,100 - 2,500

↑ Net debt

The Group's net debt target range is US$12 to US$17 billion, with net debt expected to remain towards the lower end of the range in the near term

-

Net debt

Dividends received from equity accounted investments

~110

↑ Operating cash inflow

Dividends paid to non-controlling interests

~610

 ↑ Financing cash outflow

Provision related to cancellation of power contracts (after taxation) as part of shift towards 100 per cent renewable energy at Escondida and Spence (no cash outflow in H1 FY20)

~500(V)

↑ Exceptional item charge

Financial impact on BHP Brasil of the Samarco dam failure

Refer footnote(iii)

↑ Exceptional item charge

(i)     Numbers are not tax effected, unless otherwise noted.

(ii)    There will be a corresponding balance sheet, cash flow and/or income statement impact as relevant.

(iii)   Financial impact is the subject of ongoing work and is not yet finalised.

(iv)   Vessel lease contracts must be remeasured at each reporting date and are priced with reference to a freight index.

(v)    Provision related to cancellation of power contracts of approximately US$780 million before taxation.

Major development projects

At the end of December 2019, BHP had six major projects under development in petroleum, copper, iron ore and potash, with a combined budget of US$11.4 billion over the life of the projects. All major projects under development are tracking to plan.

Average realised prices

The average realised prices achieved for our major commodities are summarised below.

Average realised prices(i)

Dec H19

Dec H18

Jun H19

FY19

Dec H19
vs
Dec H18

Dec H19
vs
Jun H19

Dec H19
vs
FY19

Oil (crude and condensate) (US$/bbl)

60.64

69.91

63.29

66.59

(13%)

(4%)

(9%)

Natural gas (US$/Mscf)(ii)

4.26

4.67

4.42

4.55

(9%)

(4%)

(6%)

LNG (US$/Mscf)

7.62

10.19

8.53

9.43

(25%)

(11%)

(19%)

Copper (US$/lb)

2.60

2.54

2.70

2.62

2%

(4%)

(1%)

Iron ore (US$/wmt, FOB)

78.30

55.62

77.74

66.68

41%

1%

17%

Metallurgical coal (US$/t)

140.94

179.82

179.53

179.67

(22%)

(21%)

(22%)

   Hard coking coal (US$/t)(iii)

154.01

197.86

201.33

199.61

(22%)

(24%)

(23%)

   Weak coking coal (US$/t)(iii)

101.06

134.12

126.46

130.18

(25%)

(20%)

(22%)

Thermal coal (US$/t)(iv)

58.55

84.15

72.18

77.90

(30%)

(19%)

(25%)

Nickel metal (US$/t)

15,715

12,480

12,444

12,462

26%

26%

26%

(i)     Based on provisional, unaudited estimates. Prices exclude sales from equity accounted investments, third party product and internal sales, and represent the weighted average of various sales terms (for example: FOB, CIF and CFR), unless otherwise noted. Includes the impact of provisional pricing and finalisation adjustments.

(ii)    Includes internal sales.

(iii)   Hard coking coal (HCC) refers generally to those metallurgical coals with a Coke Strength after Reaction (CSR) of 35 and above, which includes coals across the spectrum from Premium Coking to Semi Hard Coking coals, while weak coking coal (WCC) refers generally to those metallurgical coals with a CSR below 35.

(iv)   Export sales only; excludes Cerrejón. Includes thermal coal sales from metallurgical coal mines.

The large majority of iron ore shipments were linked to the index price for the month of shipment, with price differentials predominantly a reflection of market fundamentals and product quality. The large majority of metallurgical coal and energy coal exports were linked to the index price for the month of shipment or sold on the spot market at fixed or index-linked prices, with price differentials reflecting product quality.

At 31 December 2019, the Group had 345 kt of outstanding copper sales that were revalued at a weighted average price of US$2.80 per pound. The final price of these sales will be determined over the remainder of the 2020 financial year. In addition, 322 kt of copper sales from the 2019 financial year were subject to a finalisation adjustment in the current period. The provisional pricing and finalisation adjustments will increase Underlying EBITDA(2) by US$16 million in the 2020 financial year and is included in the average realised copper price in the above table.

Corporate update

In November 2019, BHP approved US$44 million for BHP Brasil's share of the funding for work related to the restart of one concentrator at Samarco. The funding will enable the construction of a filtration plant and the commencement of operation readiness activities. This follows the approval of the Corrective Operating Licence (LOC) for Samarco's operating activities at its Germano Complex in October 2019. Restart can occur when the filtration system is complete and Samarco has met all necessary safety requirements, and will be subject to final approval by Samarco's shareholders.

In December 2019, BHP agreed to fund a total of US$793 million in further financial support for the Renova Foundation and Samarco. This comprises US$581 million to fund the Renova Foundation until 31 December 2020 which will be offset against the Group's provision for the Samarco dam failure, and a short-term facility of up to US$212 million(3) to be made available to Samarco until 31 December 2020.

As at the date of this Operational Review, for the purpose of the December 2019 half year financial results, we are not in a position to provide an update on the ongoing potential financial impacts on BHP Brasil of the Samarco dam failure. Any financial impacts will continue to be treated as an exceptional item.

Petroleum

Production

 

Dec

H19

Dec

Q19

Dec H19
vs
Dec H18

Dec Q19
vs
Dec Q18

Dec Q19
vs
Sep Q19

Crude oil, condensate and natural gas liquids (MMboe)

26

13

(9%)

(7%)

7%

Natural gas (bcf)

189

89

(8%)

(6%)

(12%)

Total petroleum production (MMboe)

57

28

(9%)

(6%)

(4%)

Petroleum Total petroleum production decreased by nine per cent to 57 MMboe. Guidance for the 2020 financial year remains unchanged at between 110 and 116 MMboe, with volumes expected to be towards the lower end of the guidance range.

Crude oil, condensate and natural gas liquids production declined by nine per cent to 26 MMboe due to the impact of Tropical Storm Barry in the Gulf of Mexico and natural field decline across the portfolio. This decline was partially offset by higher uptime at Pyrenees following the 70 day dry dock maintenance program during the September 2018 quarter.

Natural gas production decreased by eight per cent to 189 bcf, reflecting a decrease in tax barrels at Trinidad and Tobago in accordance with the terms of our Production Sharing Contract, maintenance at North West Shelf, reduced domestic gas sales in Western Australia, and natural field decline across the portfolio.