BHP Billiton Earnings Call INSIGHTS: Iron Ore Outlook

On Wednesday, BHP Billiton Ltd ADR (NYSE:BHP) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Iron Ore Outlook

Marius Kloppers – CEO: Jason, our outlook for iron ore hasn’t changed very much since Mike made an investor presentation about two years ago. If I go and overlay out most recent forecast with a graph that is on our website, that’s two years ago, there’s really not much in it, both 2025 some tweaks on the scrap rate generation but by and large in this growth period, no changes. However, while we’d like to think that we have perfect insight, maintaining options in our business is unbelievably important. The way that I’ve explained it many times is that we cannot start something from scratch if a cash flow wave comes through because of the situation of intent. We can only deploy cash to those valuable options that are ready to meet that. So, we always need to run option long and we always need to drop off or defer options as circumstances change and I think I’ve got perfect foresight because I’ve got a great team in Iron Ore but I’m not. The Iron Ore price could be different and having the outer harbor if that materializes to the upside is an immensely valuable option that we want to continue to develop.

Jason Fairclough – Bank of America Merrill Lynch: And to paraphrase you, so minimum spend to keep the option alive?

Marius Kloppers – CEO: We certainly want to do some development, but commensurate – we stage our activities commensurate with the fact that we don’t anticipate any approvals over the next year, Jason.

Des Kilalea – RBC Capital Markets: Des Kilalea, RBC Capital Markets. Marius, do you think that we’re seeing a peak in operating costs inflation given what’s happening in commodity markets and perhaps some pushback from companies on labor rates?

Marius Kloppers – CEO: Des, we are determined to bend the trend. We are determined to bend the trend. On balance prices are reverting and costs are still escalated. How are we going to attack it? One, we’ve got to get the operating rate of those key assets up; we’ve got to get volume dilution. Two, we have to continue to be absolutely determined to close operations that are non-cash generating. I mean, it is our tough love always in our organization over many, many years that we’ve got to do that. Thirdly, as we re-sequence and re-sequence and next year we will re-sequence our options again. We need to match our development expenditure levels which going through the – some of which is going through the P&L. Two, the capital sequence. You can’t just keep on developing options and then put them on the shelf for a couple of years. So, if you know that they’re going to move out, you’ve got – so that is. That will save costs. Then we need to address the overhead structures that are geared, what activity levels are they geared. We have to address the input costs and that will come down because much of what we consume is actually what we sell and the combination of all of those things we are absolutely determined to bend this trend, but I speak for our portfolio not for others. Now, costs, when people report costs in our industry because there is not a strict accounting definition of how to present it, I get a million different representations and I, as you would do, trying to decipher how a broad range of peer groups present that. It’s not that often easy for me to do so. So we’ve continued always to look at cash generation. There is cash integration and your margin, your cash margins that you’ve got on your assets is the clearest indicator of where your cost structures are going and that’s going to continue to be our focus.

Sylvain Brunet – Exane BNP Paribas: Sylvain Brunet, Exane BNP Paribas. Questions first on your (shale) business. First, could you please…

Marius Kloppers – CEO: Sorry, which business? Sorry, just didn’t hear you.

Sylvain Brunet – Exane BNP Paribas: The (shale) business.

Marius Kloppers – CEO: Okay, yes.

Sylvain Brunet – Exane BNP Paribas: The first question whether you could share with us your gas price assumption behind the impairment, what is the (detail) in price? Second on the number of rigs, I think if I read on Slide 23 proper, you are reporting 40 rigs. Is that a decline from last year and how much? My third question is on the nickel business.

Marius Kloppers – CEO: I’ll come back to that because I have already forgotten the first part of the question. Let me just try and go back. (Shale), we targeted that acquisition of 70 rigs and I think that Mike is talking about 40 rigs or so, maybe a few more, maybe a few less and (Brendon) and I were clear to indicate in the results release that there is a little bit of flex in that as we – as commodity prices unfold. Expenditure I’m going to look to for a nod here from my team $0.8 billion spent last year to about $4 billion spent this year on that activity. I don’t have the exact number of — average number of rigs that we had in the field during the past period, but I can tell you that the rig declines on the gas side has been very, very, very material, from memory, maybe 15 rigs and in each one of those two gas fields going to effectively two or three or something like that. So, a big change where the rig counts have gone. Sorry, just trigger me on the second piece of the shale question.

Sylvain Brunet – Exane BNP Paribas: Was the delta in the gas price assumption behind the impairment?

Marius Kloppers – CEO: Impairment was done, an old process is to take the price protocols that we’ve got at year end i.e. 30 June, that’s what goes into the calculation because that’s when we close the books. We don’t disclose our price protocols, but I think it’s fairly common knowledge that for the short and medium term our normal practice is to look at observable transparent markets to the maximum extent that we can and you should take it as read that that is the practice that has been adhered to as well even though we’ve not disclosed that. Then you had a question on nickel.

Sylvain Brunet – Exane BNP Paribas: On nickel, yeah, just to get a view for how far were you prepared to go in the restructuring of that business and would you be prepared to describe part of your nickel businesses as non-core within the portfolio now?

Marius Kloppers – CEO: I think that the guys have done a great job in nickel. If you look at the cost containment over the last year, Glenn and the team, Paul in Nickel West and his predecessor have done an absolutely outstanding job in terms of cost containment. However, they have followed the nickel price down and so the cost targets that we gave them some time ago which were targeted to maintain cash generation at the nickel price that prevailed, it’s no secret that since we started that process nickel prices have come off more, so Glenn is going to respond to that and I have every confidence that he and the team are going to do that. Aluminum and nickel are clearly non-core from the incremental capital investment. That has been very clear for a long period of time. There is no change in our demeanor or status of that. Just perhaps at the back there and then I will come back to the middle.

Peter Davey – Standard Bank: Peter Davey from Standard Bank. You leave the door open in your statement, no major projects are expected to be approved. So what extraneous event will change that and crack that door back open again, what major event will make you rethink that? And then just secondly in terms of the cost inflation, where is the low-hanging fruit, which business units, can you give us any idea?

Marius Kloppers – CEO: Peter, the statement was meant to say we would be very surprised if we approved new projects in the next 12 months. So just to be crystal clear on that. We’ve got a very large work program in place over the next year. We unfortunately cannot start and stop things very quickly. We always have to steer things and we have to buildup or builddown project teams in order to do so. I would be very surprised if there is a very material investment that can be triggered in the next 12 months even if conditions are very benign or we get a surge to the upside, because we started reconfiguring our business, but we always reconfiguring. I’ve described at once as you steer on the five-year horizon, for what you see on a five-year horizon to pop back at the backend what we can do. The statement was meant to be very, very clear that we are committed, we are comfortable, it’s going to deliver, and it wasn’t meant to leave the door open. Now, with you having triggered that, there are always exceptional circumstances, but our base case is we are going to be working on the things that we worked on. On low-hanging fruit, for assets, we’re taking advantage of the raw material price decreases and making absolutely certain that our normal sell at the market price, procure at the market price strategy flows through the bottom line. I do think that the fact that you are adjusting your rate at which your engineering new projects to come in will have a pretty direct knock on to cash that is pretty predictable. Then the third question is on high cost operations and you’ve seen where the pressure has been. The pressure has been on our nickel business, the pressure has been on our manganese business, the pressure has been on our aluminum business. Then lately, given the coal price decline in a backdrop of high Australian dollar and a high energy costs, small high strip ratio, met coal and energy coal mines in Australia are at the intersection of those things and we have to look very, very careful what capacity do we want to run in that business and what capacity should not run; being very, very deliberate in line with it that doesn’t generate cash, we’re going to exclude you from the production portfolio has been hallmark and I think you’re going to see that continue to be our hallmark going forward. I am going to take two more questions here. Perhaps David after this, and I’ll just go to Sydney for a while and to the telephones and then I’ll come back here.

Kaan Peker – Deutsche Bank: Kaan Peker, Deutsche Bank. What’s happened in BHP the concept of flag fall CapEx? Your (indiscernible) assets of the Pilbara, Escondida had these originally, you (peted the balking) at the hurdles now at Olympic Games and the outer harbor. Under what conditions do you can you get back to the point where you can be comfortable with that?

Marius Kloppers – CEO: You have to make infrastructural investments at some point in time. If you look iron ore, we have made a flag fall investment in a complete new rail line a couple years ago and now we want to full that up. If you look at the Queensland Coal field in that high point and in the Daunia, there is you basically setting the stage for the two or so stages of incremental production. If you look at the shafts that have been sunk in Saskatchewan that is the infrastructure that is going to be both up to 8 million ton mine. I think we shouldn’t confuse flag with changed economics I mean in Olympic Dam high exchange rate high capital cost inflation uncertainties about the long term uranium price outlook changed economics, not we don’t want to strip the open – changed economics have to go back find a solution to put today’s capital in, and then after versus in the harbor. At some point you run out of capacity in the Inner Harbor. I mean it is a finite thing and there will be a time where you run out of capacity however we probably now view that, that point is being pushed out relative to what we saw a couple of years ago and we always need to take the high return business first, when we can get that. But we have always got to at some points in time investing in major infrastructure. Sorry David and then we’ll go to Sydney, because Graham it mid-evening then I am just worried he is going to get grumpy with me if we leave in uncertainty the whole time.

David: Sort of similar question to Rob’s on hurdle rates are they changing at all.

Marius Kloppers – CEO: No David we don’t change things that quickly we don’t have a specific hurdle rate because things are so associated with product the shape of the distribution we can expect we have historically said that we hope to achieved a 15% real post tax return on projects I hope that the $20 billion what we are investing next year will get a 15% real post-tax return. So, while there is not a specific hurdle rate probably that gives you guidance on what we think the projects in execution are going to deliver for us David. Graham, I don’t know how the exactly the procedure works in Sydney perhaps if there are any questions on that side? So again just to remind if you could address them to me in the first instance and then I will try and route them to some of the other team members if required.