必和必拓 (BHP) 2008 Q2 法說會逐字稿

Welcome to today's presentation of the BHP Billiton Plc interim results for the period to December 31, 2008. My name is Marius Kloppers, Chief Executive Officer of BHP Billiton. I'm talking to you today here from Sydney. Alex Vanselow, our CFO, will be presenting from London, and to my left I've got Marcus Randolph who is the Chief Executive for our Ferrous Materials Group.

Before I begin today, I'd like to point you to the disclaimer and remind you that reading this disclaimer is important in relation to today's presentation.

I'd like to start off today by giving you a brief overview of our results before handing over to Alex, and Alex will take us through the more detailed aspects of our financial performance. Then I'll give you some perspectives on the macro-environment and how this is impacting firstly the industry, and also how it's impacting on us. And then Alex and I will be very happy to take some questions.

If we go to our highlights, let me as usual begin with safety. Over the period in question, we've maintained a good safety performance as measured by what we call our lagging indicators, most notably total recordable injury frequency rate. However, we still had four fatalities in the period; that means four families left without loved ones, and it goes without saying that any fatality is an unacceptable outcome. We continue to be committed towards getting to zero harm and ensuring that a safety culture is embedded across the entire Group.

Let me turn to results. There's no doubt that the last half year has been an interesting period and a challenging period for our industry. The very solid result, of which you will get a very clear view today during this presentation, demonstrates that our core strategy, unchanged over the better part of a decade, of being focused on Tier 1 assets and diversification across markets, geographies and so on, is a very sustainable one.

Our underlying EBITDA was up 25% to $13.9 billion. Underlying EBIT was up 24% to $11.9 billion. Attributable profit for the year before exceptional items was $6.1 billion up 2%, and as I say that, I should stress that Alex is going to take us through foreign exchange that has had a major non-cash impact on the tax line, and we'll get some clarity on that.

You will also recall that in our December quarterly production report which we released on I think January 21, we announced a number of actions, and as a result our attributable profit, post exceptional items, Alex will talk about in more detail. But perhaps to reinforce at this early stage, we've said that where demand conditions are weak and we've got assets that are either in a position where they can't sell the output or where they are cash negative and set to remain so for some time, we have and we will continue to take action.

In particular today I'd like to point you to cash flow, because we've already noted that they are quite in a period of high volatility. With IFRS, there's a lot of non-cash items in our income and, therefore, I'd like to point us particularly today at cash flow. Cash flow remains, from this diversified portfolio, remains extremely robust, increasing 74% to $13.1 billion. More significantly than this excellent result, and given today's market conditions, our balance sheet continues to place us in an absolutely unique position in this industry. And the strength of our balance sheet is illustrated by a net gearing level of below 10% at this stage.

Earnings per share was up 3% to $1.101 per share before exceptionals, and importantly given our outlook on which we will talk a little bit more during the course of this presentation, which is uncertain in the short and medium term outlook, we've announced today that we are maintaining our dividend for this period at the same level as the last period at $0.41 per share. So that's a very -- a dividend decision consistent with our outlook. But I want to note that this is a very significant 41% increase on the comparable period last year. Obviously for those shareholders which form a large portion of our shareholder base in London and in Australia that have seen those currencies weaken against the US dollar in their local domestic currencies, that'll be an even higher uplift.

During the half year we continued our successful track record on project execution. We're consistent with our commitment to invest throughout the cycle; sanctioned for projects during the half year a very major one in Western Australia in iron ore. and three in oil and gas. We want to emphasize that even in these changed conditions, our strategy remains unchanged. We want to continue to invest in value adding growth in a prudent and disciplined manner. Perhaps the only change is that to an even greater extent than before, we want to focus on Tier 1 assets and brown field expansions principally in our back yard. And in the short run, we also want to continue to maximize cash generation from our existing assets, and later on in this presentation I will give you some more detail on our initiatives to do so.

To emphasize up front, we are extremely strongly positioned at this point in the cycle, well differentiated from others in our sector. And on that note perhaps let me hand over to Alex to take you through the details of our financial results, and then I'll say a few words again at the completion of that. Alex.

Thanks, Marius, and good morning to everyone from a very cold night in London. I'll now go over a number of key areas relating to our interim results, and I'll start with the top line financials which Marius has just briefly touched on, and then move into some of the exceptional items. I'll also give a brief overview of some of the actions we have taken to further strengthen our financial position.

For the six months to December 31, 2008, we delivered a solid set of results under very challenging and rapidly changing economic conditions. Both underlying EBITDA and EBIT increased, reflecting our strong performance from our diversified portfolio of low cost, long life and high quality assets. The key highlights are undoubtedly the strength of our balance sheet and our outstanding cash flow, both of which placed us in an elite position in our industry.

Net operating cash flow was a record of $13.1 billion resulting in a net gearing of just 9.5%. This was achieved through the consistent execution of our strategy which has enabled us to continue to invest in value creating growth in a prudent and disciplined manner, also at the same time delivering outstanding returns to our shareholders.

Marius will talk about our views on the market outlook a little later, but it is worth stressing a couple of points about the current market conditions. As the global economy continues to deteriorate, we are experiencing softening demand for all our products. Accordingly, we have taken a number of hard but prudent actions, with a focus on preserving and enhancing long term shareholder value. These actions have included the Board's decision not to proceed with the Rio Tinto offer, production adjustments in line with weaker demand, deferrals and withdrawal low priority projects, and the suspension of cash negative operations and Marius referred to.

This has been the appropriate actions taken at the right time and in the face of a swift and severe downturn in the market. Of course, we will continue to take further actions if necessary. We have always said that all our operations are continually under review, and this remains the case. The current impact of these actions to date are reported under exceptional items, and as a post tax exceptional loss of $3.5 billion, which resulted in our attributable profit of $2.6 billion. They include charges in relation to Ravensthorpe, Yabulu, Pinto Valley, project impairment and deferrals, and increased remediation of the provision for the Newcastle steelworks, and costs associated with the Rio Tinto offer.

The extreme range of economic conditions that led to these decisions also materially impacted at an operating level, and it's both positive and negative. As we can see on the slide, the changes to underlying EBIT for most CSGs were affected in a material way. Some examples, the 500% in metallurgical coal which was positive, and on the other hand you have stainless steel materials that are 200% negative.

We must also again highlight the strength and quality of the BHP Billiton portfolio with underlined EBIT margin for the period averaging 46%. Our petroleum CSG delivered $2.7 billion underlying EBIT, an increase of 36%. This was driven by strong volume growth from a series of successful projects, but also [stable] operating cash costs and a higher realized price.

However, EBIT for aluminum based metals and stainless steel material CSGs, the LME CSGs, were all down significantly. In these three CSGs, the unprecedented fall in LME classes alone decreased underlying EBIT by $4 billion. And for the CSGs, volume and cost efficiencies were impacted by great declines and production interruptions at Escondida, the furnace rebuild at the Kalgoorlie nickel smelter, and the mandatory reduction in power consumption in South African aluminum smelters.

Our steel-making commodities contributed $8.5 billion to underlying EBIT. We benefited from higher realized prices, record iron ore shipments, and a favorable exchange rate. We have, however, been impacted by the weak steel market, especially in the last quarter of 2008 when we announced reduction adjustment both at Samancor and at Samarco. These weaker conditions will have a more pronounced impact in the second half of this financial year. Underlying EBIT for our energy coal business was up 287%, and this was due mainly to higher realised prices.

Significant price volatility had a material and immediate effect in the revenue line. Input costs have also been volatile, but with a delayed impact on cost of goods sold.

In our last result presentation, I highlighted that cost pressures in our industry had accelerated in the second half of 2008 financial year. This has continued into the fiscal year of 2009. During this half, cash costs increased by $1.6 billion compared to the corresponding period.

About 13% of this increase is the structural. The remaining 87% is either costs that were deliberately incurred to maximize production, one-off incidents, or costs that were caused by the heated market earlier in the half year.

Represented in the graph, we have $298 million in one-off costs relating to Queensland Coal flood recovery and the Kalgoorlie nickel furnace rebuild. We also can see a $592 million of higher costs for fuel energy and input materials such as coke, pitch and explosives. The benefits of the falling input prices will have a lagged effect on reducing costs, and we are starting to see some signs of easing input material prices.

In addition, labor and contractor costs increased by $368 million. Contractor charges increased because of both higher rates and increased activity. In certain cases, we deliberately incurred costs to increase production at times of high prices. We expect this cost to decrease and to reflect the supply demand fundamentals as well as lower usage rates.

High economic volatility also had an extraordinary impact on financials below the EBIT line. The tax charge, excluding exceptional items, was $5.1 billion. Excluding the impact of foreign exchange and royalty, our underlying effective tax rate was 30.6%. The foreign exchange impact was approximately $1.2 billion, and most of this is a non cash foreign exchange revaluation on Australia deferred tax balances. Going forward, we expect the underlying effective tax rate, which is excluding royalty and foreign exchange, to be around 31% to 32%.

Interest expense was in line with December 2007 half, and we achieved a lower average interest rate due to debt reduction, and also to lower benchmark rates. Approximately $2 billion of debt is due to mature over the next 18 months, most of this being at subsidiaries and jointly controlled entities.

So we'll have a situation where we have very low gearing, with debt maturity skewered towards the medium to long term, and higher margins from a diversified portfolio, and this places BHP Billiton in a unique position to continue delivering shareholder value.

I am pleased to share that our net operating cash flow, which is after the payment of interest and tax, was a record $13.1 billion, which is up 74%. This is an excellent result given the current market conditions. We achieved this through the disciplined execution of our strategy, which has enabled us to continue investing through the cycle and growing our business organically.

Capital expenditure for the half year was approximately $6 billion. Our cash payment of $0.41 per share of dividend declared in August 2008 was about $2.3 billion. As Marius mentioned earlier, we have maintained a dividend of $0.41 per share, which is an outstanding achievement in the current economic environment.

This is in line with our progressive dividend policy that seeks to maintain or increase the dividend in the US dollar terms which we readily assess based on our expectations of future market outlook and the investment opportunities. We are very well positioned, but also alert to the fast changing and uncertain economic environment.

I just wanted to take a little bit of time now to try to give you some more clarity about the issues that will impact underlying business performance over the next six months. This slide provides a summary of the production adjustments we have announced so far in response to this impressive [downward] deterioration in our markets.

The indefinite suspension of the Ravensthorpe nickel operation and the cessation of mixed nickel cobalt hydroxide processing at the Yabulu refinery, the temporary suspension of two of the iron ore pellet plants at Samarco, the temporary reduction in Samancor Manganese production, the suspension of copper sulfide from the Pinto Valley mine, and reductions in metallurgical coal producing during the second half of the year. As we have flagged as well, we expect one-off costs of approximately $500 million in the second half that are linked to the implementation of these decisions. As we have said, we will continue to take quick and decisive action as market conditions changes.

And with that, I'll now hand you over to Marius who will go through our views on the market outlook.

Thank you, Alex. Perhaps to highlight a few points. Six months ago we started off this section of our presentation with a title -- a slide titled short term global challenges exist. On that slide, we noted that global economic activity was moderating, financial market instability and inflationary pressures were apparent, and we started, importantly, to see flow-on effects of these two emerging economies. Like most observers, however, we did not foresee the speed of deterioration that we've now witnessed. It's unlike anything I've seen before and it's unlike I think what most people have seen.

To illustrate, this slide shows commodity prices over the six month period between July and December. In just six months, across most of the main commodities that we produce, prices have gone down between 50% and 60%, and some of these commodities have suffered further declines on the order of 10% or so since the beginning of this year.

Today, weakness, uncertainty and volatility in the outlook exist not only in the short term, but also in the medium term. Demand for our products is being impacted globally. Because of this, we've noted the adjustments we've made in production, maintenance schedules and projects, and we will continue to review our projects, operations, capital investments in the context of this fluid demand environment. Our view from six months has not changed in one regard, and that is that momentum and risk and our view is still probably to the downside.

Now just as the world has been too optimistic about the extent of the deterioration that we would see, it's also been too optimistic about the medium term impact and timing of the recovery. Growth forecasts continue to be revised downwards and the turning point for any eventual recovery continues to be pushed out.

Now just to illustrate, we've put on this slide a consulting company called Global Insights and their predictions, last five predictions for year-on-year growth, forward global growth. As you can see, there's been a marked change or deterioration in their forecasts, particularly in the last two forecasts, and this picture would have been in structure no different had I used the forecasts from any other forecasting consultancy.

Our sense in talking to many market participants is that on a global basis, which constitutes the markets that we operate in, very few are prepared to give a view of when that turning point will occur. But let's talk about what it'll take to improve, particularly with respect to our industry.

We've spoken about China for a long time; most in our industry have spoken about China for a long time. And most of us are aware that in terms of raw demand growth, China has outpaced any other country or region.

For that reason, China will continue to be very, very important in our industry, but we cannot let ourselves forget that we operate in global markets, and demand or consumption outside China, as we show on this slide, still constitute the largest component of absolute consumption. This chart shows us that between 65% and 70% of most of the commodities that we produce are consumed in the global market outside China, with the emphasis on OECD consumption.

With only 30% to 35% of absolute commodity demand, China alone cannot be relied on to support overall global commodity demand. For global commodity markets to perform well, a synchronized improvement in both the OECD and China will be required.

But let's take a look at China. On the short term, de-stocking in China seems to be nearing completion, and we are starting to gain visibility of the underlying level of demand for the first time in many months. While growth clearly slowed in China over the last few months of 2008, China has not experienced some of the dimensions of collapse that other more export-oriented economies in the region suffered.

China's also largely avoided the credit and confidence collapse as seen in the West. China has got a government that has got the ability to boost infrastructural spending, and with the lack of household and corporate debt and government debt, we would, therefore, expect China to be relatively more resilient than the West. But, of course, standing in against these positives, China's economy has been impacted by the reduction of export demand.

Over the longer term, while we continue to review this, our story for China is unchanged. It remains at a relatively early stage of its development. Its absolute intensity of use of many of the products that we produce remains low and, therefore, long term, our view is not very different to what we've said before.

But let's take a look at how our industry has been impacted as we take a look at all of these things that have impacted on our industry. This is a reasonably complex chart, so let me take a moment to explain what it means. On the Y axis, the Y axis represents return on capital, improving as you move up the scale. So it's an indicator of absolute asset strength higher up on the scale.

The X axis represents balance sheet strength, improving as you move from left to right. Each of the individual bubbles on the chart represents a company in the sector, and the size of the bubble is scaled to the enterprise value of the company. Just for reference, the bubble in the legend in the top right hand corner that shows that red bubble is scaled to about $10 billion.

So what can we conclude from this? BHP Billiton is extremely well positioned with both a quality set of assets and a quality balance sheet. The majority of other companies in our sector are going into this downturn in a condition of financial distress or weakness. Their asset quality is also variable. Balance sheets are highly leveraged, and significant amounts of cash will be needed just to service ongoing debt commitments.

Therefore, many of the companies are now set to have, unlike us, no option but to switch their focus from long term value growth to managing in the short term and this change in focus will have an impact on future supply of fundamentals.

In today's environment, for those companies preserving cash is crucial, as we've noted, and the industry as a result of the stretched balance sheets has promptly acted to minimize cash outflows. Production cuts have been made swiftly and severely across a spectrum of commodities in response to the downturn in demand.

Particularly with a view towards the long run, investment and new capacity is being deferred, with dramatic capital expenditure cuts announced globally and continuing to be announced. These production cuts, investment delays and cancellations of projects across the commodity spectrum will mean that the future capability of the supply side has been severely impacted.

Those of us in the industry like us who can continue to invest throughout the cycle in readiness for eventual market recovery and do not have to trade long term optionality for short term expediency, will be perfectly positioned to grow market share and shareholder value when this business cycle upturn comes. So our longstanding strategy has uniquely positioned us for the events that we are witnessing.

While on average the industry has been facing funding pressures and deteriorating credit ratings, our strongly diversified cash flow, strong asset quality has allowed us to improve our gearing position. I particularly want to draw your attention to the 74% increase in net operating cash flow, the fact that our balance sheet has never been stronger, the fact that during the half we reduced our gearing from 18% to below 10%, and that our interest cover stands at 87 times.

In this market, there will be numerous opportunities to purchase assets more cheaply than in the past. Of course, very few of these assets will fit our unchanged strategy of a focus on Tier-1 assets, but if and when these opportunities arise, we have the capacity to act.

But these opportunities are not mutually exclusive to growth in an organic way. We will continue to invest in value adding growth throughout the cycle. And in addition to that longstanding strategy of investing in our own business, keeping the balance sheet in tact and returning surplus cash to our shareholders, the strength of our diversified cash flows has underpinned our ability to maintain our progressive dividend policy.

However, being in this strong position does not mean immunity from the strong winds that are blowing. We continue to systemically and methodically review all aspects of our business and, in this regard, you have seen a number of production and project announcements, most recently on January 21, in our production report where we announced a number of sensible, prudent and responsible measures.

We will continue to tailor the production of our product if we are unable to sell the products, or if any of our operations are cash negative and set to remain so. We've also, as I've said before, refocused our capital spend, which has always had a high bias towards brown field expansions in our back yard to an even more increased manner reflect to focus on Tier-1 assets, brown field expansions in the back yard.

But I also want to emphasize here today that our business strategy is always to live within our means. And not only on the production side, but also on the capital side we will continue to review and make adjustments necessary consistent with the environment in which we operate.

So in summary, we had a robust first half. Our production to date has been strong. The market outlook has been deteriorating, and together with the production adjustments that we've made already, will impact results over the balance of the year.

We don't expect any relief in the short and medium term from uncertainty and volatility. The timing of any recovery is unclear, but while that global outlook is uncertain, I again want to emphasize the quality of our assets, the strength of our balance sheet, and the cash flow that is generated from this diversified portfolio, uniquely positioning us for when this business cycle turns.

We will continue to, as we've done, act proactively and with a high degree of decisiveness to preserve and grow shareholder value, ensuring that long term value is not compromised.

You've just listened to the webcast of our investor presentation given in Sydney earlier today. I would like to thank you especially for those in London in the snow. Thank you for taking the time to do so. We are trialing this style of presentation for the first time, and I look forward to your feedback on this after the Q&A session.

We will now take any questions that you may have. You can submit these questions either by the web tool provided, by email, or we will take your questions by telephone. Alex is in London, I am in Sydney, and we will first go to the telephones; if I may have the first question, please.

Thank you. Our first question comes from Robert Clifford from Deutsche Bank.

Hi, Marius.

Hi, Rob.

Just a quick question. In your presentation, you talk about the '09 CapEx, $11.3 billion. Now that's down from $13.5 billion you talked about six months ago. When I look at the --

That's correct.

Yes, when I look at your results presentation, you detail your projects and they don't appear to have changed any of the CapEx or timing. Can you just let me know where -- which projects you're trimming; how you're getting that CapEx down, and what it's going to impact in terms of your projects?

Yes, Rob; obviously, the projects that you see are the ones that we've sanctioned and that we are busy executing. Most of the projects that you are seeing, we've got several investments that were probably in our budget that have slipped beyond that through deferral or have been cancelled, and examples include the Suriname development which, while we never released any definitive numbers around that, was something between $500 million and $1 billion worth of capital investment.

I think the Guinea investment at the beginning of this year probably would have been on the charts here as being sanctioned earlier and, as you know, that project has gradually slipped out.

Then there are a number of things that -- where we had pre-sanctioning spend which has come out, and that is things like Pearl, the Indonesian nickel, and so on, and apart from that, obviously, we have had on some of our projects where there's an appreciable local currency component, we've had some currency movements.

I think that covers the main items. Alex, is there anything that I have omitted?

No, Marius, you give a very good view. We never gave a forecast to FY '10. The $13.7 billion was a forecast for FY '09, and what you see as well is a reduction to some extent on the sustaining capital base and also other minor capitals, but also in exploration, because the $13.7 billion encompasses everything.

Yes, so I can see sustaining's nearly halved. Is that -- do we expect some lower production as a result of that? Is that the inter-development CapEx? Are you cutting into the buying I guess is the question I'm asking?

Well, yes; Alex and I, who basically play the role of capital allocation in the Group, have certainly dug into the minor and sustaining CapEx, and have asked whether all of these projects are necessary to be done at this time. I don't think that there's any production guidance outside of the production guidance that we've already given in our results.

Okay, thanks for that.

May I have the next question on the telephone, please?

The next question comes from the line of Sam Catalano from Macquarie. Please go ahead.

Yes; hi, Marius. Just a couple of questions; first one on the -- your slide on future CapEx and comments about supply being impacted. I'm just wondering, as you look at that and consider that, are there any commodities in particular, or do you look amongst the commodities and think that some may or may not be more or less affected in terms of barriers to entry for spending large amounts of CapEx, for example, that make it more difficult for some of your competitors to do so? That's the first question.

And secondly, do you have any comment in terms of growing or potentially acquiring businesses, relative attractiveness between acquiring existing production today, or long dated development options where the value is yet to be added?

On the second one, the question is long dated options or existing production. Our bias is always towards things that are already in production. Obviously, you do also want to add from time to time long dated, very high-grade resources, and I think the potash acquisitions over the last couple of years would be an example. But on balance, we always bias towards productive assets, or assets that are already in productions.

If we look at the future CapEx and which things have been most affected, haven't really given that a lot of thought in this format. Perhaps just thinking aloud, there certainly has been in the copper business no material new extremely large mines or even provinces opened up during this upturn. And I think it's fair to say that the current events have taken a lot of, let's call it expectations for capital deployment, particularly in places like the Congo and so on, has gone out of it.

Then perhaps a second thought, and this is pretty unstructured, on the iron ore business. Clearly we are very happy that we're in a position to keep on growing production at a time where some other competitors seem to not be investing in those businesses.

Those are just two thoughts, but overall, Sam, probably I haven't analyzed the question in exactly the -- sorry, that aspect in exactly the format that you've asked.

That's fine. Thanks, Marius.

Perhaps one more question from the telephone, and then I'll try and take some from the webcast.

Okay, our next question comes --

Is there another question?

Our next question comes from the line of Tobias Woerner from MF Global. Please go ahead.

Yes; good morning, Marius.

Hi, Tobias.

Good morning, Alex. Three questions if I may. Firstly, you've delivered, obviously, very strong cash generation, net debt lower than at least what I've expected. Would you be so kind to give us some kind of sense where the year should end for yourself, irrespective of any M&A and any other exceptionals which could come during the year?

The second question is, you have through your one book approach, at least that's what I've always believed, quite a strong insight into the shipping market around the world. We've seen the Baltic freight rates move up quite nicely recently from 663 up to now 1150. Maybe you can tell us what you sense in the shipping market at the moment and what it tells you?

And then just lastly, and I don't want to dwell on it, but I think it's got some important messages and lessons to learn from it, Ravensthorpe. We can discuss it maybe with Alex and the round table more in detail what your lessons are from it.

Okay, Tobias. Perhaps taking those in reverse order, starting with Ravensthorpe. Clearly, there are always lessons to be learnt. The one aspect that I emphasized earlier today on Ravensthorpe is, obviously, we had a massive change in the nickel business over the last couple of years, particularly over the last 18 months, in new technologies, nickel pig iron and so on, dramatically changing for how you think upside in that business will respond. And we've spoken about that before.

Nevertheless, I think the -- obviously, a lot of debate. I think the one thing that the management team would ask itself today in the -- given the same set of issues, is just whether a focus on absolute Tier 1 resources wouldn't have screened out this project on the basis of resource, size and quality.

But there are, obviously, a myriad of other smaller lessons to be learnt, and it is a pity if you've got to learn from your own mistakes rather than purely learning from the mistakes of others. But I think we've said that that's probably not the finest investment out of our portfolio of 44 projects that we've completed since the merger, or the creation of the Company in its current form.

On the one book approach, Alex and I did review just a couple of days ago with our shipping folk what they're seeing. I think particular -- while we can't forecast for you where the freight market is going, I think the one thing that stood out for us is, given the [bulk] commodity environment that we've outlined here today, the one thing that I actually think overhangs the shipping market is a very, very large number of deliveries of vessels over the next two years.

And even though some of those vessels may not materialize as a result of financing, shipyard issues and so on, it is still a very large proportion of new additional capacity that is going to come on the market. So that would probably be the one aspect that we would take into account. Alex, do you recall any other specifics that the freight guys highlighted to us in preparation for today?

No, Marius. That's basically -- it was the case of going from chronic under supply to just dead market. So it was a significant, I think more than in any commodities, the very quick shift in that market. And that's even more pronounced with the new capacity that's coming in in the next couple of years, as I said.

Okay. And then on the third question, on cash generation forecast for the year, Tobias, that's probably a very, very difficult question for us to give you more guidance on. We simply can't forecast that, and particularly in this volatile outlook.

If I could perhaps ask the operator to just read out the first question that has been submitted by email, please?

The first two questions from the webcast come from Mr. Jason Fairclough of Merrill Lynch. The first question is, could you discuss why you haven't restarted the share buyback program? And secondly, could you please discuss the future of your Southern African smelters in the context of low prices and poor outlook for aluminum and ongoing power restrictions in South Africa?

Yes, Jason; thank you. On the share buyback program, I think the most succinct summary that I can give is that we believe that the optionality that we get from maintaining that cash on our balance sheet, firstly from an outlook perspective where we don't know what will happen, the option that we've got retaining that on our balance sheet, plus the option to use that capacity in what we believe will be an environment that will deliver additional opportunities. Between those two things, the optionality probably outweighs other considerations.

On the South African smelters, I believe that starting off with the last part of your question, which is the power restrictions, actually the power restrictions are probably ameliorated by quite a lot of capacity cut-downs that have occurred in the platinum industry, which is power intensive, particularly in the ferro chrome industry and then, obviously, also in our ferro manganese industry, coupled with other diminished industrial use. So the power availability issue has probably been ameliorated.

From a profitability point of view, clearly, we've got to continue to review particularly the higher cost capacity. And as you're well aware, not all of the capacity is the same. Bayside is a slightly older smelter. We've got to continue to review that, but I would like to point out that as part of the power curtailment some time ago, we actually closed the highest cost capacity in that region.

Second thing that I would highlight is that for some of the products sold on the domestic market, particularly in South Africa, there's obviously a value added premium as well as a logistical advantage, and we capture that. So we don't realize purely just the LME price on sales in that domestic environment.

Operator, if I may have the next question on email, please.

The next question is from Sylvain Brunet of Exane. Are you expecting cost deflation in the second half of the financial year? And secondly, do you think that value accretive opportunities could arise earlier in the oil and gas sector than the metal sector?

On cost deflation, I think Alex showed a slide that broke down the $1.6 billion in additional costs that we saw. And while I don't know all of those numbers off the top of my head, roughly speaking, there was about $600 million in there for raw materials cost inflation, coke pitch, aluminum fluoride, sulfuric acid, and so on.

Our philosophy on these input materials is to follow the market in the same way that we follow the market on our revenue line, on our interest rates, and so on. And so, while that is not perfectly possible to immediately move to -- as the market move -- shed those costs, clearly, we expect that as sulfuric acid has decreased I think eightfold in price, and so on, those cost decreases will come through.

Also in that category, obviously, on a more immediate business, are things like lubricants and diesel and explosives, which are very coupled to the petroleum price.

Other categories of cost that will come out of our cost or will be non-recurring are, for example, the $300 million or so in the rebuilding cost of the Kalgoorlie nickel smelter. And then thirdly, Alex has also detailed there that we incurred extra costs on additional contractors producing high margin products, particularly at the beginning of the period, highlighting manganese and coking coal as two examples. Out of those contracting costs, I think that the -- both on a unit usage basis as well as a unit cost basis, we're going to see decreases.

And then on the last one, I'd like to tie that in to Rob Clifford's question on sustaining CapEx and maintenance costs, where you saw that maintenance did indeed, as we saw, very high availability in the first -- particularly in the first half of the first half. Clearly, going forward, we're going to scrutinize maintenance costs extremely closely. So those are the components of how we think about costs coming out of our cost structure.

I had a second part of that question. If the operator could just repeat that, my abbreviation here is now largely illegible to me.

The second part of the question is, do you think that value accretive opportunities could arise in the oil and gas sector before the metal sector?

Probably haven't looked at it that way. Typically we don't break out opportunities by end-use product. We typically look at it on an opportunity-by-opportunity basis, so I couldn't really comment on that.

On that note, perhaps let me go back to the telephones and see if there's another question on the telephones. If I may have the first question, please.

We have a question from the line of Charles Kernot from Evolution. Please go ahead.

Hi, thank you. It's just a question really in relation to cash flow; the cash flow situation. Clearly there's a big increase in reported cash flow, but I suppose in looking through the details, a lot of it relates to -- it was around $5 billion I think -- of $5.4 billion of an improvement in trade and other receivables which will, obviously, come down a lot.

Now that, I suppose you've talked about the big increase last time in the full year results because of much higher commodity prices. And in a way, isn't it true that actually this cash flow improvement really relates to the high prices that you're receiving in the first half of the 2008 calendar year, rather than any strong improvement in underlying cash flow in the second half of 2008 calendar year?

Yes, I think the -- if we look at cash flow and EBITDA, there are clearly some separations there. Clearly, liquidation of the receivables book in a lower price environment is an important contributor. And there are some impacts around provisional pricing and so on, I think, which I don't have the exact detail on.

But it's fair to say that there is indeed some cash coming in because of liquidation of the receivables book, with receivables days staying at approximately the same level period-on-period.

I should point out however, that in the credit environment that we've got actually bringing that cash home and bringing that into bank accounts is a serious management task, and one that we work on very, very hard. So maintaining our receivables book at a very, very tight level in what is a difficult credit environment is something that we take particular pride on.

Alex, I don't know if you can shed a little bit more light?

I'd just like to point to Charles that you are correct in your analysis that there has been an impact from working capital perspective. But also you should look at the margins that -- EBIT margins that our business is producing. The 46% is quite significant. It is coming down from where we ended last year which was about the 50%, so you have seen the impact of the lower prices on the aluminum products. But we have also seen the impact of the higher prices on the bulk products that are coming through. So it is a mix of both.

Okay. Thank you very much.

Thank you. If I may have the next question, please.

We have no further questions coming through on the telephone line.

Let me thank you. Let me check the operator on the e-mail. Are there any other questions?

The next question is from Mike Bedford of BJM. We note today the $508 million Newcastle Steelworks rehabilitation. Are there any other single obligations that we should be aware of?

Mike, yes; good morning. No, the Newcastle Steelworks remediation project is a complex one. Like another one that we've had to handle in the past, South West Copper, it is something that stems out of a legacy operation that was there for the better part of the century, in this case the steelworks. As a result, it's taken considerable time for us to quantify the exact amount of material, and this legacy really stems from the split out of steel from BHP in perhaps 1999/2000. It's taken some time --

(Operator Instructions).

-- [permits] to obtain in order to get clarity of what this will cost us. So it's taken some time. We finally have a quantification of volume, method and rated which we can do it, and we've got that go-forward commitment on this. There is nothing similar that has been identified through our risk management process that is insipient here.

If I may have the next question, please, from the e-mail operator?

The next question is from Kieran Daly of Investec Securities. Do you envisage building a potash business by M&A, as well as by green field projects? Given your balance sheet and the sharp fall in equity value of listed producers, there must be some good opportunities for you.

Kieran, we obviously -- there not that many companies when you talk in the potash basin. By me commenting on this I would implicitly be commenting about one or two specific opportunities which you'll understand we can't do.

Perhaps a couple of comments. We don't see green field and M&A activities as being neutrally exclusive. That's perhaps one comment. And secondly, I note that potash prices have held up relatively well compared to some of the other commodity prices. So there hasn't been the same movement in potash prices as we've had in some of the other commodities, which has, obviously, effected valuations and so on in the sector. And perhaps I should just stop at that point.

If I may have the next question from the operator, please.

The next question is from Kieran Daly of Investec Securities. On costs, you normally have a slide showing the rate of cost increase year-on-year. Can you provide some guidance on the first half 2009?

I thought we provided a fairly good breakdown of the costs in the usual format. I would say that, without wanting to make a forecast of exactly what we expect on costs, which we never do, I would restrain my comments perhaps to noting those things that I've already discussed on contractors, raw materials, maintenance costs, unit usage and non-recurring items, all of which point to all things staying as they are today to probably a net deflationary environment in the second half.

Operator, if I may have the next question from the e-mail, please.

The next question is from Jason Fairclough of Merrill Lynch. Could you please discuss the outlook for volumes on the various steel making raw materials?

Yes, Jason; we've in the appendix material on the release, you'll find some guidance. Essentially we hope to, in iron ore since the -- we believe that a substantial amount of de-stocking is taking place in China, we hope to sell approximately the same volume of material in our iron ore business over the second half of the year as we did in the first for a total of about 130 million tonnes per year.

Our on manganese and coke and coal, the situation is a little bit more complex. These products have different customer regions where the iron ore is very North Asia focused, with 50% going into China. And hence, you've got a reasonable degree of visibility with the steel de-stocking in China, and local domestic Chinese production being the main variables there.

On coke and coal and manganese, we have North American markets, we've got European markets, Brazil, India and so on. In addition to that, manganese is a very easily storable product, and hence when de-stocking is complete, it's fair more difficult to judge.

So we've given guidance on the coke and coal. I don't think we've got any update to that here today. My observation would be that, if anything, the risk is probably to the downside in that product, consistent with our overall outlook that we've given today in the short and medium term.

And in manganese, you have seen that we have had the cutbacks on our manganese operations totaling almost 50% in the second half of the year on a unit basis. Like on coke and coal, and particularly given the unclear stock situation here, because large volumes or large -- from a time perspective, a lot of manganese can be stored, probably the risk here is towards the downside on volume, even from here at this time as well.

Just one last word on the iron ore. We probably have on iron ore modified our selling behavior where we've got more product going into the market, clearing market than we had, and with term contracts relatively contributing less.

Can I take perhaps at this point the next call on the telephone, please?

Our next question comes from the line of Damien Hackett and Tyler Broda from Canaccord Adams. Go ahead, please.

Yes, good morning, Marius and Alex. It's just a quick question on accounting, IFRS accounting. The tax effect of that write-down on the Australian dollar tax assets, I presume that is an IFRS accounting mark-to-market issue. And, therefore, does it mean that we might see a reverse of that tax situation going forward should the exchange rate strengthen?

Yes, Damien, we've had this and we've noted a couple of years ago, I think two years ago we noted that over a two-year period, because the Australian dollar had strengthened on a more progressive basis, I think we had on the order of a $300 million or $250 million/$300 million effect year-on-year. Obviously, what comes to book here is the fact that we saw such a very quick weakening or depreciation of the Australian assets. And the number that you are seeing is exactly that. It is a mark-to-market effect which, if the -- with no cash impact, and where the companies that don't have a US dollar functional currency for the assets, we just see this as a balance sheet size increase or decrease.

Unfortunately, because we've got US dollar functional currency, these adjustments show as a mark-to-market on the US dollar side and flows through the P&L. Alex, I don't know if your education of (inaudible) is complete but --

That was perfect, Marius. You got a star in accounting there. The only thing I would add to that, Damien, is that the drop in the Australian dollar in relation to the US dollar in that half year was to the tune of 28%. If you go back into this half year, you're going to see that never -- it was never even double-digits. I think the highest before was 9%. So it is all happening very dramatically in one period.

So, Alex, just if I can follow up. It's got nothing to do with the long term view that you may have on the Australian dollar rate?

No, no; it is a mark-to-market thing.

Thanks.

And again, out of all of the things on our P&L today, if I look at all of the elements as we broke it down and how we feel about our EBITDA, our EBIT, our margins, our cash flow and our profit after tax net of this amount, I think all of those are exceptional performances. And we've got one item which is quite difficult to understand, or to communicate, which is of a non-cash nature, changes nothing on the value of the company, which flows through our P&L because of a US functional currency choice rather than through our balance sheet. And I'd like to emphasize that point perhaps for all of the people that are on the line.

If I may take the next question on the telephones, please.

Our next question comes from the line of Amos Fletcher from Cazenove. Please go ahead.

Morning, gentlemen. Just one question with regard to your nickel business. I notice for Yabulu and Nickel West, if we strip out the cost of the startup of Ravensthorpe, both of those businesses are still loss-making at the EBITDA level. Can you talk about how you might be able to adjust the cost profile of those businesses going forward, or whether your focus may be on reducing production potentially? Thanks.

Yes, on -- perhaps two comments. There's obviously a substantial amount of cost associated with the build-up of partially processed stocks ahead of the Kalgoorlie nickel smelter which we've -- which we liquidate progressively now that that smelter is re-built and start-up -- sorry, costs associated with the re-build of the nickel smelter. The second one is perhaps on the Mouth Keith open cut operation where we've got lower grade material which is at surface, and which we will process during the next period.

Alex, I don't know if you've got anything else to add on nickel costs?

Nothing to add, Marius. Just --

Okay, thank you.

If I may have the next question on the telephones, please.

We have no further questions coming through on the phone lines at this time.

Let me do one final check of the e-mail please. Operator, are there any other questions on the web material?

We have one last question from [Luke Pearce] of [Otto Securities]. Could you again elaborate on how third party access to your railway network in the Pilborough could impact your existing operations and also your expansion plans?

Luke, thank you. Not a lot of comment from what we've said before. We have an obligation to carry material as part of our state agreement for third parties. That means putting their material in our trucks or in our railway trucks. And that's an obligation that, clearly, we take very seriously, and we've got every intention to comply with that.

On the -- on other access agreements, on putting third party rolling stock on our rail and so on, clearly, we've seen a ruling late last year by the [Treasury] on whether this process could be considered a production process or not, and hence the ruling there. But we are still quite a way from completing all of the legal processes around that. It could be several years before all of that is completed, and I think as such, the impact on our earnings as you model it over the next couple of years should be absolutely negligible, both from a revenue basis or otherwise.

And on that note, I think thank you very much once again, especially for people in a cold London. We've appreciated having you. We look forward to your comments perhaps on the format. We genuinely would like to see whether that gives you better value, and thank you very much again for sharing with us what we believe is an excellent set of results and a company that is in terrific shape from a cash flow and balance sheet perspective.