必和必拓 (BHP) 2010 Q2 法說會逐字稿

Ladies and gentlemen, welcome to today's presentation of BHP Billiton's interim results for the six months ended December 2009.

I usually get this wrong, but I'm speaking to you today from Sydney. Alex is in London. And we're really happy to be here.

Before I start today, I'd like to point you to the disclaimer and remind you of its importance in relation to today's presentation.

I will start by giving you a brief overview of our results. I will then hand over to Alex, who will take you through the detail of the financial performance. And then I'll come back and talk to you a little bit about our views on the macroeconomic environment. And I also want to share a few words with you about our strategy and plans.

During the December 2009 half year, we did see a strong recovery in demand and prices for most of our commodities compared to the first half of calendar year 2009. The rally in prices and demand was driven by strong recoveries in China and India and, lately, by start of restocking in the developed economies. However, we do want to note that this run-up in demand depends on government stimulus and low interest rates in both the OECD as well as in China.

And before turning to our financial results, I do want to point out that, while commodity prices have generally recovered compared to the first half of the calendar year, they are still lower than the comparable reporting period, which we report against, which is the second half of the 2008 calendar year.

And, mainly, on the back of these lower prices, compared to the comparable period, our underlying EBITDA for the half was down 22% to $10.8 billion, underlying EBIT down 28.5% to $8.5 billion and, apart from prices, which you will see in Alex's presentation, was a big driver of these variances. Exchange rates with stronger producer currencies was another strong driver of variance.

Attributable profit for the half was $5.7 billion before exceptional items, down 7%. Our balance sheet remains strong. Gearing is up a little bit over the last period, but we're standing at 15% - a very comfortable level of gearing. And, today, we announced that we have increased our dividend to $0.42 per share, an increase of $0.01 per share over the last period, continuing our progressive dividend policy.

Given the volatile trading environment that we had over the 12 months proceeding, we are very pleased with these results.

So if I look at our performance and addressing our performance, I would like to begin, as I always do, with safety. I'm saddened to report that during the current financial year we have had four fatalities; each one of these a tragic testament to the fact that we have risks in our business and an important reminder that we can never let up on our quest for zero harm.

We have always maintained that any injury is avoidable. I truly believe this to be the case. I'm happy to report that we are making progress and that the number of injuries at our operations reduced by 30% over the comparable period, continuing a long-term trend of improvement in injury rates. The safety of our people will always continue to be our highest priority.

On an operational level, the recovery in demand that I spoke about meant that we achieved strong results in many of our commodities, driven by good operating performance in existing assets as well as volume growth from new assets.

During the half year, we delivered first production from three major projects in iron ore, alumina, and energy coal. And, pleasingly, we produced record results-- or record production results in two of our largest businesses - petroleum and iron ore.

We continued to simplify the portfolio, which led to the announced sales of the Yabulu and Ravensthorpe nickel businesses and the exit from the bauxite and alumina businesses in Suriname. I want to note that the restructuring of our nickel portfolio is now complete and, as you can see from the results, leaving us with a much simpler and stronger nickel business.

Now let me hand over to Alex. And then I'll come back after Alex has spoken to us about the financial results.

Thank you, Marius.

I'm delighted to be presenting today what is described as a very clean and solid set of results. As Marius said earlier, and I'm going to re-stress, the last six months was marked by a strong rally in prices for most of our commodities on the back of a recovery in demand. However, the realized price for most of our products were lower than those achieved during the December 2008 half year.

So, for December 2009 half year, the main negative impacts were lower realized prices and the effect of a weaker US dollar in our costs. Partially offsetting these negative impacts was our continued focus on quality growth and the rigorous cost control across the business.

A strong operating performance, cost control, and continued project execution contributed to underlying EBIT by more than $2 billion.

Through the ongoing investment in large-scale projects, we are well positioned to continue to capitalize on the growing demand for our products. Volume growth was particularly strong for petroleum and iron ore, in which we have successfully delivered 26 projects since 2001. This is not just a six-month story but one of focused and sustained volume increases over the long term.

In our last set of results, we pointed out that costs tend to lag prices. And I'm pleased to be able to report that we are now seeing a cost decrease flowing through. With continuous focus on cost containment and the benefits of falling input prices, we achieved a cash cost decrease of about 4%. Although this is a positive sign, we should note that the main decrease is due to lower input prices for raw materials; particularly, energy and fuel. And, just as we have seen a recovery in commodity prices, we expect that this increase in input prices, especially for energy products, will eventually flow through to costs.

By consistently adhering to our strategy and delivering strong operational performance and quality growth, we have maintained a healthy and aligned EBIT margin of 38%.

Underlying return on capital was 24%, which was an outstanding achievement, considering that we have consistently increased our capital expenditure every year. And there is a considerable amount of new, not-yet-productive capital on the balance sheet. Excluding this not-yet-productive capital, our return on capital employed would be higher by about 4%.

Now let's review the results of each of our businesses. Our diversified portfolio remained well balanced across energy, nonferrous, and ferrous products.

I'll start with energy, where low prices negatively impacted underlying EBIT for both petroleum and energy coal. Petroleum delivered another record production over the period, with the majority of the volume growth being in the higher-margin liquids. Our energy businesses continue to provide us with exciting and significant growth opportunities. We have six petroleum and three energy coal projects currently in execution.

In contrast to other businesses in the Group, nonferrous generated a positive net price variance for all major products, except for aluminum. As Marius mentioned, we took actions to further simplify our nickel and aluminum businesses. And this led to a $445 million favorable variance to underlying EBIT. The sale of Ravensthorpe also contributed $433 million to exceptional profit after tax. With a much simpler portfolio containing strongly performing assets, stainless steel materials, and aluminum remain core to the BHP Billiton diversified model.

Underlying EBIT for the ferrous and steelmaking products was also negatively impacted by the lower realized prices. This was offset by significant increases in sales volumes underpinned by strong improvement in physical demand for metallurgical coal and manganese. And, following a series of successful expansions in our Pilbara operations, we continue to set consecutive production and shipment records for iron ore.

Before I wrap up this section, I do want to highlight an important market consequence of China's growing imports of bulk commodities. As soon as China started importing iron ore in large quantities, it effectively connected the global iron ore cost curve with its own domestic cost curve. This created a single, global market with an active spot market-clearing price.

We are also seeing this manifest itself in other bulk commodities, such as metallurgical coal, which Marius will touch on later. But this will have flow-on implications to our results, as we are seeing higher volumes sold on shorter-term referenced pricing. You can see today that the market price for iron ore is about 90% above current Australian benchmark prices.

So, to sum up, it is fair to say that our focus on simplicity, on delivering excellent production, performance, and quality growth, combined with a market price approach and rigorous cost control, translated into another solid and clean set of results.

Marius will talk more about how we will continue to invest in value-added opportunities at a record pace. But, right now, I just want to give you a sense of how we are progressively deploying our cash to deliver long-term value to our shareholders through the business cycles.

On the top, left chart, we note that net operating cash flow was basically flat versus the six months ended June 2009. When compared to December 2008 half period, the result is a noteworthy decrease. This decrease is mostly due to lower cash working profit caused by the lower prices and changes in working capital.

It is very important to highlight that we continue to allocate our cash in line with our strategy. And, as a refresher, our cash priorities are as follows.

Firstly is to invest in the business. And, as you can see on the chart marked 1, we have done so in a progressive way, defying the boom-bust history of our industry, and done it at an annual compounded growth rate of 20%.

Secondly, as shown in chart 2, we manage our balance sheet to a solid A credit rating, and we have done so independent of cyclical pressures, acquisitions, and buybacks. This provides us with great optionality in a continued volatile economic environment.

The third priority, shown on chart 3, is to return funds to shareholders; primarily, via progressive dividend policy. We have achieved this over the long term, including throughout the recent downturn, and also by periodically rebasing our dividend in line with our growth and long-term outlook. Illustrating our commitment to this priority, today we have increased our interim dividend to $0.42 per share. This consistent and ongoing execution of our strategy is aimed at creating increasing, sustainable, and stable long-term shareholder value, which will continue to differentiate us from our peers.

With that, I'll now hand you back to Marius, who will walk us through our outlook and our growth pipeline. Over to you, Marius.

Thank you, Alex. Just as a reminder, I'm going to talk a little bit about our views on the external environment and strategy and then augment some of the things that Alex has spoken about on our growth plans.

The first half of our financial year 2010 results period saw continued recovery in demand, and this has flowed through to prices of most of the products that we produce, as you can see on this chart. The strong rally was driven by strong recovery in China and India as well as an end to destocking and a start to restocking in the developed economies.

Prices were also helped by a weak US dollar over the period; however, as noted in Alex's presentation, obviously, a weak US dollar negatively impacts on local currency costs for us.

And even though restocking in the OECD has begun, particularly as illustrated by the most recent US fourth quarter GDP data, China still dominates current materials demand. And you can see this near-term dependence on China from the chart on the screen, which uses steel production to try and illustrate the point. If you look on the chart, you can see that China's production is recovered and is now actually higher than it was prior to the financial crisis. In contrast, the rest of the world's production is still well below what it was at the start of the financial crisis.

Or if I can put it a different way - In absolute terms, what you see on this chart, China steel production accounts for nearly 50% of global steel production. And this growth in Chinese steel production was driven by strong domestic construction and industrial demand on the back of government programs and increased liquidity.

And this leads me to another factor, which I want to highlight, which is the extent to which many economies, including China, are still dependant on government stimulus.

And on the chart that I show, which shows the US borrowing by sector, the orange-shaded area on the right is a dramatic sign of the extent to which US government borrowing-- where the US government stepped in to support falling borrowing from households and businesses, showed in the other two colors - gray and blue. And I just want to point out that in many other OECD countries, governments responded in exactly the same way.

So we will watch with interest what will happen when these governments consider what to do about the unsustainable stimulus measures that they have been forced to implement.

Looking at all of the economic data, clearly the world global economic outlook is better than it was in mid 2009. However, the statements that we've made over the past couple of results periods, which is that the economic recovery will remain fragile and the duration protracted-- We see no reason to change that outlook statement.

But I do want to point out, again, as I pointed out in the previous results period, that in contrast to our relatively modest outlook for shorter-term world economic growth, our longer-term demand outlook for the products that we produce in the minerals and metals and energy sectors continues to be robust.

And there are two factors that I would like to, again, emphasize as we talk about that. Firstly, if we look on the chart on the screen and we look at the left-hand side, we continue to expect that the absolute GDP growth rate of China, expressed as a percentage, will remain strong relative to the US and the other developed economies. And, secondly, it's worth remembering, as I've said before, that the materials intensity of the developing economies is much higher per unit of GDP than the developed economies.

The reason for this can be seen on the right-hand side, where we can see that the absolute level of investment in the Chinese economy is basically the same as the absolute level of investment in the US economy, despite the fact that the Chinese economy is much smaller than the US economy. And you can see that by comparing the two darker areas-- or the darker, shaded area on each bar on the right-hand side.

So, a consequence of this materials-intensive growth is that developing countries, like China-- What tends to happen is they tend to overwhelm their domestic resource endowment over time, product by product, which is basically the same pattern that we saw in the industrialization of Europe quite a few years ago.

So we have all heard the story of China overwhelming its indigenous endowment of iron ore. And we've spoken about that many times. But I thought today that I would talk about a different product and then go on to talk about many of the other products that we produce. The product that I'd like to explore in a little bit more depth today is that of metallurgical coal. And the chart on the left-hand side shows how China, over time, has moved from being a net exporter of coking coal to becoming a significant importer during 2009.

Now, just anecdotally, I can tell you that I recall vividly how we sent our marketers to go down coking coalmines in China, almost a decade ago now, to see what was going to happen. And we've been waiting for this moment to happen where the indigenous endowment is overwhelmed. And while we're not sure that 2010 will be an exact repeat of 2009, we do expect the trend towards imports in this product to continue. Therefore, as we talk about coking coal having a very large resource base endowment in very close proximity to this area of growth leaves us very, very well positioned to grow our metallurgical coal business. And, in that context, you would have seen the announcement of pre-commitments in expenditure to our Caval Ridge mine and to the Hay Point expansion in Queensland's Bowen Basin.

Now I believe we can generalize this trend that I've just spoken about, where countries overwhelm their resource base. And our access to what I would call tier-one resource basins extend beyond just iron ore and metallurgical coal. And we have this same type of thing in products like uranium, copper, now potash, and, also, in some aspects of energy.

Let me also share a few words about our organization and strategy. I think we are almost unique in our industry in having had a strategy that has been unchanged for so long. In the last decade, I don't recall us making any material changes to our strategy. And we believe that this strategy has proved itself throughout the cycle. Again, to emphasize, what defines us is our focus on large resource base contained in large, long-life, tier-one resources with multiple expansion options; a focus on upstream, export-oriented assets, which are diversified by commodity, by geography, and by customer; and the financial base-- financial strength, which is demonstrated by a single-A credit rating.

Let me talk to you about some of these elements of strategy and what we have been doing. Firstly, we've continued to add to that upstream resource base in our portfolio. And you will have seen the recent acquisitions of Athabasca Potash and, also, the UMC iron ore acquisitions. It's also true of our petroleum CSG, where we continue to increase our exploration budget to continue to build our resource position.

Secondly, we continued to develop these resources into world-class operations. The deep inventory of organic growth options embedded in this resource base and in our portfolio is predominately brownfield in nature, which means that they are relatively less complex and less capital intensive to execute. We currently have 12 projects in execution, totaling some $12.5 billion - $12.4 billion.

Additionally, on the growth side, we are obviously delighted to announce, in December, that we had concluded definitive agreements with Rio Tinto in relationship with our western Australian iron ore production joint venture. We continue to view this as the most value-adding transaction that can be done in the mining industry.

Obviously, these announcements in December is a very important milestone in delivering this additional-- significant additional value to both sets of shareholders and to our joint venture partners in the Pilbara.

Alex also showed you some elements of the financial strategy a little bit earlier, but let me remind, particularly for our shareholders, what this means for you. In the previous slide, I spoke about growth. We are very pleased that our diversification, the sustainable cash flows from low-cost assets, and our financial strength continue to allow us to grow and invest in the Company throughout the financial crisis.

And, just as an example, in November 2008 - basically, at the depth of the financial crisis - we approved our RGP5 - a $5-billion investment in iron ore. We also made the decision to continue to-- in parallel, continue to accelerate work on our RGP6 project. And you will have seen that very recently. We've approved $1.7 billion of pre-commitment expenditure on that project. All of this geared towards building out the installed capacity of that business to about 240 million tons of capacity.

And, particularly important, you can see, on the chart on the screen, on the left-hand side, that we have continued, since 2001, to grow that organic capital expenditure by 20% per annum on various projects that add shareholder value.

And, at the same time, while growing the production size and value of our company, it has allowed us to maintain our progressive dividend, which, on the right-hand side, you can see we have grown by a compound rate of 25% per annum. We have, therefore, been able to grow the company at a rapid rate and, at the same time, grow the rate of the returns to our shareholders at a rapid rate, at the same time maintaining financial strength.

So, in summary, we are pleased with the results today. We're particularly pleased that the unchanged strategy has brought us through the downturn as well as position us for opportunities as they may arise.

And I want to continue, as I always do, emphasize the positive role that having low-cost assets with strong cash generation has played in allowing us to be a standout in our industry.

I want to emphasize, again, that we continue to invest throughout the downturn and continue to grow our rate of investment at the same time as growing our dividend.

The importance of making sure that our portfolio remains low cost against a backdrop of strong-producer currencies will continue to be an ongoing strategic focus.

Our strong, long-term outlook for demand means that we want to continue to invest and grow the company in order to supply the needs of our customers. And our strong balance sheet, therefore, allows us to deliver growth, income, and value to our shareholders.

Importantly, anticipating long-term growth means that we also have to work on our organization. I've spoken to you before about creating a simple and accountable organization, which is a core tool to make sure that we continue to effectively manage the larger footprint that will inevitably result over time as a result of these investments.

So, on that note, I would like to thank you, ladies and gentlemen. We would now be pleased to take your questions. We'll start here in Sydney and then take questions from the phone lines. If you could state your name as you pose the question and address them to me in the first instance-- I will pass them to Alex as required. And if we could start here in Sydney, please.

Marius, result came in ahead of expectations and, certainly, shows the strength of the Company. Just looking ahead with your capital spend program, you've got $20 billion, potentially, coming up next year. You've got a balance sheet that is in very stable condition. What is the likely capital spend beyond 2011? Is it going to be at these very high levels, considering you've got Olympic Dam coming up, Potash, et cetera? I'm just wondering if we could get some guidance on what the potential level of this CapEx is.

And, then, the second question-- There's a lot of talk at the moment about royalties, west Australian premier. We've got the federal review of royalties. Do you have any comments to make on that and how it might be affecting investment decisions? And, also, similarly, there's been changes to industrial relations laws and how wages might develop in Australia over the next few years.

And then, finally, on coking coal, there's been a change in the market. We hear a lot of noise from China about wanting to stay on a long-term-- or annual contract. But, on coking coal, they don't seem to comment at all about buying on spot. I'm just wondering why there's such a difference in attitude.

Gosh. That's quite a few. I'll try and answer them.

I think, on CapEx, the story that I want to tell again is about consistency. You should understand that a very important factor of how you-- apart from your balance sheet strength on how you can deploy CapEx is obviously the resource endowment but, more importantly, even, the ability of the organization to deploy that capital.

One of the things that we talk about a lot in our management team is - What is our capability to deploy capital, and how do we grow that capability? And, therefore, you have seen that, while we clearly moderated some plans during the downturn of a bit more risky nature, our baseline has been to progressively grow the CapEx in the same way that we progressively grow the dividend, because the combination of the low-cost assets that generate cash and then the growth assets delivering cash in due course allows us to grow the dividend.

So I would say that I probably wouldn't like to give you guidance going forward. We never do. But I do want to emphasize that we have the capability, we have the resource bases, as I've again spoken about today, and we do want to progressively grow our capital deployment.

On royalties and taxes, I think that a few things, perhaps, in the local context here in Australia-- Australia has been a wonderful destination to invest in over the last 20 years. And, where the country perhaps missed out in the '60s and '70s on the back of not being the most reliable supplier of products and not being the most stable investment destination, there has been dramatic progress through-- across the administrations of various political parties. We obviously are very pleased about that. The most important thing to mining companies is that they have investment security that the rules won't change on them at the moment when they make an investment. And, again, Australia has been very good at sticking to that.

So I'm sure that, as reviews take place-- And we can only react to the speculation-- we haven't seen any fact-- that investment stability and continuing to grow the investment in Australia is going to be an important feature of discussion as we go forward.

On industrial relations, you will have heard me say a couple of months ago that we are concerned about skill shortages. To be frank with you, those skill shortages, particularly in western Australia in certain skill segments, have come a little bit more quickly than even we anticipated. So I think it is going to continue to be a feature.

For us, the points that I always emphasize on industrial relations is cost on the one side, but effectiveness is very important on the other side. And so we probably will continue to emphasize flexibility and effectiveness more than the pure cost because that's ultimately where we get our benefits from. But no real update on that.

The last question, on coking coal. China is taking-- I think, in the last half, took 27% of our overall coking coal. I would say that almost every ton-- Let me not be completely definitive about it. But almost every ton was sold at something resembling the market-clearing price. So we've got our largest market, which has bought every ton on a market-clearing price.

And I think-- I want to emphasize two things. One is that connection of the Chinese domestic coking coal market, which is enormous, with the traditional seaborne market. And Alex spoke about that. But I do want to emphasize that.

The minute that you trade between those two-- that there is a flow, the pricing dynamics of that complex basically becomes one. We saw that, and I remember discussing with some you as long as five years ago-- that it was going to happen in iron ore. And then it happened. And so we effectively have one iron ore market.

In coking coal now, we effectively have one pricing complex across the domestic Chinese market, which is-- I don't have the exact figure in my head-- but, you know, 500 million tons of coking coal and a seaborne market of 200 million tons. We have a 700-million ton pricing complex which is connected, which means that-- Our strategy in markets like that is to run at maximum volume and to let the marginal producers set the price. And that's going to happen in coking coal.

Why the difference in reaction? I think it's got to do with the fact that, in coking coal, there are fewer long-term volume commitments in the market. And so the market is reacting in a more dynamic manner to reflect this new reality of-- You've got less long-term benchmark contracts, which is a volume pledge, which exist in this market. And I think that explains the dynamics.

So a little long-winded, but it was quite a question set there.

RGP5 and 4-- obviously, strong market. We've talked about that. You were saying most recently that full capacity would be in place end of FY '11, from memory.

Correct.

I wanted to get a sense of, once that's in place, how quickly you can actually get the volumes to the market. I mean, what's going to be the lag between the 205-million-ton capacity level and your ability to run at that level.

I don't have the exact ramp-up period that we postulate in my head. But I can tell you that our assumptions would be that it is mechanical in nature; i.e., how quickly can you commission things? How quickly can crews get to work at maximum capacity, and so on, and not by market.

Again, perhaps the strongest clue of how we view the market-- You can see if you go back to the depth of the financial despair in January, February, March - first quarter of the calendar year 2009. We ran our operations at full capacity, selling every ton into a market-clearing market. I again want to emphasize that that market-clearing market in China is hundreds of millions of tons deep. A 50-million-ton increment into that just, in our mind, means that higher-cost producers, if the demand is not fully there, will have to take the capacity decisions. But we always follow a full, full capacity strategy. And so it's really the ramp-up rate of the mechanical things of crews and so on and not market that will determine that in our projections.

I just wanted to talk about-- If I look at the result, there were three divisions, and two, clearly, don't deliver or delivered quite substandard returns. So you had iron ore was good, petroleum, and base metals. But is aluminum and, I think, in particular, stainless steel, which you said you've now finished-- The restructuring is now complete. But it delivers quite low margins and low returns. I mean, what's the future of that business in the portfolio? I mean, where does it sit now? I mean, it doesn't have the growth that all the other divisions have you talk about. There's no investment going into it. It sort of seems it doesn't fit.

And then a second question - a quite quick one - is just-- Of the cost reduction, the 4%, you made the comment in the presentation that a lot of it was reductions in just your input costs, like energy and consumables. How much did you actually pull out of your business yourself? Of the controllable costs, how much have you pulled out that will stay out, if the input costs start going back up again? Thanks.

I thought that we were very unequivocal in the role of aluminum and stainless steel. I don' really have an update which I've shared with all of our investors, which basically says these are good businesses. They're industry-leading businesses in terms of their returns in their particular industries. I think it's obvious from our investment pipeline that we've presented that we don't have any imminent new investments targeted in those two businesses. But, you know, they are good businesses which return good cash and good margins. And we really, I have to emphasize, have no plans to change our focus on these businesses.

In terms of cost reduction, I think, again, I'd probably cost it in the same way that Alex costs most of our results. We are about the long term. We don't promise any changes in our portfolio just in this respect because things are tough or not. We believe we run effective operations. We believe that there is scope to continue to improve the effectiveness methodically and consistently over time. But we don't-- To the best of my knowledge over the last ten years, we've never said - Well, now we're really going to attack costs. We attack costs every day. And therefore I emphasized, in particular, in my talk that being low cost is a job for every day. The best way in which we can do that is to build stability in our business, to build simplicity in the portfolio, and build accountability. And myself and my management team spend time on that every day. So you shouldn't expect any swings in it-- just a methodical reduction over time.

The second thing that we always emphasize is we don't emphasize hope over reality when it comes to input costs. If our product prices go up, we consume many of the products that we sell. And, with some lag, we expect things to come down. Over the current period, we effectively saw the lag that the lower product prices 6 to 12 months ago caused on our input costs, and that's coming through our cost base. And, if prices stay at the levels where they are today, which is materially higher than they were 6 months ago or 12 months ago, one would expect that, in due course, that would flow through to costs-- input costs and also producer currencies in our analysis of the world.

We have broken out what we would say your continuous improvements, which is loose of grade, loose of raw materials and so on, and that's probably-- I don't know-- 15% or so over the year of the $800 million or so cost reductions that we announced. Alex, I don't know if you can give a more accurate figure than that.

Marius, there is a slide on the pack that breaks it down a bit further than what we discussed. But it's spot on. It's not an event for us to remove costs from the operations. We've been doing that continually. And the benefit of the price is it goes back to our policy of being full floater as much as we can full float any input material. So there is a little bit of a lag. But we end up getting the benefit, like we've been saying. So not really anything else to add.

Just back on the coking coal market, you've got this huge resource base sitting out there in Queensland. You have a dynamic change with the Chinese market. The infrastructure, the big issue out there-- How do you sort of balance this huge resource base with the need to grow-- the changing market dynamics in China versus the infrastructure owned by other people, you said in the past you're not the natural owner of those assets. But how do you balance out your growth plans versus no control over that infrastructure? And how can you make sure that that infrastructure is there and available for your expansion plans?

Perhaps a couple of comments. And I do want to take it back to the market again and the fact that the coking coal market over the last 20 or 30 years really hasn't grown. If you look at the growth rate of hard coking coal, it's been very modest over that period - something like 1%, if I just-- from memory. And so the event of connecting the coking coal market to the domestic Chinese coking coal market through trade is a hugely important event because what that basically means is that you have a full 700-million-ton cost curve, which responds to price signals and which basically produces more if the price goes up, but also the high-cost producers cut back. And I cannot overemphasize that event as a first event.

The second event is obviously the growth of the Indian steel industry and the fact that it is also resource-poor.

Those two things has altered our forecast of the market going forward from 1% to-- and I don't want to state the figure-- but materially higher than that going forward, which is different from two years ago, four years ago, five years ago, and so on. And we were waiting for that connection event.

That's why we are approaching our coking coal business exactly like we approached the iron ore business starting ten years ago. We put a team in place. They've got a slate of programs. And we've started that pre-commitment.

We obviously wouldn't have committed to this first 15% increase in coking coal output through the projects that we've spoken about - Caval Ridge, the Hay Point expansion, and then Daunia and Poitrel, which we've spoken about before - if we didn't think that we've got all of the pieces of that value chain lined up.

And I think that, over the next course of the next couple of years, my belief is that the industry as a whole is going to recognize that there's been a change. And I think that it will solve its infrastructural problems as an industry. But I want to emphasize that, for this first 15% increment in the BMA business, we feel that we've got all of the pieces of that value chain cemented in.

I just wanted to focus on more opportunities for growth. We've talked a lot about, obviously, iron ore and coal. And you put close to $3 billion of commitments into the marketplace in the last sort of month or thereabouts. We haven't talked about copper. And, just shifting away from Australia, interest in Chile. Obviously, you control the world's premier copper asset in terms of size. And we've been waiting for that decision on a third concentrator for some time. It's an industry that's heavily supply constrained. I guess a lot of people are looking to BHP to get a sense of what they can do with that asset - obviously, interested not only in your plans but how you see the issues of water, gas, or NG, et cetera, in Chile impacting your ability to expand and also others.

And just apologies for a very short-term, I guess, focused question. Just in coking coal, there's been a lot of, obviously, flooding, and we've heard talk of derailments. We know you've got some damage to one of your berths at Hay Point. Specifically interested in what sort of impact you're seeing from your ability to ship at the current time.

On copper, perhaps more anecdotally than anything else, we do believe that the Escondida asset is an absolute premier asset. And, if I look at the quite dramatic drilling program that we've done there, which has found billions of tons of iron ore-- sorry-- of copper ore at grades that-- I see greenfield projects being constructed. My view is equally that that asset has got a great life ahead of it over a number of decades.

Clearly, during-- I indicated during the depth of the financial crisis we, like others, had to think about - Which projects do we just slow down a little bit? And, in Escondida, one of the things that we encourage the team to do is to try and find solutions that use less water, less CapEx, and so on. And that's really why we continue to work those options. But, in due course, we will announce them. Our view would be that that asset, is amongst the world's great mines, is the youngest of them, which, with an ability to invest to maintain or grow that capacity over many decades. I can't really add to the detail of that, but, clearly, those plans are being worked every day.

The second thing on copper for us is linked to uranium. We are very pleased that every forecast that we see on nuclear front China continues to increase the number of reactors that they're going to build. For Olympic Dam, when we commit to taking the top of the ore body, it is the start of a long investment sequence that I've just outlined in coking coal, Escondida, Potash, and so on. So it is important that, at that point in time, we do know that we can place the uranium product.

At the moment, I would say the rate-limiting step is the rate at which we can get through the EIS. I don't know if we've given exact guidance, but what I've got in my head is something like an 18-month period to get through all of those questions and so on. And that really will be the next big push for a very large mine.

Brendan, I don't know if that sort of addresses some of the questions.

My apologies. Can I just take one or two questions from the telephone? And I will come back here to the audience in Sydney. Operator, if I may have the first question from the telephone, please?

Peter O'Connor, Merrill Lynch.

The market likes your performance today. Two questions; firstly, on long-term prices. Which have you reviewed, and which have you changed on the back of this zealous view on Chinese-based global cost curve?

And, secondly, the CapEx pipeline. Could you help me backfill some of the numbers in 2011? If I add up from the exploration development report, I get about $6 billion or $7 billion. I'm just trying to plug the gap between that number and sort of the 15-ish of organic growth that you've earmarked for next year.

Peter, on the second question, perhaps, since it's difficult to state all of the questions, what I will do is I'll ask our Investor Relations people to, immediately after this, follow up with you and give you more detail on that.

On our long-term prices, we only review those once a year. We never make them public. I think the only thing that we've made public historically, at times, is our long-run petroleum price, which, essentially, is just the forward price. So, unfortunately, I probably can't comment on that much.

I should state that, this year and, I think, going forward, one of the vexing questions for us has been and, I think , will continue to be - Where do the various currencies end up? And then, secondly, on these products that are connected, you are right in stating that the estimation of the cost curve in these connected markets in China in iron ore and coking coal is a material portion of the conduct. So I can affirm those two things, but I really wouldn't like to divulge on whether we've revised them upwards or

Tony Rizzuto, Dahlman Rose.

Marius, I was intrigued by your comment about countries overwhelming their resources. And I'm wondering-- Are you not only referring to the sheer quantity but also quality? And I'm thinking specifically with regard to iron ore and met coal.

Yes. I can confirm that that's what I am talking about. And I-- Perhaps to add a few comments to that, I'm not sure, but perhaps six years ago, China put out a steel policy. And the steel policy essentially said - Shut down all of the small steel mills, consolidate the industry, and build big, environmentally efficient blast furnaces. That has happened and is going to continue to happen. They're moving closer to tidewater, which means that-- on average, which means that they require higher quality raw materials at the same time as being positioned more within striking distance of the importation market.

So we are-- We've got a number of factors here at play. We are logistically more competitive. The quality requirements are going up, and the quality supply in the domestic market is going down. And that's where the opportunity is.

Perhaps there's one more question-- Sorry, Please, Tony?

Tony has just canceled his question. And there are no further questions from the phone at this stage.

Thank you. Let me just check. I don't think Alex has got anybody in London, but I just wanted to check that there are no questions from London, Alex.

No. No questions, Marius.

So, I just move back to Sydney and take a few questions here.

Can you discuss your current gas strategy in western Australia? I've got three questions. First of all, on Scarborough and Thebe, what are the big-picture development options for these fields?

And, secondly, on the Browse JV, we've seen actually just yesterday the development concept for that project was selected. Your stake is 8.7%. And, obviously, looking at northwest shelf, it's a highly profitable and valuable business for you. But Browse, at 8.7%, it seems-- The question is - Is that material? And do you believe that you could potentially exit that project or actually increase your stake?

And, thirdly, a question on Macedon. This project, which seems like it is in advanced feasibility stage, to my understanding, the reservoir does seem compartmentalized, and the gas is lean. But the gaseous project-- Is it destined for the domestic market? And do your mineral projects - i.e., iron ore, aluminum, and nickel - need the gas from this project due to potential shortfall of domestic gas projects or gas, I should say, between commissioning of the large LNG projects in that area?

Let me start on the last one. Yes, the project is in advanced stage. We've committed some pre-commitment funds there. We've done a lot of work on - What is a lean gas to be able to pipeline that? And that work has progressed well. And, also confirming that we are a large, domestic gas user in the combination of our nickel, alumina, iron ore, and so on businesses in WA. We-- I think Alex commented on the fact that, from an input cost perspective, we always look at market prices as a signal. We've got a view of what the western Australian market prices domestically will be. And we hope to develop this asset on the back of those market prices to input in that western Australian market. And the fact that we've got offtake which basically balances this tells the story there.

With respect to Browse, I can't really comment on that. You, again, pointed out that it is a relatively minor stake. We've had a decision here. We've taken the decision to support the work program at the moment and what comes out of there as they solve the various technical issues on how to construct risers, lay the pipe to the shore, and so on. In due course, we'll deliver an outcome there. But, just because it is a relatively modest stake doesn't mean that we are not interested in it. I wouldn't like to speculate what we would do if some more of that would become available, which I haven't seen any speculation of; nor do I want to speculate on what our intent would be.

And, then, on Scarborough/Thebe, we are very pleased that that work has ramped up substantially. Exact decision of where that gas goes obviously hasn't been made. It's too early for that. But, you know, we do hope and expect that there will be opportunities to deploy our capital in the commercialization of that gas in due course. But I can't update any specific plans today. ExxonMobil obviously is the operator of that. They may be able to shed a few more points on that. But I can't do so today.

I just had a couple of questions. Just on, I guess, realized iron ore prices, I think you saw something like 54% on contract prices and the rest on a mixture index and spot and whatever. Could you quantify just how much difference that made to your realized price?

And, also, could you give us this sort of profile of how you expect your-- the amount you sell on contract to go over the next few years?

And, just a second question on petroleum and its growth. You've got quite strong growth over the next couple of years. But, beyond there, certainly, in my model, you've got-- you've got flat and then starts declining. Can you just give us some indication of how you see the petroleum growth? And do you want that to become, I guess, a bigger business in your portfolio? At the moment, energy is 30%. Do you see that growing as a mix, or do you see it leveling off?

Neil, taking those in turn, you should understand that our commitment to market-clearing prices is longstanding. And what we've indicated is that we are prepared to sell a product on the market-clearing prices, whether that market-clearing price is below the contract price or above. And, over the last couple of years, we have indicated that we are not going to sign any new benchmark contracts. So, out of the 46% that was sold on non-benchmark prices, there's obviously a mixture of pure spot, some contracts where, last year, people couldn't agree on benchmark prices but are actually benchmark contracts, and we agreed as a tiebreaker to price on shorter term, and then there are some hybrid contracts and so on and so forth. I think the real-- And so, in the beginning of that period, we probably sold that iron ore below the benchmark price. And, as the market tightened, we then-- that price moved on to be above the market price.

I think, from our results that we presented, you should probably be able to back calculate that the average realized price over the period, taking into account sometimes that was sold below the benchmark price in the beginning of the period and then, other times, above, it's probably about-- I don't know-- 8%. Please don't quote me. Something like that-- above the benchmark price over that-- over our entire volume mix.

And you see a similar effect, obviously, in coking coal, where, as I've said, we've sold 27% of the product into China; effectively, also on a price that has moved.

The big movement-- I want to emphasize that there are two portions of that 46%. There are contracts which we agreed to price on an intermediate basis, just for the year, which, this year, we've got to decide again what we've got to do. We haven't got a solution that can go one way or the other. And then there's the tons that are, you know, as a result of the contracts we've signed over the last couple of years, is purely into that index market and so on.

The real growth in non-benchmark tons for us will only come when the next stages of investment kick in. That, rather than the runoff of benchmark contracts, will be the determinant of how much volume we've got on the market-clearing-- And I hope that gives you a little bit better guidance.

On petroleum, I would say that we don't like to give volume forecasts beyond projects that effectively have been sanctioned. And it probably goes back towards a couple of years ago when, whenever we made a discovery in petroleum, we would sort of pencil it in in the forward curve, and then things don't work out exactly like they do, and then you've seen us not having given an accurate forecast. Rather, what I would say is that we continue to discover things. I mean, if you look at the announcements that we've made in the Gulf of Mexico, around Mad Dog and so on, which, along with the Atlantis field now is one of the great oil fields of the world. And so I think the petroleum business always has the nature that resource replenishment is an important thing. And, therefore, for me to make a long-term volume forecast of exactly how that's going to happen would be a little irresponsible. We would like to grow that business. If we're growing the rest of our minerals businesses aggressively as we are through these backyard expansions, we've got to continue to grow our petroleum business as well.

So, yes, we would like to deploy more capital. No, I probably can't give you a volume forecast, Neil. But I do hope that the comments around iron ore and so on helps you to make a little bit better forecast.

[Phil Leske, the ABC]. Two questions. You've spoken about the boundless opportunities that China and India presents. Australia is a reliable and stable supplier, which may attract a premium perhaps of some sort when we talk about prices. Does--? Under those circumstances, doesn't the government--? Isn't there some room for the government to take an increased dividend from that type of business without jeopardizing jobs and investment?

And the second question is-- I'm sure you're aware of the contractual dispute between resource house and the Chinese. Is that something that could happen to BHP? And, if not, why not?

I wish we attracted premier for our product. But we sell commodity products, even though I think, if you go and ask our customers who is the most reliable supplier, not only from a geographical perspective but also from how the Company conducts itself when it enters into contracts, where, basically, we perform, I think, at most, we get good-quality counterparties for that. We don't get a premium for our product.

I think that fiscal stability is a very important thing. And I was very, very careful in articulating that, at the point where you're putting the capital into the ground, having a reasonable expectation that things are not going to change throughout the life of that asset is an extraordinary, important thing. And other countries which have tinkered with that over time, thinking that that is not the case, has always found that, in a depleting-asset environment, we consume our assets every day. So reinvestment is always a feature of our industry that, perhaps not in the short term, but, if you measure over a 10- or a 20-year term, you always lose investment. And the most important driver of overall return for a country is always growth and investment.

So I would say that we take a long-term view of how this works. I don't want to specifically refer to Australia but in any country. And we've seen during the nationalizations in the '70s in Latin America it took decades for them to reestablish fiscal stability again. With some of the issues in Africa and so on, we've seen a dramatic loss of good-quality investment, which ultimately just depresses GDP. So capital is always mobile over the long run. And, as long as you have a competitive regime and you have a regime of fiscal stability at the point that the investment is made, you have good outcomes for countries. And that's what we've had over the last couple of decades. I don't see any reason why that's going to change.

Contract disputes. We sometimes have customers that do not honor the contracts that we sign. In particular, that happens when you have priced product and then you-- the market goes down. And that's why we like to price product on prices that change every day, because then that propensity not to honor contracts just disappears for the two parties. I really can't comment, nor do I have any knowledge about the contract dispute that you talk about. But our basic philosophy is structure our contracts in such a way that the two parties to the contract have no economic reason not to want to pursue the contract, whether things become better or worse.

[Mark Buzetel] from UBS. Look, there's a couple of things you've said this morning. Firstly, you said the three priorities for your business are, number one, to invest in the business, number two, to manage the balance sheet, and the third would be shareholder returns. You've also said that the iron ore joint venture is the most value-adding transaction in the mining industry. And, in that context and also in the context of you being associated with certain M&A transactions in the press over the last 12 months, a couple of questions for you.

Firstly, do you believe you have enough development projects in your pipeline for the foreseeable future? And, secondly, does it still leave you capacity for M&A and/or capital returns, particularly given the fact you're going to be spending $21 billion next year?

I can only emphasize on the development pipeline what I tried to say this morning. If we look at-- I don't even want to talk about tier-one assets. But, where we have basins of resource in the portfolio, where you can put a team on and have them invest and grow that business for decades-- If I look at our portfolio, the things that stand out for me is WA iron ore, the Bowen Basin, Escondida, Potash, Olympic Dam, the Hunter Valley assets, perhaps to a little lesser extent, the Cerrejon asset. We have ten or so assets in the portfolio-- and the Gulf of Mexico-- sorry. We have ten or so assets which, you know, you don't put a team on for a project. What our aim is-- We put a team on, and you keep them there for decades building one project after another, riding down that experience curve. And we think we've got the resources, and we obviously continue to add the resources, to maintain that growth of capital deployment in our business.

I think Alex was also equally clear in saying, notwithstanding that, where we do stand with the gearing in the balance sheet, if an opportunistic opportunity comes up to procure something which is long-life, low-cost, et cetera, et cetera, all of those strategic elements, we have got the capacity to do that. But I think what Alex and I would like to leave you with a message is this Company is not about M&A. M&A is a part of the strategy. But it is about a diversified portfolio proposition which has got the ability to grow. We believe that, if you purely want to speculate on iron ore or nickel or copper or whatever, there are other ways to speculate on that. This Company's value proposition is stability of cash flows, long-term growth. And, really, the message around that is unchanged over the last ten years.

I'll get back to the telephones after this question, operator.

I'm Mike Harrowell from [ABY]. Just following up on Neil's questions, what is up for negotiation with respect to iron ore, given that you have said you don't want to sign anymore long-term-- or annual-price contracts? Given that you're able to move to spot for those-- that 46%, what is--? Is there a negotiation where the customers have any power at all to push you back to long-term contract on those items? Or have you actually moved--? What is the negotiation there?

And, in terms of the oil and gas question also, in the old days BHP didn't have a problem allocating capital between the oil and gas division and base metals and minerals because they were two different investment type-- the old-nature investment was different. Is that still a problem within the organization? And is it sort of a preference, maybe, to go to something more like gas, which looks more like a long-term mineral deposit than the sort of crude oil business does?

On the negotiations, again, please don't quote me on the exact figures, but we may have on the order of 100 million tons of benchmark contracts in the portfolio. Those contracts have to be renegotiated on an annual basis. And we are going to do in good faith-- try and discover the market price, forward-looking for the next 12 months, taking our cues, basically, from where the market-clearing price is, because what the benchmark price is-- it is an attempt to discover the supply/demand conditions that will prevail over the next 12 months. And we obviously now have a forward curve and a swap curve and multiple quoted prices to help us to discover that price, which will be our approach.

We will scrupulously honor those contracts and the terms of those contracts, as we always have. Again, I want to emphasize, if you go and ask our customers who their best-performing raw material supplier, I think that, in the vast majority of cases, they will say these guys stick to their contracts. And so we will honor those contracts.

Really, what we have indicated is that-- over many years is that that price formation, unfortunately, is stressful. And we take months, where you are in very heated discussion with your customers in order to try and discover that price. And, if the market conditions are volatile, the conditions change while you're discussing, resetting that conversation constantly. It's tough. It works well when prices are constant. It works less well when things are going all over the place, particularly as we've seen over the last six months or last nine months. We moved from-- I don't know-- $50 a ton landed in China to $150 today. It is very difficult to settle a price. And, for that reason, our approach is - Let's move to shorter pricing term contracts. We would love to sign longer-term volume contracts priced on an index. We think there's a value proposition for the customer in having security of supply and knowing what quality will come. But our fallback is always to-- If the customers prefer to not sign those contracts, we will operate in this 100-million-- multiple-100-million-ton market-clearing market. My expectation would be that we would much rather prefer to sell tons into that spot market than sign new benchmark contracts where we know we're just going to have a difficult negotiation.

On CapEx allocation, you should understand that the way we think about our portfolio is not copper, coking coal, uranium, and so on. We think 100 assets, multiple projects. Which ones have got the best returns, the lowest risk, and the best prospects? Those are the ones we do first. If it's in copper, it's in copper. If it's in met coal, it's in met coal. If it's in iron ore, it's in iron ore. If it's in energy, it's in energy. Over time, what that will tend to do is it will tend to-- Sometimes one product grows at the expense of another, and we are comfortable with that. So I don't see it as a capital allocation between energy and minerals. I see it as - What are the best products in the-- sorry-- the best projects in the portfolio?

Can I just go back to the telephone, if the operator can check for us if there are any new questions?

David George, JPMorgan.

In the event that the iron ore JV with Rio gets knocked back by the EU, is Plan B just to press on independently with your own organic growth, or is it some other potential deal that could be done with a smaller player that could deliver a smaller amount of synergies? I'm thinking FMG with its rail parallel to yours and its port passing yours.

I think Rio would tell you the same thing as I would tell you, which is that we have to run-- Both Tom and myself and our teams have to run our businesses today, running as if this JV does not happen. So we have to take our expansion plans; they have to take their expansion plans. We've got to continue to run the businesses independently as we work through the regulatory clearances. Now, I've given you every indication today that we continue to make progress, that we're very pleased with how the teams are getting along, and so on. But there isn't certainty. And, therefore, both parties are continuing to expand their mutual businesses. And, indeed, the term sheet that we signed and the definitive agreements make provision for that. Our first priority for that business is therefore to complete RGP5 and 6 on a standalone basis, and that's really the only two projects that I can comment on. Obviously, opportunities. Obviously, we are continuing to work Quantum 1 and 2, the outer harbor things and so on. But the things we are working on today are the two things that we've put in the public domain. And I wouldn't like to speculate beyond that.

Operator, I don't know if there are any other questions on the phone.

There are no further questions from the telephone.

Thanks. We will return to Sydney then. I'm assuming that nobody has shown up in London in the meantime, Alex.

Just the cleaning lady, Marius.

Are there further questions here in Sydney? We have one more question in the front.

A question on your aluminum strategy. You mentioned that you haven't approved any new projects in aluminum yet. I note that Global Alumina, your JV partner in Guinea, has announced a preapproval and pre-construction has begun on that refinery in Guinea. If you can just clarify that--

And then, secondly, if that project does proceed, can you talk maybe about the placement of that alumina? Do you believe that alumina will be placed into, potentially, your proposed smelter in the DRC? Or will that alumina, do you believe, be placed into China?

And can you actually talk about potential pricing-- the pricing change in the alumina market? Certainly, there's upward pressure on linkage. Can you maybe talk about our potential pricing upside and contract change over time in the alumina business?

Paul, we don't really have any update on that project. We're still some time off, spending substantial amounts of money there. And I think we are quite far away from thinking about where that product will go still. With respect to your-- But we have no update on that project. It is not yet close to sanctioning by our measurement of things. And, again, no view on where that alumina would go. Certainly, the DRC smelter is some time off. So it would be speculative to assume that the two are linked.

With respect to alumina prices, we are a relatively small player in the merchant alumina market. That market is-- has got the same issues as our other markets, which is-- How do you price the product so that, if you sign a fixed-price contract and the market price for the product changes, which is now more and more volatile, your customers don't default on you? And so my answer to your question is that we would continue to like to move our product there also to a more frequent pricing reassessment basis that is reflective of the supply/demand conditions in the alumina market, rather than the smelting market-- the supply of smelting capacity. But I-- You know, it's a market where you've got few contracts. You've got relatively little re-contracting. And you've got very few stable pricing indicators published or traded market indicators which aids you in forming a price. And, from our vantage point as not the largest player in the industry, it's actually difficult for us to push our market price view and get any real traction in reforming the market there.

I think we're complete here in Sydney. Thank you for coming today. We are pleased with the results. We are pleased with a longstanding strategy that allows us to continue to invest in the business, maintain a stable financial rating, and continue to return more money to our shareholders. And I hope that we've given you some view of how our strategy unfolds as we go forward. Alex and I and the rest of my management team thank you for being here today.