必和必拓 (BHP) 2018 Q2 法說會逐字稿

So welcome, everyone, to our 2018 interim results. I'm here in London, and Peter, Peter Beaven, our Chief Financial Officer, joins us from Melbourne. As usual, please note the disclaimer and its importance to today's presentation.

Over the past 6 months, we have lower debt with increased return on capital and distributed more cash to shareholders. Yet there's still much that we can and will do to increase cash flow, capital discipline, value and returns. Our agenda for safety and productivity will increase latent capacity across the portfolio. It'll grow volumes this year by 6% and get the most out of our investment dollars so that we can thrive at low levels of capital. And if spot prices persist, free cash flow is on track to exceed $12 billion for the come -- 2018 financial year.

In the December 2017 half year, higher commodity prices and a solid operating performance, combined to secure increases in underlying EBITDA to over $11 billion. And return on capital employed rose to 13%. Through disciplined investment in high-return and low-risk opportunities, we delivered free cash flow of almost $5 billion. We reduced net debt, and we increased returns to shareholders through dividends of $3 billion, that's almost $1 billion over the minimum 50% payout ratio.

The health and safety of our employees and contractors and of our communities are core to all that we do. And while total recordable injury frequency, or TRIF, this period fell to 4.1 per million hours worked, tragically, 2 of our colleagues died, one at Goonyella Riverside, that's in Queensland in August, and another in the Permian in the Texas part of our shale business in November. These fatalities have had a profound impairment impact on families, friends and colleagues, everyone at BHP. So we are more committed than ever to learn from these events to make sure all our people go home safe every day. We're committed to bring this about by how we design, plan and execute every part of our work and by how we make sure that the effective tool -- controls we require to eliminate fatality risks are firmly in place.

Part of this involves our field leadership program, and that's where leaders spend more of their time in the field on safety, and that includes me, and that's now recorded over 0.5 million interactions in the first half. This is one way, an important way, that we create the culture that will eliminate fatalities and reduce injury rates. And we're also determined to make use of technology for a step change not just in productivity but also in safety.

At Samarco, BHP's, our commitment to do the right thing for the people in the environment affected by the dam failure is strong. In Brazil, the Renova Foundation's compensation and environmental programs are making good progress. However, regulatory and licensing challenges have delayed the resettlement of some of the most impacted communities. On the other hand, the state prosecutors have now joined in the discussions with the Federal Prosecutor's office to settle the major outstanding civil claims, and this is a positive development. Restart of Samarco is also important. However, as we've always said, it has to make economic sense and the effective approvals have to be in place.

So I'll now hand over to Peter. Welcome, Peter.

Thanks, Andrew. Higher commodity prices and a solid operating performance supported our results over the last half. We generated EBITDA of over $11 billion, up 14% with a margin of 53%. Our underlying profit of $4.1 billion was 25% higher. Our attributable profit of $2 billion includes 2 exceptional items: $210 million related to Samarco and a $1.8 billion charge as a result of the recent U.S. tax reform, although the reduction in the income tax rate will clearly have a positive impact in the years ahead.

Each of our commodities made a significant contribution to our operating results. Iron Ore generated EBITDA of $4.3 billion with high margins. While the unit costs were impacted by the Mount Whaleback fire and port maintenance, these will come down as improved supply chain performance underpins expected record volumes in the second half.

Higher oil and gas prices supported petroleum EBITDA of $2 billion. Our Conventional business continues to generate strong margins and higher-than-expected recoveries in our shale fields are pushing volumes to the upper end of guidance.

In Queensland Coal, we had record production 4 mines but Geotech issues of Blackwater and Broadmeadow meant that production fell. We've increased this year's cost guidance to $66 per tonne due to these issues, although we remain confident of reaching our medium-term target of $54 as we continue to drive productivity and release latent capacity at Caval Ridge.

Finally, in Copper, Escondida's Los Colorados concentrator has now ramped up to full capacity and Spence is currently beating its nameplate capacity of 200,000 tonnes per annum. And as a result, total Copper production was up 17% and EBITDA nearly doubled.

The EBITDA waterfall chart highlights the gains from higher commodity prices, which more than offset the productivity challenges faced during the period. While underlying productivity momentum remains strong, this period was marked by several one-off events. We've consistently said that productivity gains will be lumpy, and this is increasingly true now that the low-hanging fruit has been picked. The negative productivity of $500 million this period was largely attributable to Olympic Dam and BMA. At Olympic Dam, we just completed a planned smelter maintenance campaign. It's key to the asset's integrity, which in turn is the foundation for our future expansion plans. At BMA, the Geotech issues at Broadmeadow and Blackwater proved more significant than first anticipated.

In other parts of the business, things are going well. Escondida positively contributed more than $200 million of productivity with the ramp-up of the third concentrator. And Western Australia Iron Ore delivered over $100 million of gains as we reached a record-annualized production run rate of 284 million tonnes in the December quarter.

As we move into the second half, Olympic Dam operations have restarted. The Geotech issues at Blackwater have largely been resolved. We'll continue to creep production at WAIO, and our 3 concentrator strategy at Escondida is seeing record material processed. And with this momentum, we're confident with our guidance of $2 billion of further productivity gains by the end of the 2019 financial year notwithstanding some rising inflationary pressures.

Operating cash flow was $7.3 billion. Underlying cash flow increased by $2 billion. As you can see on the graph on the right, this robust operating performance was offset by higher tax and other payments, including the $1.3 billion cash tax payment related to the jump in profit last financial year. We generated free cash flow of $4.9 billion, a solid result albeit down on the strong performance in the prior period due to the higher tax payments and CapEx in line with our expectations.

If current spot prices persist, we can generate free cash flow of more than $7 billion in the second half. To do this, we'll need to produce more and at lower cost than in the first half. This will, no doubt, have its challenges, but given our current performance, we think we can achieve this.

Our capital allocation framework continues to be firmly embedded in every investment choice we make. During the half, we invested $1 billion in asset integrity. We preserved our balance sheet strength and under the 50% dividend payout ratio, we paid out $1.8 billion. With the $3.6 billion excess cash, we invested $2 billion in our high-returning development projects. We returned $500 million to our shareholders as additional dividends and we paid down debt.

Our net debt was $20 billion a year ago, and now we're at $15.4 billion, significant reduction. This half, net debt reduced by $900 million. With $4.9 billion of free cash flow generated, $2.3 billion went to shareholders and $900 million went to noncontrolling interests, predominantly Escondida. In addition, there was a $700 million noncash mark-to-market movement as the U.S. dollar weakened. And this was offset by the increase in value of the hedges included within other financial assets in the balance sheet.

Our commitment to a strong balance sheet through the cycle is unwavering. And as we've previously said, in the medium term, this translates to a net debt level of between $10 billion and $15 billion. And in keeping with our capital allocation framework and with some of our commodities trading above our long-term forecast, we look to take net debt to the lower half of this target range in the near term. We also continue to make significant progress in capital productivity. And our commitment to capital discipline means that we only invest in the best of a broad suite of quality projects. Our guidance for capital and exploration expenditure is unchanged with a total spend of $6.9 billion, this financial year. $2 billion of this will go into maintenance, which includes around $900 million of deferred stripping. $1.9 billion will go towards capital efficient, latent capacity and improvement projects, and this includes infill well drilling in Conventional Petroleum and sustaining CapEx in Queensland Coal and Western Australia Iron Ore.

We'll invest $1 billion in major projects, including Mad Dog 2 and the Spence Growth Option. $1.1 billion will go to Onshore U.S. where we continue to carefully assess our CapEx program rig by rig and completion by completion to secure the best value for shareholders ahead of the planned exit. And finally, $900 million to exploration.

In the 2019 and 2020 financial years, annual capital and exploration expenditure is expected to remain below $8 billion, and this includes a South Flank Iron Ore project for which we'll seek board sanction in the middle of this calendar year. The capital cost for South Flank is now expected to be around $45 per tonne. This reflects the stronger Australian dollar and updated estimates as feasibility studies have progressed. This spend will fit within existing guidance for sustaining CapEx in Iron Ore of $4 per tonne.

In addition to investing in high-return development for options, we've been steadily increasing the share of free cash flow distributed to shareholders. As a result, shareholders are receiving a higher proportion of the cash generated by our business as illustrated here. And notably, this has been achieved at a time when we have also significantly reduced debt. As always, all future capital decisions will be determined by our capital allocation framework. The optimal balance between shareholder returns, investments and the balance sheet will naturally evolve through the cycle. But we think the balance is about right at this point in time.

Once again, we present return on capital by asset. Over the first half, ROCE was almost 13%. Higher prices helped to offset one-off events. We're confident that our detailed asset-level plans will drive continued improvements. Escondida reported a step-up in returns, with the ramp-up of the Los Colorados concentrator and no major capital investment required, you can expect further increases. Western Australia Iron Ore, once again, generated returns of over 25%, and in the medium term, continued capacity creep, coupled with unit cost below $13, will support stronger returns.

Smelter maintenance clearly weighed on returns at Olympic Dam this year. With the operations ramping up to full production and with access to higher-grade ore in the Southern Mining Area, the increase in copper production will continue to lift returns.

In the Onshore U.S., our focus is on maximizing the value of this acreage as we move forward with our exit plans. We announced in August that we classified our Onshore assets as noncore. We're pleased with the progress that we are making and remain on track to complete the exit within the 2-year time frame we have previously mentioned.

On the trade sale, extensive work has been performed on each field to prepare it for sale. The Fayetteville data room is now open and the data rooms for the remaining fields will be opened in coming weeks. Assuming 2 to 3 months for due diligence, we expect this will be received midyear. Negotiation and completion of transactions would follow and we would expect that this could take place in the second half of this calendar year. In parallel, we are evaluating the demerger and IPO options. There's been encouraging interest from potential buyers, the environment for sale is supportive and we remain confident our exit process will deliver value.

So in conclusion, we remain absolutely focused on maximizing cash flow, maintaining capital discipline and improving value and returns. I'm confident, we will continue to make strong progress in each of these areas in the second half of this year and well into the future.

Back to you, Andrew.

Thank you, Peter. So as normal now, our insights -- our detailed insights on economic and commodity markets are available in the prospects blog, which has been released today onto our website.

But briefly, despite recent volatility, we are still optimistic on the short-term outlook. Global growth is healthy and sentiment remains positive. And our long-term view is also unchanged. Population growth, higher living standards and a recommitment to free trade will increase demand for all our commodities.

With our simplified portfolio, with the removal of close to a decade of cost inflation and with lower debt, we are very well placed for this future. Our commodities are geologically difficult to find and extract, and this concentrates rent in those value chains close to the mine gate or wellhead, and that's where our capabilities are at their most competitive.

And our large-scale assets are also biased to the production of high-quality products, and these are becoming even more valuable in an ever more environment-focused world. And our production is low cost and hence benefits from steeper cost curves.

It's our portfolio's blend of quality, scale and geographical concentration that is a key differentiator. That's what provides us with a strong and long-lived foundation to enable high value, continuous improvement and growth. And at the same time, we lead and develop our people and our culture so as to create those distinctive capabilities, which accelerate us towards those goals.

Over recent years, we, I have described our strategy to increase the value of BHP in 6 parts: part one, first, relentless pursuit of safety and productivity. And if you've seen from Peter's presentation with $12 billion of annualized gains and much more yet to come. Second, small, low-risk, high-return investments that release latent capacity. Third, the development of our strong pipeline of major projects, always in line with the discipline of our capital allocation framework. And fourth, countercyclical investment in exploration, which has delivered results. Fifth, a drive for industry leadership in technologies, which unlock more resources through high-return investments, reduce cost even further, and as I said earlier, keep our people safe and healthy. And then sixth, as you just heard from Peter, the realization of maximum value for the exit from our Onshore U.S. acreage.

And we've made considerable progress in all 6 of those areas. In our Australian minerals assets, our Maintenance Centre of Excellence has used leading-edge data and analytical techniques to drive significant savings in unit costs. And despite some one-off setbacks in this half that Peter covered, we anticipate to add a further reduction in unit cost of 10% across our Australian minerals operations over the medium term, and that adds to the 50% reduction that's been secured over the past 5 years.

So for example, in Iron Ore, we expect cost below $13 a tonne, chiefly through efficiency gains at the port. There's autonomy matters too and our Jimblebar truck fleet is now fully autonomous. And technology continues to work its magic as well. It's improved the scheduling and throughput of the rail system. And just of yesterday, we have the approval to increase production to 290 millions of -- tonnes of Iron Ore per annum, and we expect to reach this by the end of the next financial year.

In Coal, as planned, the Caval Ridge Southern Circuit project will come online early in the 2019 financial year. At Olympic Dam, after the completion of its maintenance campaign in the last half, it will unlock its potential as it moves further into the high grades of the Southern Mine Area.

Escondida's Los Colorados Extension project reached full capacity in December and its 3 concentrators achieved the record throughput of 365,000 tonnes per day just last month, of course, we plan to go beyond this. Our investment in desalinated water has put Escondida on track to average 1.2 million tonnes per annum of copper throughout the next decade with minimal further capital.

In Spence, we approved in the half the development of the 2 billion tonne hypogene resource in August and this adds almost 200,000 tonnes of copper concentrate production to Spence. But we want to create more options to grow in copper outside our current footprint. We're mainly choosing to do this through greenfield exploration. And so we're pleased that we've just been awarded several prospective leases in Ecuador.

In Petroleum, we have a program of work in the U.S. and Mexican Gulf of Mexico and the Caribbean to grow our Conventional business. In the near term, our rich pipeline of brownfield projects will partly offset the natural decline of existing fields, and these are projects, which offer an average return of over 50%. The North West Shelf Greater Western Flank B and Mad Dog Phase 2 projects are on track. And several opportunities are emerging beyond these, for example, a new tieback to Atlantis.

Because our Gulf of Mexico exploration prospects are near-existing infrastructure, if they are successful, like our exist -- our exciting discovery, earlier this year at Wildling 2, capital cost and production lead time for those will be on the low side.

So over the past 6 months, our long-term plans delivered solid results. We generated free cash flow of close to $5 billion. We increased return on capital to 13%, and we declared dividends of almost $3 billion. These are strong foundations from which to deliver our plans for the 2018 financial year. Copper equivalent volume growth of 6%, free cash flow of spot prices of more than $12 billion and further debt reduction and shareholder returns.

There is still much we can and will do. We are committed to maximize cash flow, committed to maintain investment discipline and committed to substantially increase shareholder value. We have everything in place to deliver significant further improvements in safety, productivity, return on capital and, ultimately, in returns to shareholders. Thank you.

Okay, so I think we're now ready for questions. Who would like to ask the first question? I think I got Paul Young from Deutsche Bank on the line.

A few questions on Escondida. First of all, on the live negotiations, Andrew, how will your strategy differ this time to avoid a prolonged strike? And then also, just on the planned throughput, the theoretical throughput of all 3 plants is around 390,000 tonnes a day. Just interested in the early stages of ramp-up. What are you running at...

Paul, can I stop you a minute? There's -- we have a sound problem here in London. So I got the question about the Escondida labor, but I didn't get the question of the ramp-up. Can I ask the technical people to see if you could fix this? I'm sorry about this, Paul. Look while we're waiting, let me just talk to the first part of your question, and then hopefully, we'll get it fixed so we can ask it again. I can't, sorry, just a minute. No, I can't hear him and obviously, this wasn't checked earlier. So Paul, look, on the industrial relation side, it's very hard for me to give you a kind of firm answer to that question. Clearly, as you know from July, the workforce has a legal right to go back on strike as we restart, I think, a restart the negotiations that we broke off 18 months ago. I can tell you that since that, the return to work has been very positive. You've heard some of the results from Escondida. Morale is strong, and relationships at the moment are very positive, I think, on that site. We fully intend to talk to the union and talk to them about the possibility of getting a settlement ahead of when it's possible for a legal strike. I can't say more than that but clearly, our intentions are not to undertake a disruption to our production. But we also have the long-term aim of making sure that when we get through to the latter part of the next decade and we're producing in a much lower grade, we have a cost structure that still makes it competitive to invest at Escondida. So I've got...

Andrew, can you hear me?

I can hear you now, they put a speaker next to me, which is much better. So if you ask the second question?

Yes, it was actually on the upside of Escondida. With running 3 plants, the theoretical throughput is 390,000 tonnes a day or thereabouts. So I'm just wondering what rates have you been running at recently with running all 3? And do you think you can actually trade the 390,000 tonnes a day sustainably?

Well, we've been running just in December at 365,000 tonnes a day, I would certainly hope that the team there can get to 380,000 and beyond sustainably. I'm very optimistic, a bit like you've seen in Iron Ore and Coal that having created this investment platform over the last few years, which we don't really need to add to in the near term, that some of the best new latent capacity projects are going to come out of Escondida in the years to come that will mirror some of the success we've had in some of the Iron Ore and Coal assets in the preceding years. So yes, I'm sure we will get to 380,000 and more sustainably.

Okay, great. And then lastly, just on oil exploration, your rigs [at] exploration strategy 2 years ago. Just wondering how would your markets sell so far on oil -- on the Conventional exploration?

7 out of 10, obviously, pleased with the discovery at Wildling and at LeClerc, and we're looking at how best to commercialize these right now. But I included in that strategy, Paul, the very successful bid that we had in Mexico where we won the opportunity to be the operator of the development of Trion. I think with hindsight, looking at the more recent licensing around in Mexico where we were significantly outbid, I think there's a lot more interest come back into that market, and we timed our bid in Trion, I think, very well, if you like, at the low point in the cycle. And I think everything we know about Trion and as we continue the process to get on with appraisal, they lead us to believe that this is a very effective catch. There's a lot of exciting prospectivity now in the Western Gulf of Mexico and, again, during some of the follow years for the oil price, we've been extremely good at picking up some very attractive acreage. So 7 out of 10, but I'd like a 10.

So the next question is from Clarke Wilkins.

Just first question is probably for Peter. Just in terms of the unification, like the Eliott proposal, the big difference still seems to be in terms of the tax losses and whether that could be maintained or not. Is it as simple as that sort of top-act structure that they proposed, or is it something else that they're not aware of, or we're not aware of that just drive the high cost that just doesn't justify the cost that they all see at the moment? And the other question, just in terms of the increasing the payout ratio versus buyback. What consideration was given, obviously, to get the cash for the U.K. by increased dividends, again, and sort of diluting the frank credits down and is there a reconsideration, a better way to return those frank credits through off-market buybacks rather than helping the payout ratio?

So Clark, can I suggest that Peter answers the whole of the second part of your question and deals with the detail of some of the costs related to the loss of a tax cover on Plc revenue from unification. But if I may just answer a bit more broadly aspects of your question. If I -- broadly aspects of your question, what I'd like to say is -- sorry, I'm being a bit distracted by the sound and the technical problems that haven't -- are still not being quite ironed out here. Let me just collect my thoughts a bit. So yes, what I wanted to say is that there's a huge difference in the valuation that we would put on unification depending on the assumptions that you make around the mix of the shareholding in the unified company and how many of those shareholders are resident in Australia. And that difference drives how many of the franking credits will be wasted and how many of them can be used by Australian resident shareholders. And that range creates a wide range in valuation from something that can be quite positive and something that can be quite negative from unification. And as I've said in several media interviews this morning, we have to understand that. We have to reduce that risk considerably and we are working on that. We're very open to the ideas around that before we might rush to move towards unification. And then we have to consider the cost that Peter will now describe. Go ahead, Peter.

So Clark, just on tax losses, I mean, just a quick recap. Probably roundabout $1 billion worth, 2 material sources -- there are 3 sources, 2 of those are material [sources] in what was [Worsley] and so on, and that is offsettable against the profitability of New South Wales Energy Coal, which as you know, is a highly profitable asset. Now we have, as I say, more or less $2 billion -- over $2 billion worth of assessed losses in that grouping. And so you can see that as worth a lot of money to us to utilize that against our very profitable assets. It's probably NPV in the order of $600 million associated with that. In the other part, the other material part, of course, is the Singapore, the BMI profitability. You know that, that is, again, a profitable entity. You know that our tax rate is 0 essentially in Singapore. But you also know that only 42% -- 58% of that gets taxed in Australia, therefore, 42% is really the benefit, I think, to shareholders. Now in the -- there is more stamp duty, but in the event that we collapsed the issue is that in fact, those costs would -- we would, in fact, not be able to take advantage of those tax losses. The issue for the Australian tax group in Plc is that it would essentially dissolve. Now the only thing you could maybe restructure ahead of the -- any reunification, but you'd have to have a good business purpose. The ATO is something they look very closely, they're very -- they're smart folks, and we'd have to work our way through that. The second part is really around Singapore. Again, we have this ongoing conversation with the ATO. It's a matter of a difference of opinion on the prices that we are charged. It's -- it isn't going to go away from where the collapse, they're very different independent issues. And so that's really the issue. The tax -- the costs are there and they're not going to go away from as a result of the unification. In fact, we'll lose the benefits that we have. So that's really a basis of that. On the payout ratio versus buyback, every time we have a go, we have to think about buybacks versus cash returns. One thing, though, there's a couple of things -- 2 things basically around buybacks. One is that you're buying something, so you need to be sure that you're actually buying something for value and you know what you have to pay for it and you sort of have -- you have a pretty decent idea of what it's worth because it's our company. And so we got have -- we got to tick that box. The other box you got to tick is it's got to be material. And in this half, we declared a dividend of 17% above the payout ratio. Of course, the payout ratio has to go in cash, that's $900 million. And so that's just not material in a company of our size.

Okay, look, Clark, if I can just add to the first part of the question. We are going to be spending a lot of time on the road. Peter and myself and with some of our colleagues. We will be talking to a wide range of shareholders, including, by the way, Elliott, about their most recent proposal, but also about what we understand around the unification of the DLC based on 5 years of work. I personally have been studying this since I became CEO and trying to find a way through because we are attracted to the simplification that comes from unification. However, I think what you've heard from myself and Peter, at the moment, there are enormous risks in assessing what the value might be from pretty decent to ones, which are actually value-destroying. Until we can reduce that level of risk and increase the level of expected return from this kind of -- type of transaction, we'll do it -- we'll handle it exactly the same way we'd handle capital projects. We have to get the risk return right. But we are open to ways in which we can do this and, look, things can change externally. We can bring about changes internally. And we see this a lot with these sorts of things. And just last week, we saw RELX choosing to unify after many years, I think, in their case of studying it through external changes and things like Dutch taxation and then internal changes that they did. In the same way we are working towards and waiting for the stars to align, and we are always open to ideas as to how we might unify and make our company more simple, if that's the right thing to do. And I know that we'll hear a lot more this week and we'll probably talk to you again, the shareholders.

So next question is from Sylvain Brunet, who's from Exane. Sylvain?

First question maybe on the supply chain, potential indication on the cost. Have you experienced in any part of your business, any tightness already in consumable spare parts, which were made in China and impacted by the supply reforms? We heard that on electrodes, for instance. My second question is on Escondida again. If you could tell us a bit more beyond tomorrow and the results at Escondida, what would you say is different from last year, obviously, other than the copper price, which is 20% higher? And lastly, if I may, on strategy. You talked positively in recent times about electrification. One metal that comes to mind is obviously lithium, where there are probably more opportunities than in cobalt, for instance. Conceptually, is that an avenue BHP could consider?

Okay, let me try and remember all 3. So I'll try and do them in this order. I don't have anything specific to add about, if you like, supply chain inflation. We're seeing pockets where prices are up a little bit, but we have a new and globalized supply organization. There are obvious things, of course, the flow through of higher ore prices, some of the, if you like, margin resets that we've seen in the steel business. But I think we feel with our productivity agenda and the way that we buy our -- the goods and services to do our businesses that we are able to quench the small amounts of inflation we're seeing. And continue to drive our unit cost down through our productivity agenda. I didn't quite understand your question on Escondida. I mean, the -- but I think what's changed from last year to this year is we now have 3 concentrators. We now have our new desalinated water supply working. We have relatively unconstrained sources of electricity. And so we are able to substantially ramp up the amount of ore that we can process. And while grade has remained reasonably constant, this is resulting in a much higher production of copper and that's why they to continue. And of course, now with more of the grade -- sorry, more of the ore going to the concentrators, the tank house is no longer full, and we'll be looking at ways in which we can fill that to possibly increase even more the production of copper from our Escondida. As I said on the top, we've invested majorly and we don't really have to invest again now to --in a significant way to ramp up production and hold it at around 1.2 million tonnes per annum for about 10 years.

Sorry, Andrew, to be clearer, but my question was really on the parameters of the wage negotiation, should have been clearer.

Okay. Well, these are things that we still have to talk about with our union and our -- I'm not really wanting to negotiate at that level of detail in public. I think in my answer to Paul's question, you heard, roughly, where we're heading to maintain in the long run a competitiveness at Escondida that makes it investable in 10 years' time, when it's more of a 0.7% to 0.8% operation. And you're supplementary question, what was your third question, again? I had it in my...

Lithium.

Lithium. I've been very clear. We do believe in the trend towards electrification, but our best way of benefiting from that, we feel, is growing our copper business. The copper market, even when you look for all the increases that are likely to happen, is -- and certainly compared to lithium, is at least 10x the scale. And for a company like BHP, that is our best way of participating in electrification and while we have it, we get a small kicker as well from nickel.

Our next question comes from the line of Jason Fairclough of Bank of America Merrill Lynch.

Two quick ones for me. First, just on the productivity gains, you've talked about $2 billion. Just to clarify that this is going to be before uncontrollable factors such as oil and currency. And so I guess, given what's happening with oil, with the Aussie dollar, to what extent do we actually see anything drop through to the bottom line here? Just secondly, there were some passing references to Potash in today's presentation. Could you please remind us of the sunk capital in Jansen and maybe frame your current thoughts about that market in the project?

Okay. Well, let me give the first question to Peter, because he'll tell you the detail of the productivity calculations.

So Jason, the -- as you say, the productivity gains that we -- how we calculate them is before prices for inputs, and that's no change, foreign exchange and so on. So to the extent that those things come through, that's obviously has an impact. But as we said a few times before, in the event that we have a high oil price, of course, that is net-net, a very good thing for us. FX is -- will do what it does, but it tends to, as we know, flow through everybody's results, and of course, that then has an impact on price. So more or less, I think the most important thing, I think correctly, we call out what is controllable, and as we said earlier, I think we're on track for a $2 billion -- an additional $2 billion through the course of the next financial year. And I think, as we have done in the past and you can touch it and you can feel it with the $12 billion, I think we would expect that we would be able to touch and feel it in the form of cash.

Okay, Peter will give you the detail on the Potash capital, but let me just sort of remind you that we have been clear that we're not going to make a decision on Potash for at least another year. But while we are continuing to sync the shafts, that work is going well. It's about 85% complete. And we're through all the technical difficult areas now. We're well below the freeze level, where the ground is frozen, and our excavating technology is working well. So we're on track. Probably and quite shortly into this year to actually get into the ore body, and then we have to think about permanently aligning the shafts so they're ready to be developed when we choose to do so. And that's a decision that is at least a year, probably more, away, and we signaled that recently. But in terms of the actual capital, we spent most of the capital that was sanctioned for building the shafts. But Peter, I'll give you the -- kind of the detail of the numbers as the CFO.

We have $3.5 billion sitting on our balance sheet, and that's what you see in the ROCE chart. And obviously, happy to take any questions offline on that.

So just to be clear though, Peter, so it's a statement of the obvious maybe. If we start looking at decisions on whether to invest more into this project, we take that $3.5 billion as sunk, so it's an MPV from here calculation?

That's how the corporate finance theory will tell you, and that is probably absolutely the right thing, unfortunately, in many ways. I mean, that is -- it is what it is. But I think this will be in the fullness of time -- I think it's a good option. It's conceptually a good business industry to be in. We have to work really hard to make this thing make sense. There's no doubt about that, and it'll have to go through the capital allocation framework. We said this many times, we'll continue to say it. We have demonstrated it on many other types of projects, on many -- in other commodities. It's not going to be any exception to this one, and we've got our work cut out. But we've got good teams. We've got options. But if it doesn't make it, it doesn't make it.

Just -- so $3.5 billion on the balance sheet today. To get it to the point where you even think about the next investment, what do you think the sunk capital is going to be? Is it going to have a 5 in front of it?

I think we'll continue to work the project, Jason. I mean, at the moment, we're looking at something relatively modest, but which will deliver a project on a cash basis, which will operate at the bottom of the cost curve, and it will use very much the ore body very close to the shafts we're sinking. But this is something we work all the time, while we wait to think about our decision, as we do with many projects to see what is the right thing for this company. And if I refer to your own conference, when we presented a while back, I think it was in August results, we laid out in some detail the optionality we're considering. And I think when we make some choices around that, then we'll obviously be completely transparent with the market about the costs involved.

The next question today comes from Myles Allsop of UBS.

Three quick questions. First of all, with the Iron Ore business in the Pilbara, do you think you can creep it beyond 290 million tonnes or are you going to be constrained by the licenses now? Secondly, can you just give a quick update on Samarco, what needs to fall into place before we can see a restart? Is a restart possible during calendar year '18? Is it likely? And then thirdly, just going on to sort of the onshore process. Clearly, there's been a bit of a slow start, but it looks like we've got good momentum. If you get $10 billion, $12 billion coming in, will you consider out of cycle capital returns or will you wait until this time next year before deciding what to do with the cash?

Okay, okay. So gosh, I should write these things down. Let me -- just give me the 3 headlines again, and -- because I have answers to them all, quick ones. If any...

290 million Iron Ore. Samarco.

Yes, okay. Yes, 290 million, Samarco and then, obviously, the cash from shale. Well, we just got the 290 million approved, and we are confident that by the end of the next financial year, we can produce at that level. And I think that's all I would want to comment on at the moment. This is a system that we continue to work the oil, and the way we can creep its productivity by. We've done a great job on rail. We're now very much applying ourselves to the port operations. And trying to do that with the minimum amount of capital. Once we get closer to 290 million in a year's time, we'll talk some more then. But I'd rather not go beyond that at the moment. The restart of Samarco, there's a number of things that we have to get right. But I think, if I might just back up a little bit, where we are right now, I mean, what -- I kind of talked about it very briefly on my presentation. We now have all the parties sitting together working on something that we call framework 1.1. Framework 1 point -- Framework Agreement 1.1 is an agreement, which we hope to reach, the target is April, but certainly by the middle of this year with all the parties on progress towards settling all the outstanding civil claims. And the data that will be sought from that, the consultations that will be required in order to get what we call Framework 2.0, that is very important that we iron that out first, so that we understand what everybody wants and what we agree to provide in terms of the restitution of the damage and in many cases, the social disruption that was caused by the failure of the dam. But certainly, once we get to Framework 1.1, we can start thinking then beyond and to what is the likely fate, if you like, of the Samarco operation. We want restart to happen, as I mentioned in the talk. But we -- but there's several things that we need to get right. We need to get the economics right. We need to understand the best way to run that business. We for sure are not likely to go back to the sort of independent nonoperated joint venture that we had before. I think Vale and I, and Vale and BHP are very much agreed on that. But the exact look of that is something that we still have to discuss, as restart becomes more likely, because we haven't yet got all the approvals that would be required to restart, and we also need to get an appropriate settlement with the bondholders who have yet to come to some sort of compromise with us, as the equity holders, on what part of the, if you like, the costs of cleaning up Samarco they should bear. So there's quite a few things that need to come together, and they need to come together in a way that makes economic sense for restart to occur. But of course, we would like that to happen, and we'll be working with that intent. But also, we will be, as all things, looking at it through the capital allocation framework. And then as to the -- Peter might want to add to this, but as to the proceeds from shale, again, I would say, one thing at a time, Myles. I mean, the important thing is that we need to get these transactions done. We'll need to then, as usual, do our long-term plans, look at our cash flows. And when we come back in August, of course, we'll have a little bit more certainty around that, possibly not yet -- not then on the sale. I take slight issue with your comment that it's off to a slow start. We always said we'd give ourselves 2 years to maximize value. I think against that timetable, we're doing very well. All the data rooms will be open in a matter of months. The flyers are already out, we expect to receive bids by the middle of the year. So there's a lot of things that need to come together before we would want to give you the kind of more firm guidance that you seek. And we need to put it in the context of how the world's markets look in 6 months to a year's time, as we normally do in a more fundamental way around August, or by then, we probably won't have exact certainty on how the sales are going, but much more than we have today. I don't know if there's anything you want to add to that, Peter.

It's a matter of weeks, not months, Andrew, on opening of the data rooms.

Sorry, I misspoke. Yes, it will be open by March, for sure.

But out of cycle returns on -- what are the options you have?

But we'll talk to you about that when we have more certainty around what our cash flows are.

Our next question today comes from the line of Menno Sanderse of Morgan Stanley.

Just 2 questions around the targets. The company remains exceptionally confident in the $2 billion efficiency savings, despite what more people would argue is 2 out of 10 in the first half of financial year. Could you just give us a bit more detail why you are so confident, and especially in met coal, you're still targeting $54 cost, for instance, which is far, far away from where you are today? So are these -- this is now more aspirational or do you still think you can really genuinely get there? And secondly, on free cash flow, clearly, a good number for the full year, over $12 billion. Are there any big swing factors in the second half versus the first half, for instance, working capital or taxes that deflated number a little bit for the full year?

Okay, I don't believe so to the second part of your question, Menno, but I'll double check with Peter after I've answered your question. I think 2 out of 10 is a little harsh. I always said that as we find it to get into the -- deliver -- [give quite] the [heart of] territory on productivity that, that delivery was not going to be monotonic, it was going to be a bit lumpy. We were very clear that we were going to face a one-off hit from the Olympic Dam shut down, and that some of the other things were going to be a little bit slower in coming to kind of compensate for that. Obviously, we've added to that. Some of the difficulties that we faced in coal, they're partly geotechnical, but they're partly down to the sort of the impact -- or the long impact of Cyclone Debbie. But 4 out of the 6 BMA mines are actually beating their targets. They're just held back by geotechnical problems at Broadmeadow and Blackwater, which we're more or less through right now. I think this is a bit better than aspirational, and if you look at some of the other businesses, there's a lot of things going in the right direction. We did 284 million tonnes of Iron Ore in the second quarter. Quarter-on-quarter, we took about $1 out of unit costs at Iron Ore. The $54 a tonne for coal, that's in the future. We've guided to $66 for the full year, and of course, we had the difficult first year, which was at $71. You've heard a lot of the answers to the questions on Escondida. The ramp-up of OGP1 and obviously, joined by the desalinated water, has gone well. And that is unquestionably creating the potential for further increases in both recoveries and throughput to maximize the capacity of that system. And that's something we'll see later on into financial year '19. But in time, I would say to secure strong delivery of those productivity targets. I could go on. I mean, obviously, Olympic Dam now into the Southern Mining Area gives us an opportunity to chase productivity in that area as well. We've had good results, even though we're selling the business, from our trials in the shale business on different wells. They've been more productive than we had expected. And we continue to work at pushing availability, reducing the number of shots we have to take, and there's not many in the back half of the year. So that partly answers the second part of the question. We're extending the time between shots, which means we have more producing time and it means that we're spending less money on shots. So a lot of things. I mean, I could probably go on, but the list is very long, in order to give us the security that we really are still very much driven to drive further productivity benefits, including reaching the $2 billion target. But I'll just double check with Peter that I haven't missed any one-offs. I don't think I have. I think the second half is much cleaner than the first half.

No, I think, Andrew. I think there isn't anything unusual coming in the second half that we know of at this point in time. We've got our work cut out, there's no doubt about that. The second half has to better than the first half, we always expected that. But the -- we have the operations running where they are today. And so we're thoughtful about that -- maintaining that guidance. And of course, the biggest -- of course, if we make $7 billion in the second half, well, it's price. Price will be important whichever way. So we're not making that as guidance. It's just the way it is with spot prices today. So...

The next question comes from Glyn Lawcock of UBS.

Just going back to sort of WA Iron Ore and 290 million, you've answered a lot of questions on it, but just a couple of things. Firstly, just you're not far off 290 million, you're within sight of it. But how do you think about that with respect to the market? And then is there anything you have to do to get to 290 million material? And then my other question is just on Slide 17, which I found quite interesting. You're obviously balancing cash and returns, and then on top of that, you're obviously -- there's an extra bit of spending, which is you're paying down debt. So once you're at the sort of bottom end of your debt range, which is where you say you want to get to, given the current environment, how should that chart look? Is that the new BHP, where you're going the be balancing or will we see that swing the other way, where that net line actually merge more into the return? Just thinking how you think that chart looks a couple of years down, once your balance sheet is where you want it to be.

Okay, I'll come back on the Iron Ore question in a moment. But we make these decisions on the basis of our capital allocation framework. This is not some kind of new metric around balancing, but it has become more balanced, because we've got our debt into -- as of the 31st of January, into the $10 billion to $15 billion range. We don't want to go outside that range, but we do want to drive to the bottom part of the range. So it does mean the majority of the free cash is either going to be invested in the business or is going to be returned to shareholders. And we've been very clear that we're not going to allow capital to go above $8 billion out to 2020, $7 billion or $6.9 billion for this year. It's not really targeting a balance, it's just illustrating that it is more balanced, if I could put it that way, and that was the purpose of that chart. Is there anything you want to add to that, Peter? No?

No, Glyn, when we get there, we'll -- guess what I'm going to say, we'll run it through the capital allocation framework, and we'll come up with the good -- the right balance between the balance sheet, the returns to shareholders and investment. But it's -- clearly, as we get our balance sheet to where it needs to be, and we're there inside of, in fact, our medium-term range today, the guidance on CapEx is unchanged. We want to give and we need to give more cash back to shareholders, no doubt about that, and that line will take care of itself.

Can I just ask then, if an opportunity comes along, would you move outside the debt range?

You mean back up again?

Well, yes. Or is that now a very hard to [deal with] ?

It will depend -- Glyn, again, sorry to say, you'll probably predict what I'm going to say. It would depend on the opportunity. We do think about our balance sheet on a stress tested basis. So we do 2 things on our balance sheet when you think about what's strong. First of all, we need to make sure it buffers the downside, so we, of course, stress test it for prices, and so on, that we have seen in the recent past, which would in our modeling persist for an extended period of time. But in addition to that, we would also -- we also model a countercyclical investment, and we want to make sure that we can both buffer as well as be offensive, if you like, countercyclical, in acquiring something, some unknown asset that may just come to the market in the event that everybody else became distressed. And so we think we're good on both parts, given -- and this is really the basis of the $10 billion to $15 billion range that we've provided. And so we would be able to make an acquisition and retain a strong balance sheet. That is a balance sheet that would, for convenience sake only, always have an A in front of it.

So in our Iron Ore, I can't add much to what I've already said, Glyn. I mean, clearly, some of the discussions I had about extending shutdowns, that applies to Iron Ore. We have used a lot of work in sort of tightening the way we run our rail system, improving its maintenance, shortening turnaround times, increasing throughput. We're doing all the same work on the port to creep towards 290 million. It's -- and then it's lots of little small things, as we orientate so much of our workforce to make themselves and the equipment that they operate more productive, more available, higher utilization. And that's -- and we get there with minimal amounts of capital.

Sorry, maybe, Andrew, I'll rephrase my question, and apologies. What is the first priority for Iron Ore? Is it 290 million? Is it return on capital? Is it margin? I'm just trying to understand how is the 290 million a must-achieve.

Well, the first priority is, obviously, return on capital or if you like, shareholder value. In the case of Iron Ore, through the ability to add tonnes at almost no additional capital and no additional cost, then that correlates perfectly with boosting the return on capital employed.

The next question today comes from Lyndon Fagan of JPMorgan.

Look, my questions are on costs. The first one is just in relation to Iron Ore. I'm just trying to understand the cost increase a little more clearly half-on-half that you reported, about $1 a tonne increase in Aussie dollar costs half-on-half, which compares to a bit of cost out from Fortescue and Rio. So I guess, when you benchmark against the key figure of why costs went up, it'd just be good to understand that a little bit better. And then I guess, on met coal, you've retained your $40 a tonne medium-term cost target. You're sort of in the $70s now. So I guess, I'm struggling to work out how you get to that $40.

Quite a lot of numbers in there, but I mean, I'm looking at Peter. But I think our medium target is now $54 a tonne, not $40, am I right? Yes. So...

That's correct. I think maybe just New South Wales Energy Coal is $40 in the medium term. And so Queensland Coal is a little higher than that. But I think it's -- anyway, I'll stop there. Andrew, you can take the rest.

Okay. I mean, so on Iron Ore, there's some detail in there of one-offs on the half-on-half. But I think on the full year to full year, we have reduced costs by, I think, by about 2% or 3%. And if we take calendar year to calendar year. And I also think, from memory, we've reduced costs from first quarter to second quarter by about $1 a tonne. So I'm just saying, I mean, there can be one-offs, it can be a bit lumpy. But our trajectory is down, and we are confident of in the medium term getting below $13.

Yes, that was my bad on the $40. Just a quick follow-up in relation to South Flank. You've talked about what happens to the weighted average Fe content and lump proportion after bringing that on. Just wondering if you could share how it influences costs. I imagine it's a higher cost asset than Yandi, yet you've still got your $13 sort of (inaudible) cost going down to $13 in Iron Ore. So just wondering how that fits in there if costs potentially go up from 80 million tonnes of ore coming in.

Well, I think there's a lot of detail in there that I'd rather have you -- handle with you offline and possibly through the IR team. We haven't actually finally agreed that the definition that will be moved into execution on South Flank. We're a few months away from that. At the point when we do that, we would be -- we'll be very clear to lay all these things out for you, Lyndon.

Our next question comes from Grant Sporre of Macquarie.

Just a follow-up question on Samarco for me, please. Earlier this year, Vale indicated that they would look to wanting to own 100% of the asset. I'd just like to know from your perspective, what sort of milestones you would like to see in place before you contemplate, let's say, the sale of your 50% to Vale, if indeed you were to consider that?

I think that, that's a very high level of specificity. There are many ways other than running things through a nonoperated joint venture that we might run Samarco were we to achieve a restart. And of course, we are engaged -- we're always engaged with Vale. We've had a good relationship since the terrible disaster happened. And we go backwards and forwards on the best way to make it work. We're really not at the point of getting to the final stages. We're looking at all options. But as I said earlier, the most important thing we need to do now is to complete Framework Agreement 1.1, which puts us on a trajectory to get a full settlement of all the remaining civil claims. Once we have that and we start to see the approvals be come upon in Samarco and we think a bit more about how we deal with the bondholders then we will continue to work with Vale in what is the best way to run the operation and what is the best perspective from the perspective of BHP, what is the best way that we can retain influence over that operation, and most importantly, the influence that we have on the ongoing cleanup of the environment and the resettlement of the affected communities, but also dealing with a lot of the compensation issues through the Renova Foundation. So it's a complex set of things that we have to work together. We have to have our influence felt, and we also have to look after the return on capital employed for the BHP shareholder. And that will be preeminent, and there are so many moving parts that the level of specificity you're asking me to do now is, I think, a little bit premature.

The next question today comes from Fraser Jamieson of JPMorgan.

The first one is just an extension actually on that question on Samarco and nonoperated JVs more generally. I think you previously spoke about fearing that those were probably unsustainable in the long term. You've got a couple of other ones in the portfolio other than Samarco. Can you maybe give us your latest thoughts on that structure in general and how we might see that developing over the kind of medium- to long-term? And then the second one is, if we assume successful sale of the U.S. onshore assets, your volume growth profile will be much more limited at a group level than it currently does now. So I'm just wondering how comfortable are you with that dynamic? Do you think this is a business that needs to grow in volume terms or can you still drive enough earnings growth through other means? And I'm thinking about that particularly in the context of cost inflation returning adverse FX moves, et cetera?

Okay, so on the nonoperated joint ventures, not a lot more to report, Fraser. I mean, we've been very clear that we're never going to enter into one of them again. But we've also been clear we don't believe that the nonoperated joint venture structure -- independent nonoperated joint ventures could be blamed for having caused the dam failure. But there's no doubt, we -- these were things that were set up a long time ago. I think, with a modern sense of, if you like, accountability that we would feel they're not the right things to do in the future. However, unwinding the existing ones where you don't have the impetus that I've been talking a little bit about, the Samarco restart, and the knowledge and the sense that we both have between ourselves and Vale is not straightforward. Our other shareholders are perhaps less motivated to make changes to the arrangements than we might be, and we obviously have to through all of these things protect value for the BHP shareholder. But long term, I don't think you'll ever see another one like it within the BHP portfolio. And we would hope that by then, we have reformed to something different and at best, more in line with a joint venture, whether it was a nominated operator from one of the major companies that is commonplace in petroleum. But other than Samarco, this, I think, will take time for, I think, reasons that you can understand because of the different motivations of the other shareholders. And so one word. I'm sorry, I should write these things down, your second question? I did have an answer.

The second question was just around volume growth for the group and (inaudible).

No, I've got it. I've got it. You've heard me on this before. We do not have volume targets either for the company or for individual commodities. We assign capital through the capital allocation framework to the projects, which offer the most competitive return and compete with -- effectively, with returns to shareholders. We want to create options that can compete for that capital across our portfolio, but we're not driven to simply replace volume as a result of decline at a high level than driven to get returns or even to increase volume. Then it can be at the company level a reasonable surrogate, if you like, for growth in free cash flow and growth in value. But we'd rather measure the dollars than the tonnes or the barrels. So I -- and that's basically the answer. And therefore, because of that, I mean, we've looked at that from a number of angles, including the climate change angle and how that may change the demand for our products. We always feel there are several ways in which we can grow value and cash flow and therefore, grow volume, with different mixes of commodities depending on how the markets for those commodities evolve. That's part of the benefit of the diversification that we offer within BHP. I think in oil, we are clear that having pivoted back towards conventional, we would like to create a few more options that could compete for capital within those constraints. That's why we do have a fairly significant exploration program, why we went for and won our bid for Trion, and are interested in a number of brownfield operations within our existing footprint. But they have to compete within the capital allocation framework.

Your final question, Andrew, comes from Hayden Bairstow of Macquarie.

Just a quick one on met coal, just on the issues you're having at Broadmeadow. I mean, the longer-term growth optionalities, most of them do appear to be sort of similar large top coal caving underground. Is it specific to the type of mining you're doing? Or is it just a lot faulting in that specific mine that's causing the instability in the operational performance?

Well, the answer to your question is, the second part is right, that we have had a greater, if you like, geotechnical challenges in that mine than we had hoped to have. I think top coal caving as we go deeper in there will become more important over time. There are -- there have been peers in the past when Broadmeadow has been probably the best top coal caving operation in the world. We have a lot of knowledge about how to run these operations well. We actually transferred some of that from the San Juan mine before we sold it, manager of Broadmeadow was the previous -- one of the previous managers of San Juan. That's in North American coal, which we sold. And so we've learned and therefore, we will get better with time. And some of those geotechnical challenges will be easier for us to overcome, all other things being equal, as a result of that knowledge. But you're right, it is an important part of the future development of coal, and we are absolutely determined to be leading exponents of top coal caving and have an ability to handle ever-increasing geotechnical problems with less disruption than we've suffered in this case.

So as you can see, over the past 6 months, our long-term plans, they have delivered solid results, despite some several one-off issues that Peter referred to, and they're largely behind us. So this, I think, sets us up very well for a strong second half, with higher volumes, lower cost expected right across the portfolio, and that's particularly at the Iron Ore, Escondida, Olympic Dam and Queensland Coal. And the questions about all this too, I think, give a bit more color around that. So this momentum in our operations coupled with the further gains in capital productivity, maybe said a bit less about that, will support free cash flow. And if spot prices persist, that should be more than $12 billion for the 2018 financial year.

And with this kind of cash, which is effectively the same as we had in the last full year, we'll continue to reduce debt and increase shareholder returns, as we've done in this period.

So I hope you feel that our plans are consistent and clear. We build a solid base, and we're applying them consistently, and we're building momentum. And so I look forward to talking you through our continued progress when we meet again in the full year results in August. I should just close on one thing, I apologize for a little bit of the technical difficulties earlier on. I hope that didn't spoil your enjoyment of this call and that we recovered appropriately, and see you all soon. Thanks.