必和必拓 (BHP) 2019 Q2 法說會逐字稿

Hello, everybody. I'm in London with Danny Malchuk, who's President of Minerals Americas, and Peter is in Melbourne with Arnoud Balhuizen, our Chief Commercial Officer. But thank you all for taking the time to call in.

Before I begin, I do want to reflect on the tragic incident at Vale's Brumadinho iron ore operation in Brazil last month. The collapse of the dam is a tragedy, and we offer our heartfelt sympathy to all those affected. At BHP, we are very much committed to learn from this, as we should as an industry, and redouble our efforts to make sure that events like this simply cannot happen. We'll be meeting with a number of global bodies this month to expedite this response and this work, but at BHP we welcome and would welcome a common international and independent body to oversee the integrity of the construction and the operation of all dams, and we certainly endorse the call for increased transparency in tailings dam disclosure. So we'll work with the industry in the coming weeks and months to make sure the disclosure is consistently applied, and we'll inform better tailings dam stewardship and risk assessment.

So we just announced our interim results. Just a brief summary. It's been a strong half for our shareholders. We returned record amounts of cash. We generated underlying EBITDA of $10.5 billion, which is a margin of 52%. And after disciplined investment, this was converted into a free cash flow of USD 3.6 billion. That, of course, excludes the proceeds from the recently completed sale of our onshore U.S. assets of $10.8 billion. We further reduced net debt, and we returned over $13 billion to shareholders. And that included a special dividend of USD 5.2 billion paid last month in January. And on top of this, our Board today declared an interim dividend of $0.55 per share. That's a payout ratio of 75% for the half, and that dividend will be paid next month in March.

While we did experience some unplanned outages in the first 6 months, I am confident that our asset-by-asset plans will improve safety, unit cost and production in the second half. And that's why at current spot prices, we expect a full year free cash flow of more than USD 9 billion and a return on capital of 20%.

We have over some time now been shaping our portfolio around the highest quality of assets in stable, low-risk jurisdictions. These are assets that can supply premium commodities with attractive fundamentals. And of course, we hold a range of exciting development options and exploration licenses in the world's premier basins for our commodities, and they include the potential to increase our exposure to copper, to oil and to potash.

Our portfolio is unique in the sector and does confer a degree of advantage on us, but that competitive advantage has to go beyond the quality of our world-class assets and the attractiveness of our commodities. It's through our culture and capability, how we work, how everybody in BHP works, that will truly set us apart. And that's why late last year, we established a transformation office, reporting to me, that should set up and will set up -- is setting up the next wave of value creation. This is the program that we will use to leverage a number of the things we have under work right now. Obviously, we continue to enhance our basic methods of continuous improvement, and they're well-proven. We are pushing different ways of working, standardizing our work at the front line, more automation. And we have very strong centers of excellence that now contribute considerably in the areas of maintenance, project execution and geoscience.

So to conclude, our focus is simple, our focus is resolute: maximize cash flow, maintain capital discipline and increase volume returns. And our track record -- sorry, our track record shows us that this is the right formula for our shareholders. Just in 2016, we strengthened our balance sheet through a $16 billion reduction in net debt. We've reinvested $20 billion in high-returning projects, and we returned more than $25 billion to shareholders. But there's still more -- much more that we believe we can and we will do. With a constructive outlook for all our commodities, a culture of continuous improvement that I described, a strong balance sheet protected by our capital allocation framework and our rich suite of development options, BHP, we are set up for a great future.

And so with that, I welcome your questions for myself and the team.

(Operator Instructions) Today's first question comes from Paul Young from Goldman Sachs.

Andrew, the first question is on the met coal division. Just looking at your production performance over the last 3 years, we've been looking at flat December half production for 3 years now. That's despite a really strong push on productivity over that period. I know Caval Ridge is coming online or has come online as you described it. What is your medium-term target for that business now in volumes? Also, a second question on met coal. Just can you explain the strip ratio increase in the half? And then moving on to Olympic Dam. Obviously, one of the big levers you have to pull -- you can pull, I should say, is that grade increase in the Southern Mining Area. But the other lever you can pull, Andrew, is on the cost front. Your absolute costs are running at USD 1 billion a year. In my view, they're running still too high. Are you taking a hard look at the absolute costs on Olympic Dam?

Okay. I mean, let me just start with Olympic Dam. Obviously, Peter and I will contribute to these questions because it's quite wide-ranging. We are taking a very hard look on costs at Olympic Dam. And under Laura Tyler's leadership, I think there is more to come out in an absolute sense, and she's working on that. And it's very -- and she's very much part of the transformation program that we described. But of course, the most effective way to reduce unit costs at Olympic Dam, because it has a high fixed cost base that we have to erode, is to just produce more. And that's obviously behind our agenda for growth, which you're well aware from the brownfield expansion and possibly later on the construction of a couple of shafts in the Southern Mine Area, to close to double in aggregate what we're currently producing from Olympic Dam. This is a slow and steady progress. There's no doubt. And it will be greatly assisted if we have more stable operations, then we can avoid some of the problems that we had with the asset plan in the half. I can report that after the recent shutdown, we came back very strongly with a record-breaking performance in the smelter. Obviously, that was interrupted by the outage, but we're now back producing at these levels within the smelter as we hoped we'd achieve through the shutdown.

In addition to that, we have definitely turned the corner in the construction of new stopes within the Southern Mine Area. That's a very important part of feeding higher grade into the Olympic Dam system and therefore, lifting production over time. But of course, we're also learning while that's going on about where will be the best place, for example, to put the shafts in the longer term and how to develop it. We made the decision to construct a third decline because we were unsure about some of the development options that we had there about constructing a fairly significant conveying system back to the existing Clark Shaft. And also -- whether -- or alternatively going to the Whenan Shaft, which could be reconditioned. We've since learned that actually reconditioning the Whenan Shaft is tough, and therefore, we've taken that off this plate. And we've also decided to continue to use the decline and therefore, to truck ore from the Southern Mine Area to the surface that way. That is -- that, in the medium term, will probably reduce some of the capital cost, but it will increase the operating cost. And you have to look at things in totality.

Second question, going backwards, I think was on stripping. We have substantially increased stripping, and that has proved to be a little bit more expensive, as you'll have seen from the results there, particularly in the pre-strip, so that we can actually get a lot more coal available to be mined. And that, over time, should add incrementally to the production of met coal from the total system. I don't quite have the medium-term guidance at my fingertips, so Peter, maybe, can answer that question. But -- and I think we're going to hold roughly -- I've just remembered, around about 48 million tonnes per annum. And we have, of course, a medium-term cost target that we're some way from in our guidance for this year of $57 a tonne.

Peter, you might want to add anything to my answers, and -- but I think -- and also met coal performance, we'll maybe come back to.

Yes. I think, Paul, underlying that $57 per tonne in the medium term is obviously more productivity, less cost, but also more tonnes. And I think we've probably got another 6 or so of our share out of -- really out of Blackwater, out of Broadmeadow and out of Goonyella, and that is off the back of more stripping and higher utilization of gear. We're not at the right -- at the bottleneck, which is the wash plant at the moment. So obviously, as we get there, that's where the bottleneck should be. So that's really the under -- that's what should underpin the next 3 years.

Okay. So met coal is an exciting business, and it has the benefit in many ways of having a much more diversified customer base certainly than we have in iron ore.

Our next question comes from Sylvain Brunet of Exane BNP Paribas.

First question for me was on petroleum and on both CapEx and cost, given the industry has reported some pressure, so just wondering if you're experiencing some of those. What are the main items behind that and the drivers, not just -- of course, you need cost level and just -- and the fuel decline.

My second question is on Jansen, just to get maybe an update of whether you've had new contacts with customers. What is the time line we should keep in mind for any decision there? Is it further down the line? And my last question, in an environment we find investors tend to be a lot more focused on ESG criteria compared to previous years, does that change anything in the way you'd like the portfolio to be positioned going forward, in particular with exposure to coal?

Okay. So let me deal with them pretty much in the order you've asked them. And again, I'll probably turn over to Peter and possibly Danny, if you feel my answer to Jansen you'd like to add something, because Jansen reports to Danny. But on petroleum, relatively simple. We're not seeing huge cost pressures in petroleum. I mean, clearly, we're facing the problems of decline, but we've actually declined less than we expected. So tremendous performance in the half by our team. And as I would look across all our businesses, and it's all relative, I would say that deepwater petroleum is the area where we're experiencing the least cost pressure compared to the rest of our businesses. But even there, apart from very localized areas, we're not too concerned right now about cost pressures directly. There are some issues about availability of labor that's affecting aspects of our reliability, and that does translate through to cost, but petroleum would probably -- and deepwater petroleum would be the area where we're least concerned.

So maybe I would just start with the ESG because it's not a bad way to think about some aspects of Jansen, which I'll come to. Yes, of course, we see more sort of focus on ESG, and there's no question that the incident in Brazil that I referred to in my opening remarks are increasing that. I believe we, as a company, have front-run this. We've been exceptional, I think, in our commitment to transparency, both as it relates to tax and the way in which we report on a wide range of sustainability issues. And we've led the industry through the introduction of a Water Report. And I am totally committed to be highly transparent about tailings dams in the future. And you've seen in our results a fairly detailed breakdown of our tailings dam portfolio. We expect more to follow, and we certainly expect it to feature much more broadly within our sustainability report and our ESG briefings in the coming year.

Now onto Jansen. I mean, I think one of the watches that you asked, does it in any way affect the portfolio? I mean, we wrote about our portfolio and the portfolio effects of things like climate change a few years back. We updated that post Paris. And I think we've been fairly clear that we think the core portfolio, provided it measures on high quality products, so high-quality iron ore, high-quality coking coal, high-quality copper concentrate, that is playing into a number of -- into a number of ESG issues, which are product-specific. I mean obviously, there's a bunch of other things about our relationship with communities and so on going forward. You mentioned it with respect to coal. I mean, obviously, the message from met coal is quite different than it is for energy coal. We are comfortable with our position in energy coal at the moment, but this is not something that we will seek to grow going forward. And we will continue to examine whether or not this is something to be competitive to remain in the portfolio. But for now, we keep it.

Met coal, as I answered to Paul, is a very attractive commodity. We happen to have an opportunity to do well out of just the kind of met coal that will improve environmental performance of blast furnaces. And as I said, it's quite useful in that it has a more diversified customer base, only 30% of it goes to China. But coming to potash, clearly, one of the reasons we like this option, it's potentially a 100-year business that could in time come to rival what we have today in iron ore. Maybe it won't take 100 years for that, but -- decades anyway, what we have today in our other 4 pillars. And it also actually, as well as offering diversification away from fossil fuels, it also offers diversification, again, away from overdependence on China.

So we still have work to do there. The shafts are constructed, but we are now going through the permanent lining, which will allow us then to decide whether or not we construct a mine at the bottom or we hold off a bit. This is a long-term commitment that we're seeking to make and so we have to time our entry into the market appropriately. While we wait, we continue to -- to continue with our reduction in risk. Part of that is having the shafts built and lined, but part of that is really just understanding more and more about the market. You've seen more recently that we've signed a long-term memoranda of understanding with potentially major customers, which is another way of risk reduction. There's a number of other angles we're looking at. We continue to look as to whether we might actually bring in a partner, which we therefore, we can share the risk with somebody else rather than the BHP shareholder, and possibly bring in other expertise that would allow us for further reduction.

We reviewed that with you at the capital allocation sort of workshop at the end of last year. It fits firmly in the box of relatively low risk now, but arguably, also low return. And we have to keep working on that because ultimately it has to pass all the capital allocation tests. We have no fixed time line, if you're asking for that. We are having more and more strategic discussions within the context of the capital allocation framework and our portfolio strategy at our Board meetings. It's an ongoing discussion as we monitor the market and we look towards risk reduction. And if there's any change, then of course in time we'll let you know. And so with that, maybe -- first of all, anything, Peter, you want to add generically to the 3 questions? And then maybe Danny, if there's anything you want to say about Jansen.

I just want to remind everybody, on the energy coal, we have less than 3% of our capital employed in the 2 thermal coal assets. So that's just a reminder. That's all.

Anything from you, Danny?

No, I think all has been said.

Our next question is from Lyndon Fagan of JPMorgan.

Andrew, just revisiting iron ore capacity. Obviously, the price has skyrocketed after the tragic accident. I see you've sort of reiterated the June '19 run rate of 290. But what -- can we just look at what the bottlenecks are in the system at the moment in the Pilbara? How quickly these can be released? Is there any potential to accelerate volumes? Will you revisit the iron ore strategy as a result of what's happening? I guess there's a few in that, but that's the first one.

The next one's just on tailings dams. I really appreciate the new disclosure. Can you talk a bit about the upstream dams? And are there any legacy assets in Brazil? How should we think about potential decommissioning and rehab costs and any other changes related to the outlook there?

Okay. Thanks, Lyndon. So -- and I know it's mainly noes, in answer to your questions. I mean, the reality is that we have been concentrating for some time, as you know, as maximizing the capacity of our existing investment. And we continue to do that, and we really have no plans that we would change as a consequence of what's happening in the current high price because we've not been holding investments back or holding capacity back, we continue to try and push harder. Of course, we do only have permission to do 290 from the Western Australian Government. But if we were capable of consistently doing more, of course, we could ask for that.

We do work on the bottlenecks, and we have now through strong performance on rail and within our mines and the ramp-up of Jimblebar and now the ramping up of South Flank meant that the bottleneck sits very much at the port and with the car dumpers. And that's something that we work hard on the asset integrity there to maintain the reliability and look at modest investments as to how we might make that bottleneck more stable in time, which could give us small increments. But beyond that, the reality is as we look forward on the price, we assume over time that some of the current issues in Brazil will be worked through and in some form that iron ore will come back to market. It may be a year or 2 of volatility while that's worked through. And when we look at those long-term prices, and we look at that within the context of our capital allocation framework, we don't see the case for any major new investment in iron ore, just simply keeping the capacity we've got through everything I talked about in terms of transformation and an ever increasing focus on asset integrity.

Look, on the tailings dams, quite a few questions in there. We could probably take up more of the call than I think we should, but just to refresh you on the numbers, we have 115 tailings dams, the majority of which are inactive. But we have 20 active dams, of which 13 are upstream, and they are, I think, almost exclusively in Australia. But I would want to make a point that these dams are very different from the upstream dams in Brazil. They're on flat plains, they're not in valleys, they're in regions of relatively low rainfall. And they've certainly been subjected to extreme care and attention, particularly post the incidents at Mount Polley and obviously more profoundly for us at Samarco. We -- as I said in my broader remarks, we've put in place a very rigorous process post-Samarco to really refresh our understanding of all those dams. We found no serious deficiencies using what was then and is now the gold standard of the Canadian Dams Association. We have nearly 400 actions to further improve things. They're about 93% done, and those that are not done are things that are -- were scheduled for later and more administrative in nature.

We've done drills where we have people still at harm's way, and we are moving people out of harm's way. They have all passed the test of getting people out well within the time that will be required in an event of the most extreme form of break. We have improved monitoring, have got a lot of new systems in place -- that were being put in place using lasers and so on and the sorts of things that can give you early warning systems. We have alarm systems. So we take it -- we have been taking it very seriously, particularly post-Samarco, and will continue to do so. The tailings dam work reports directly into me. I'm taking a lot of personal concern in this area. I think there is more we can and should do there. We need to upgrade the science, and we need to open ourselves to even more transparency in the way I described in answering Sylvain.

In terms of legacy in Brazil, we do still have the Germano dam, which is the dam that sat behind that Fundão dam in Samarco, that we are in the process of decommissioning, and that's -- and regrading and making it safe. So some of the announcements more recently, the upstream method may not be allowed anywhere in Brazil. It's something we're well ahead of. And we will continue to expedite that work. And we certainly will have -- can provide all the plans to the authorities well within the deadline that has been set, I think just this week or was it last week?

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

Just, Andrew, come back to the Jansen question. And I just -- maybe you could help us understand a bit more about how you're thinking about the time line to approval from here. What are the nodes on that decision tree? And ultimately, is this a decision for this version of BHP's executive? Or is sanctioning Jansen a decision for the next CEO?

Second question for me would just be on the DLC. There has been a bit of commentary lately that some of the obstacles to a potential collapse of that structure are being removed, particularly around tax. And I'm just wondering if you have an active watching brief on the DLC. Again, is this a decision for you or for the next CEO?

I'm not even going to answer any of the questions about which CEO makes what decision, because there's a lot of speculation in there that I do not want in any way to be part of. We make decisions at the right time. We're not in a hurry to do anything stupid, but we wouldn't delay things for similar reasons. So I mean I think in terms of the nodes of the decision-making, I mean it's pretty simple. I mean it was laid out, I think, very clearly by Peter and the team at the Capital Allocation Day, where we talked about how we look at these things, how we evaluate certain projects. And I mean, clearly, there are certain physical issues to do with Jansen that we have to think about in a way, but we're under no pressure to do something that would actually violate capital allocation framework one way or the other.

We have long-term security of tenure. As I described earlier, we do think this is a very useful option to have in the portfolio. There's many ways that we can seek to create value from it that we've gone out -- gone in the past. And this is a long-term game for us. And our appropriate entry into this market, if we decide to go ahead with Jansen, is something that needs to be chosen to be done at the right time. Like, as I come to the moment, the DLC, we keep it under active review as a Board. We still have work to do for the next year or 2, to fully complete our work on the shafts that we have committed to complete. And -- but beyond that, it's simply about all the work we can do to reduce the risk through better engineering and through better work with our potential customers and also just a better understanding of the market and what is the most cost-effective way, if we chose to do it, to enter into it, fully in line with the capital allocation framework. And that is, if you like, the key decision node, if you would like to call it that.

So to look on the DLC, we keep it under review. Yes, we have seen the settlement of the ATO dispute, which removes one cost that would occur on unification, but there are other hurdles that still have to be debated. First, we still enjoy, as a result of the dual listing structure, which we'd lose, if we were to unify in favor of the limited, some tax benefits, particularly that pertain to our energy coal business in New South Wales. And they build a measure of several hundred millions that will obviously get used over time. The plc shares have a strong South African ownership. And if we unify in favor of the limited, then they would face a fairly significant Capital Gains Tax, and that would certainly affect their attitude, if you like, in terms of any shareholder vote that we have to be mindful of. You're well aware in this market of the issues of indexation and what the loss of indexation might mean. And we have to be very sensitive to that, and from a wide range of shareholders, and are.

And then finally, there's a lot of speculation as to exactly where the unified share would trade, based on a wide range of things which are more assertion-based than real. And we have to get our -- continue to get our arms around that as well because that will affect obviously the experience of shareholders, both on the limited side and the plc side if we elect for unification. So one barrier has been removed. There is definitely a timing element around the remaining tax benefits that we enjoy. That means that we, we can -- we should be patient as we go forward. And we keep it under review.

Just have a super quick follow-up on potash, if I might. And maybe it's for Peter, but could you just remind us what the current carrying value is of Jansen?

Yes, Peter can handle that.

Yes. It's in the ROCE chart, and we've got about $4 billion or $4.5 billion sitting on the books at the moment -- sorry, $3.7 billion.

Our next question comes from Menno Sanderse of Morgan Stanley.

I have 2 brief ones. Andrew, you talked all about -- you talked a bit about the operations center and the new technology center, and the word technology is coming back a couple of times in the statement as well. Historically, I've always understood BHP to be, let's say, a fast adopter rather than a first mover. Is your approach changing a little bit to that? And can you give us a little bit of a sense of the scale of the opportunities that the company is looking at?

And then secondly on Olympic Dam. I appreciate all the comments you made and you're clearly back at your record processing volumes in the smelter, but you have been encountering quite a lot of unexpected outages, as you pointed out. What have you changed in the management of the aboveground facilities in the last 6 months to -- for you to deal with this asset problems?

Okay. Yes, you're right. We are definitely shifting our approach to technology. We do believe that in -- with the current wave of technology change, you can kind of somewhat exaggerate things like what everybody -- what do you call it, the Internet of Things, the availability of much more effective sensors and systems and AI. There are a number of opportunities to sort of lift the performance of basic industries, and we want to be at the leading edge of what's possible in mining. And there is a fairly detailed slide as backup in the pack, which I think should now be available online, but it breaks things out between sort of mine planning to mining, which of course is autonomous processing, which is improved throughput and advanced process control, transport, how we schedule trains and boats and have kind of less unplanned events, to a number of issues that we can do in marketing. I mean, I don't -- I've got the slide in front of me now, but you can -- there's a lot of things in there that you can go through. And if you've got questions arising from that, then we have even more backup behind that if you want to talk to the people in Investor Relations.

I think, on Olympic Dam, what have we changed? Well, we've obviously -- more recently, we've changed the leadership there. And as well as that, we are putting -- particularly on the surface stuff. You're right. One of the challenges that we have in Olympic Dam is, if we were to build the system today, we would probably avoid what I call a factory in the desert or a factory in the outback. I mean it is very capital hungry. And it has more than its fair share of asset integrity issues. We are trying to get through them. The asset plant failure was very unfortunate, but it may have dated back even to WMC days. Or if we were being a little bit more accountable, we might say we missed it and was not doing a proper inspection back in 2016, and it was sort of waiting to happen. We do need to put in a lot more in terms of -- and some of it is technology, of better reads of how the equipment is performing so that we get more early warning and we could intervene in a way that prevents major outages.

We already started planning another shut down for 2021, which is going to try and take it to the next level. But there's no doubt that the stable operation to be then obviously be debottlenecked under the brownfield expansion is absolutely critical. And I think we are -- we're front-running that, but -- yes, it's hard work. It's -- ever since we gave up the open pit, which is exactly the right decision, we're now having to get an underground mine -- already the biggest underground mine in Australia, to perform, if you like, with the reliability and precision that we shoot for and some of the other things I've been making about in an open-pit operation. We're using our best people to do that, and as we should, because it is a fabulous ore body in a very stable and favorable jurisdiction, which is South Australia.

And a quick follow-up on technology. Are we talking -- in terms of scope of the efficiencies, is it still billions that you can see? Obviously, I appreciate you have to put CapEx in to probably get to it, but how big is this opportunity?

Yes, but I mean, I wouldn't want to see it in isolation, Menno. I mean, our transformation program, as I kind of roughly described, it starts with something we call world-class functions, which is benchmarking all our functions against what we think is best-in-class all around the world, all the sub-function by sub-function, and simplifying a lot of our internal processes, but as well -- and as well by taking work away, reducing costs as a consequence of that and also increasing our, if you like, our -- reducing cycle times, increasing our speed to market on a number of issues.

It includes something we call our new operating system, which is about -- it's about our culture. It's about how we organize our work. It's about really teaching people at the front line how to sort of look almost, move by move, as to how they can actually do their jobs more effectively. It's about, within all of that, in-sourcing more of our contractor workforce, so that they can be more -- they can be trained up, more constant and therefore more stable. It's about some of the technology things that I said to you that includes some of the automation that I've spoken about. And it's a whole bigger push, if you like, on the culture and capability of our workforce through training. When you put all that together, we haven't released firm numbers yet, but it is -- the benefits in value terms are measured in many billions. There is some investment, but less than you might think because a lot of it is cultural. And of course, that investment is equally applied through our capital allocation framework.

But if I were to say things in -- the way we grow this company going forward, most of it -- no not -- most of our conversations tend to be on the traditional things I've spoken about. We've already talked about expanding Olympic Dam, potash and so on and so forth. But a substantial ability for us to grow free cash flow, all other things being equal, which I think is equivalent in scale to the total growth we can do through more traditional investment, is in this transformation bucket. And we believe, having created this highly simplified portfolio, much more connected workforce with a real can-do attitude, we prime the pump to make a lot -- to get a lot of benefit from it. And in no way are we going to be fast followers. We want to be leaders in this area. And I think we are.

Our next question comes from Myles Allsop from UBS.

Three questions. First of all, just looking back over the last 6 months and arguably over the last couple of years, you've had more than your fair share of operational issues, whether it's fires, whether it's derailments or plant leaks and so on. So what can you -- why you think that is? And is it just you have been unlucky, and why should we kind of assume that you're not going to have issues going forward?

Secondly, in terms of cash flow, your guidance points to free cash flow doubling in the second half. Now when we look at your capital allocation framework, net debt's at the low end. CapEx guidance, obviously very clear. Should we assume the vast majority of cash flow now gets returned to shareholders? Or do you think M&A opportunities are picking up?

And then thirdly, just on franking credits. Could you just -- I mean, with the elections in May, labor government, it sounds like, is sort of likely to come into power. What are the proposed changes to franking credits? And how will that impact BHP?

Okay. So I'm -- Peter can answer questions 2 and 3. I'll handle question 1 in a moment. But just briefly on franking credits, and then Peter can go into some details. I mean we have just done a $5.2 billion special dividend, fully franked. We also then did a major buyback, fully franked. So we've been working pretty hard to monetize our franking credits. And so -- and right now, no forecasts. I mean we've -- for example. But we don't have plans for doing anything special, but that can change. But Peter can say a bit more about that.

Just about the operating issues, I think you're a little unfair to say we've had more than our fair share. I think we're very transparent about these things. We tend to put everything out there, and we try and hit targets with very high levels of stability. I think if you looked at most of our competitors, and I could go through a long litany of things that happened, it's par for the course in this industry. And you talked about train. I mean, 3 or 4 years ago, we had 4 derailments a year. This -- we've had 1 derailment, and it was a completely different one. It was nothing to do with a maintenance issue. It was to do with the fact that there have been inefficient process and -- applied and followed that left the train on a slope without proper breaking facilities in place. I accept that this level of incident is unacceptable.

The main push, I would say, for our transformation agenda is to eliminate these incidents through a much higher level of stability. It's as much down to culture as it is to do investment and asset integrity, and we're attacking it from all angles. The fact that we can maintain guidance shows that we're -- that in terms of our unit cost and our production, we certainly -- we have to build in some contingency for some of these things. Some of it, of course, is uncontrollable, although we need to get better at it when it's things like weather events.

And our commitment is to do better in this area. And I think underlying, when you look at what we've achieved, we are getting better. We delivered $12 billion of productivity up to about 2 years ago and in the preceding 3 to 4 years. We've given none of that back. We've just not been able to maintain that trajectory and that momentum. What we're doing in transformation, the intent is to regain that momentum. And an important part of that is by making our operations stable and eliminating events like that through judicious investment in asset integrity and then a wide range of things, which our transformation agenda is designed to do, which in course includes things like what we do in maintenance and things like culture.

But, Peter, you might want to add to that. But if not, let's just talk about net debt and cash returns and anything you want to add on franking credits and special dividends and so on. I should say, on the dividend side, we've also just done 75% payout on this one as well, if I may just give a headline. Over to you, Peter.

Myles, very quickly, the free cash flow will be what it is at the end of the 6 months. The capital allocation framework will take care of how we allocate that. As you said, maintenance CapEx is spoken for. I don't think we've got anything new to say on that at this moment in time, happily. And net debt is at the -- just under slightly at the bottom of our target range. We don't -- as we said before, don't expect us to slide through that. It's a good range. We do want to be at the bottom. We've said that for a little while. So that's fine. Good news.

So therefore, there's only one other home for that cash, and that's a very happy home. M&A is something which, of course, we keep an eye on, but it's not something we have to do, and it's tough to make value in there. We did take a position in SolGold, but that's -- we'll wait and see how all those -- that and those types of things play out. So it's always something, as we say, we pay attention to. So that's straightforward, I think. And I don't think you would expect me to -- and I haven't said anything I haven't said before.

On frank creds, yes, we've managed to actually just in the last 6 months get 4.5 -- another way to look at it, we've put $4.5 billion of franking credits back through to shareholders, which is good, but we still have a lot of franking credits. We won't -- we don't think about our dividend that we pay in terms of that franking credit other than in how it plays out in terms of the buyback versus the additional cash dividend. And in the event that we have got additional cash, then we decided that buybacks are a good idea. And of course, it's a decision between plc and limited, in the event that franking credit plays out, in the portent, what generally looks like a 10% to 15% premium of limited over plc. So that's how it plays out, nothing new there. I hope that answers your question, Myles.

The next question comes from Hayden Bairstow from Macquarie.

Just a couple of quick ones for me. On costs, I mean, the currencies are sort of going your way. I mean was there an opportunity here, given volumes in bulks particularly are supposed to be higher second half against the guidance range? Is that -- we could have actually cut the cost guidance a little bit, given where the currencies are? Or are you actually seeing some industry pressures that sort of lead you not to do that at this stage?

And just quickly on Scarborough. Was there any sort of holdup on making that decision, given Woodside are pretty keen to push ahead with it?

Okay. Why don't you handle the cost question, Peter, and then I'll -- well, you can say something on Scarborough, and if you want, I can add to it.

Sure. So look, on the cost guidance, we've held our guidance. I think that we're going to have a better second half -- we expected a better second half, and we're going to have to deliver that out a little bit. But I think we got the plans in hand and obviously, the FX, to the extent that it continues to help, well, good news, but I don't think there's any need to change our guidance at this moment in time.

On Scarborough, we -- like all of our investments, we want to make sure that we push it through the capital allocation framework. It needs to make sense, and there is an economic side of that. It also needs to be ready from a project perspective because we all know very well that we need to be well considered and well prepared before we launch into these very large projects. So that's really where we are on Scarborough. I think it's a very interesting option for us and obviously, we're in good -- robust conversations with Woodside on what this thing looks like and our views on it.

Yes. And I can assure you that the ghost of our capital allocation framework is at the negotiating table.

Our next question is from Kaan Peker from CLSA.

Just a quick one for me. A couple have already been taken. But just circling back on Olympic Dam. As you mentioned that Whenan Shaft refurbishment project has sort of been shelved. Just wondering, from our last site visit, it did look like you needed that refurbishment to sort of get to that 13 million tonnes and push the bottleneck to the smelter. Does there -- well, the question is, does there need to be a replacement for that capacity? And secondly, what exactly did change?

We can do it with the new decline, which we decided to build almost as a sort of contingency. We could always have used both if we thought that was going to work, and that was something we managed that we constructed within budget and schedule, and is now fully operational. So all that changed was the cost of refurbishment became unattractive in terms of our own capital productivity tests. And therefore, we will live with using the decline for BFX 3. And obviously, at some point, we need to build some shafts in the Southern Mine Area, and we'll learn more about that through the development we're doing at the moment which would be the best location.

But clearly, as I'm sure you're aware, that comes after BFX 3, which will take the high-grade ore from the Southern Mine Area and a little bit more volume to increment the current production a bit through a little bit of debottlenecking of the smelter and the refinery. But then with the Olympic Dam Expansion Project, we need a lot more processing capacity, and we hope to provide the bulk of that through heap leach obviously, but feed it with a new set of shafts dedicated to the Southern Mine Area.

Right. Just also quickly on -- just to follow up, so I mean in terms of CapEx that may have been saved from this refurbishment that's been shelved. I mean is there a number that we should sort of look at into FY '19 and '20?

No. No, I think we have to value things in the round, and we obviously are not changing our guidance for '19 and '20 that we'll leave within $8 billion for the total company.

Our next question comes from James Redfern, Bank of America Merrill Lynch.

The first question is on thermal coal. You mentioned that thermal coal is 3% of capital employed for BHP. Just wondering, just going back to whether you view thermal coal assets in Australia or in Colombia as core to BHP? And more generally, is the portfolio simplification process finished? Or is it an ongoing project? And I've got one more after that, please.

The portfolio -- sorry, did you want to say something else?

I guess, the question simply is, is thermal coal, is it core to BHP, given it's only 3% of capital employed?

Well, I mean, it is a reasonably high-returning project, as you'll see on some of the slots on the slides -- business. And so for now, we're happy to have it within the portfolio. But we keep our portfolio under review all the time, and clearly, we look at smaller businesses and smaller assets as things that may be fit less well than some of the big guns like Bowen Basin met coal and Western Australian iron ore and Escondida. But I have nothing more to say at this stage, and we continue to run these businesses well. We like them. And even though we might not like energy coal as much as we like energy coal in this instance, we have 2 assets that sit at the bottom of the cost curve, and so we're not embarrassed to continue holding them for now.

And just my second question related to non-major JV, how are you thinking about your stake in Antamina post-Samarco? It's a great asset. But again, it's quite small in the context of BHP. I'm just wondering, if you change your involvement in JV, does it fit? And can you please remind me who manages Antamina?

Well, Danny looks after all our non-operated joint ventures. So I mean I'm going to ask him to maybe say something about this. But we like Antamina. And we have no real concerns about that asset and we certainly want to do more with it and work with our partners to expand it if we can. But Danny, maybe you could add a bit more about that.

Right. Antamina is unquestionably one of the best copper resources in the world. We're very happy to have Antamina in our portfolio. It gives us fantastic returns for the capital invested, and we have really good plans to continue to get more value out of that asset. Also, I remind you that following the Samarco tragedy, we enhanced our visibility of all our non-operating joint ventures. We have a fully -- a team dedicated. There's been very good outcomes out of that, both actually at Antamina and at Cerrejón, by the way.

Can I just confirm who manages the asset, please?

There is a non-operated joint venture group, which reports to Danny that's run by Bryan Quinn. You may -- some of you may have met him in the past. He was previously head of our technology group, and before that, he ran the manganese business that has now gone to South32. And he has a team of people based in Santiago that not only look after Samarco, they look after Antamina, they look after Cerrejón, and they look after our interests in Resolution and 1 or 2 other smaller joint ventures that we're trying to get out of around the world.

We are much more active in how we handle these things. We've always been pretty engaged in Antamina. Our proximity relative to our other partners has always helped us and being the same time zone and having predominantly Spanish-speaking staff. We're now applying that same love to Cerrejón and it's having a good effect. And clearly, we need that resource more than ever at Samarco, whether as a result of what's happened in Brazil. But they, for example, are overseeing some of the work I told you earlier about decommissioning the Germano Dam at Samarco. And then we contribute lots of wisdom to the pace and development of Resolution. So -- and of course, Danny reports to me.

Our next question comes from Craig Campbell of Northcape Capital.

Good results. Just with regard to balance sheet again, the net debt range, you're seeing a number of other mining companies driving the net cash. And when I look around the world, and everyone can see it, there's potential for black swan events probably more so than ever. And if you were to drive the net cash and a really good opportunity came up for M&A, it would mean you'd raise less equity if you needed the equity. Is this something you guys would consider, please?

Well, look, Peter can handle the details there, but I think he sort of answered the question earlier on. We don't really want to go much below our $10 billion to $15 billion range. At this point of the cycle, and particularly given some of the benefits we're getting on the pricing on the bulks, we think it's appropriate to stay at the bottom of the range. But at that level of the range, we would feel, if the cycle were to turn, we do have the capacity to do the sorts of things that you're suggesting without the need to go to net cash. I don't know if you want to add to that, Peter.

Yes, the thing is though, with the black swan thing, quite this one is something you don't see coming.

But we -- well, we do factor that into some of our plans, but Peter can say more.

So Craig, how we think about this range in the bottom end is we stress test it. So what we try to do is be defensive. Your point about the black swan, we've got to buffer the organization. So we think about a price -- suggest that essentially it looks like an extended multiyear period of prices which were probably more or less, let's say January of 2016, something of that minus a bit, and we just hold that.

And then in addition to that, the way we model it is we are offensive at the same time because, hopefully, some folks will come under pressure and some good assets will be coughed up, and so we put those both into the model. And then we decide -- and we see if, in fact, we can hold at sort of on a AA- on the rating through that period, so that we -- again, back to your buffer question. And if you can put all those things back together again, then it works. And that's sort of where we are. So I think, absolutely agreeing with you on the basic premise. Can we be defensive and offensive in the event that we get into a difficult period? I think -- we think the answer's yes.

Our next question comes from James Gurry of Deutsche Bank.

Reading through the prepared remarks, there is a good sense that you're not only reflecting on the last 6 months, but also on the last few years. But I -- just wondering about the future. It doesn't look like you want to approve Jansen anytime soon, but can you just touch on the Ruby oil and gas project? I think that's up for consideration.

Secondly, on net debt, can you just confirm that you're at the top end of the guidance range if we adjust for the special dividend that was paid out in January, and if there...

James, you'll need to repeat your question, and speak a lot louder. We've got everything on max volume here, and we can barely hear you.

Okay. Well, I hope you got that first question. Just on the second question, in relation to net debt. You'd be at the top end of the range, I think, if we adjust for the special dividend. And can you just let us know if there's any nonoperational cash flows that we should be aware of, given that you've guided at spot prices here to $5 billion in the second half? And just on iron ore, can you confirm or not that you're operating at 100% in iron ore, and whether you might hit the lower or the upper end of the guidance? I think I've got the sense that it was a tough ask to meet guidance after what happened with the derailment.

Look, Peter will answer the question on net debt, I'll come back to your question on Ruby. But just very quickly on the iron ore one, we always push to maximize our volumes through existing capacity, and that hasn't changed. And I'm not sure if that completely answers your question, but we don't have lots of production up our sleeves, if that's what you mean. And we are able certainly to recover from the derailment. I mean it was only out for a week, and we do have some sprint capacity on the rail to do that. The more critical issue is the bottleneck at the port and the performance of the car dumpers.

Do you want to answer the net debt question? And I'll maybe -- sorry, you really have to shout James, we can barely hear you. What was it -- what were you trying to say there?

I -- Just a sense, whether you're at the bottom or the top end of that iron ore guidance range?

Well, I mean, we've said that we still expect to meet guidance, and we've got several months of production ahead of us, and I'm sure we'll update you as we go through the various operation reports.

Yes, on the net debt question, James. Really in just the -- so we have, let's say, $9.9 billion. We have a couple of things which are moving in relation to shale between -- since 31st of December to where we are right now. We had $5.2 billion go out end of January for the special dividend, and we've still got $3.4 billion to come in on the deferred consideration. So if you tied all that up, so we're at less than $12 billion, I think. And of course we're making reasonably strong cash flows every month at the moment. And so I think we're comfortable where we will land up, shall we say.

So on Ruby, I mean, I think maybe not everybody is aware of that, but because one of the partners has opted not to participate in this commercial discovery in Trinidad and Tobago, means our interest is now 68%. I'm not sure if we've communicated capital, but it will certainly be in the sort of -- above $250 million, which is into board territory. I mean, we're looking at something in the 300s right now. And we do expect to make an investment decision this year. It will produce roughly around about 16,000 barrels of oil a day and about 80 million cubic feet of associated gas. And there is a detailed slide, which I'm looking at now, partly reading from, as well some of my other notes in the Appendix of the slides that we've put in our website this morning -- or this afternoon in Australia.

So that's the decision this financial year?

CapEx, $330 million.

$330 million. Okay, $330 million.

Yes. Yes.

Okay. I think that's it. So thank you for your interest. And Danny and I will be -- maybe I'll be seeing some of you in London later today, and I think tomorrow -- or maybe it's later this week, Peter and Arnoud will see those of you who rang in from Australia. I'm looking forward to it. Thank you very much.