必和必拓 (BHP) 2014 Q2 法說會逐字稿

Good to go? Okay, well welcome to our interim results. I'm speaking to you here in Melbourne which is the first time at our new Global Head Office and Graham Kerr, somewhere, joins us from London. Other members from the GMC are here or have joined by telephone. Now, first let me point you to the disclaimer and remind you of its importance to this presentation.

I will now provide you with an overview of the last six months. Graham will then take you through our detailed financial performance and I'll discuss how our focus on productivity has increased return on capital in a sustainable way. I will also cover how our continued focus on our major resource bases will further differentiate us.

Our commitment to produce more tonnes and more barrels from existing infrastructure at lower cost is delivering. We've achieved an increase in production of 10%. We've embedded productivity led volume and cost efficiencies of $4.9 billion. Full year capital and exploration expenditure is expected to decline by 25% and this sharp reduction has increased competition for capital and driven investment returns higher. At the period end our net debt position was $27.1 billion. Our solid A balance sheet is strong. We've delivered substantial growth in free cash flow, but there is more that can and will be done to maximise the value of our high quality portfolio so as to consistently grow shareholder returns.

Our people are the foundation of our success, so their health and safety must come first. Safety continues to improve and this is demonstrated by a reduction in our total recordable industry frequency rate to 4.4 for every million hours worked. This is a record low for our Company, and as we strive to create an environment free from illness we will not become complacent. We must identify, understand and manage the material risks within our business to make sure our people and the communities in which we operate are safe.

The first half financial performance benefited from a substantial improvement in productivity and from the volume growth delivered by our largely low risk brownfield investment program. Underlying EBITDA increased by 16%. Underlying EBIT by 15% to $12.4 billion. Underlying attributable profit increased by 31% to $7.8 billion and net operating cash will increase by 65% to $11.9 billion. Free cash flow has grown by $7.8 billion. Our disciplined approach to investment has increased our underlying return on capital to 22%. Our interim base dividend is comfortably covered by our internal cash flow. By the end of the financial year our net debt of $27.1 billion is expected to approach $25 billion. We are well placed to extend our strong track record of capital management.

We delivered record production at 10 operations for three commodities. For the half year our Western Australian Iron Ore business produced a record 108 million tonnes. Early reproduction from Jimblebar and volume led productivity initiatives including the use of relocatable crushers contributed to this result. As a consequence we have already increased our full year guidance for iron ore to 212 million tonnes.

The best example of our productivity agenda in action was at our Queensland coal business. In the December quarter it ran at an annualised rate of 68 million tonnes. This is an outstanding result, given that Daunia is not yet fully wrapped up and that we removed 7 million tonnes of production, high cost production when we closed Norwich Park and the Gregory open-cut.

Copper production grew by 6%. Antamina achieved record copper volumes and Escondida, our leading copper asset, increased production by 7%, and in the 2014 financial year Escondida remains on track to produce 1.1 million tonnes.

In our petroleum business liquid volumes increased by 9% to 50 million barrels and this includes an increase in Onshore US liquids of 72%. Because we prioritise drilling away from predominantly gas areas towards the high return liquid switch Black Hawk region of the Eagle Ford, gas declined by 7%.

We have retained full-year production guidance for all our major commodities. Iron ore of 192 million tonnes our share, petroleum of 250 million barrels of oil equivalent, metallurgical coal of 41 tonnes, energy coal of 73 million tonnes and copper of 1.7 million tonnes.

We project that over the two years until the end of the 2015 financial year, our low risk largely brownfield projects and productivity led gains will deliver production growth of 16%. I'm sure you'll agree this is a very strong set of half year results and I would like Graham now to talk to them in more detail. Welcome Graham.

Thank you Andrew. It's a pleasure to be here in London to present our financial results for the December 2013 half year. As Andrew mentioned, the Group's strong operating performance and productivity led gains underpinned a significant increase in profitability and we have remained disciplined. Our dividend is now comfortably covered by free cash flow, our solid A balance sheet remains strong and importantly the outlook for our business and our shareholders is exciting.

In order to summarise our financial performance, I would like to focus on five areas. First, the identification of specific items in our accounts to help you with your analysis. Then, our usual earnings waterfall analysis. Also, the substantial cost in volume efficiencies that we've embedded over the past 18 months and our capital allocation and framework that has applied within the context of our value maximising strategy. Lastly, our determination to strike the right balance between selective investment in our high-quality portfolio and a commitment to extend our strong track record of capital management.

I'd like to remind you that our results have been reported on the basis of new accounting and standards interpretations that came into effect from 1 July 2013. Our accounts now include the full consolidation of Escondida, whereas we previously consolidated our 57.5% equity interest. Entities that no longer meet the definition of joint control such as Antamina and Cerrejon Coal, or those that are classified as joint ventures such as Samarco are now equity accounted.

IFRIC 20 also required a change in the accounting treatment of production stripping. In every period a number of items affect the underlying financial performance of our business. As you can see, costs in our petroleum business were elevated because of three specific charges. At Onshore US we optimise our drilling program to focus on our Black Hawk acreage. The associated termination of rig contracts reduced underlying EBIT by $75 million. In turn the Group also incurred a $103 million charge for underutilised legacy gas pipeline capacity primarily in the Haynesville. Petroleum also recorded a $115 million charge associated with its UK pension plan. These charges were offset by the restatement of monetary items in the balance sheet which increased underlying EBIT by $345 million. You may recall our functional currency requires us to take mark to market differences for monetary items through the profit and loss statement.

Now, turning to taxation, we paid $2.9 billion of income and royalty-related taxation and $1.4 billion of other production royalties during the period. The Group's adjusted effective tax rate was 32.5%. This rate is expected to remain in the range of 31% to 34% for the 2014 financial year. As illustrated on this slide, the remeasurement of deferred tax assets associated with the minerals resources rent tax reduced the Group's statutory tax expense by $491 million.

I will now turn to our strong financial result. Underlying EBIT for the December 2013 half year increased by 15% to $12.4 billion. This increase in profitability was largely driven by factors within our control. Production growth associated with the ramp up of major projects and the continued success of our productivity agenda increased underlying EBIT by $2.2 billion.

In contrast, the relief that we received as a stubbornly high Australian dollar weakened against the greenback was largely offset by lower commodity prices and inflation. For instance, lower prices for each of the major metals; copper, nickel and aluminium reduced underlying EBIT by $937 million.

A strong rebound in metallurgical coal supply lead to an 18% fall in our average realised price and this reduced underlying EBIT by $520 million. Strong growth in Chinese crude steel production was underpinned by a significant increase in fixed asset investment and this created unexpected tightness in the seaborne iron ore market despite the addition of low cost supply from Australia and Brazil. So as a result iron ore prices increased underlying EBIT by $964 million. Within our petroleum business a 5% increase in the average realised price of natural gas offset a 2% reduction in the average price of both oil and liquefied natural gas.

Now, I will focus on the factors within our control, volume and cost. As Andrew mentioned, production records at 10 of our operations contributed to a 10% increase in copper equivalent production. The ramp up of several major projects and strong growth in liquids production from Atlantis in particular also increased underlying EBIT by $705 million. The early delivery of production from our new Jimblebar iron ore mine, the commencement of metallurgical coal production at Daunia and the completion of the Macedon gas project were notable achievements during the period.

Now moving to productivity, after almost a decade of strong growth in demand and margin expansion, we recognised that value was being eroded by broad-based industry inflation and low productivity and we decided to take a hard line on all facets of our cost base. This disciplined approach delivered costs in volume efficiencies of $2.7 billion and $1 billion respectively last year and we entered the period with strong momentum.

As you can see on our waterfall chart, our productivity agenda increased underlying EBIT by $1.5 billion during the period. Volume related efficiencies increased underlying EBIT by $542 million and several [de-bottlenecking] initiatives in the Pilbara added valuable tonnes at one of the highest margin operations.

In addition, controllable cash cost declined by $1 billion in the period. Improved equipment utilisation and availability, an increase in the proportion of planned versus unplanned maintenance and the continued optimisation of our contractor activities were important contributors to this strong result.

While these metrics relate to half yearly variance analysis I now want to discuss the productivity led gains embedded over the 18 month period since the end of the 2012 financial year. On this slide we have defined three broad categories to describe our achievements in a simple waterfall chart. As you can see, sustainable operating cost efficiencies of $1.8 billion, a $1.6 billion reduction in exploration and business development expenditure and productivity led volume efficiencies of $1.5 billion have now been embedded.

While Andrew will discuss productivity in more detail shortly, I can confirm that the sustainable $4.9 billion gain is expected to grow to $5.5 billion dollars by the end of our 2014 financial year. This includes a projected $3.9 billion dollars in productivity lead cost efficiencies and reduced exploration and business development expenditure. This is a significant 11% of the $36 billion baseline operating costs we reported in the 2012 financial year.

Our strategy has worked well for our Company and for our shareholders. This remains our platform for success. The quality of our assets and adherence to this strategy will differentiate our performance and we will maximise shareholder returns by allocating capital in a disciplined manner.

A company's success can be measured in many ways and judged on the basis of multiple criteria. The ability to generate value and return capital is a great place to start. Over the last 10 years, BHP Billiton returned $62 billion to shareholders. While we don't target a specific payout ratio, this equates to approximately 50% of underlying earnings over the period. The Company's more diversified and higher margin portfolio delivers a higher return on capital with lower volatility when compared with peers. So as a result we've been able to return substantially more capital to shareholders.

Let's now look at the factors that influence our decision making. We remain committed to our solid A credit rating. It provides substantial flexibility and access to debt capital markets at attractive rates throughout the economic cycle. In this context, we are in a strong financial position. Net operating cash flow increased by 65% during the period. We received divestment proceeds of $2.2 billion and net debt declined by 6% to $27.1 billion. Should the external environment remain supportive, net debt is expected to approach $25 billion by the end of the financial year.

In the period we further optimised our debt maturity profile with the issuance of a 4 tranche $5 billion US bond. These funds and capacity on the balance sheet will be used to meet a series of financing commitments in the second half of the financial year. For example, the redemption of Petrohawk Energy Corporation's senior notes just completed and upcoming debt maturities.

Our progressive base dividend is the minimum annual distribution that a shareholder should expect. It is comfortably funded by internal cash flow and it is expected to grow broadly in accordance with the growth of our business. It has been maintained across several economic cycles and distributions have increased at a compound annual growth rate of 17% for a total distribution of $39 billion over the last 10 years.

Our half year dividend of $0.59 per share was unchanged from last year's final payment, consistent with recent practice. We will consider the trajectory of our progressive base dividend at the end of the 2014 financial year.

Now, let's talk about investment. We will continue to invest selectively in those projects that meet our demanding criteria. Our capital and exploration expenditure will reduce by 25% this year and a further reduction is expected again next year. By reducing annual expenditure we are more focused and we are driving returns higher. We also delivered on another major commitment as free cash flow increased by $7.8 billion during the period.

As many of you know, in the past we supplemented our progressive base dividend by returning excess capital to shareholders. In fact we returned $23 billion dollars in the form of buy-backs during the last 10 years which is almost 40% of total capital returned.

With strong free cash flow being generated by the business, production growth of 16% projected over two years and further simplification of the portfolio planned, we are well placed to extend our strong track record of capital management

To summarise, we have four broad buckets to which we direct our cash flow. Our solid A balance sheet, our progressive base dividend, selective investment in our portfolio and when in surplus, additional capital returns to shareholders. Many of these options are clearly interconnected.

So how do we make critical capital allocation decisions? In simple terms, we test each decision against a range of short and long term criteria across several scenarios. Amongst other things we aim to optimise for net present value, return on capital through the cycle, IRR and margin whilst remaining mindful of portfolio construction and cash flow at risk. No single metric dominates the process and alternatives, including an investment in our own shares, actively compete.

Let's look at how this works in practise. Our opportunity-rich portfolio remains a key point of difference. By reducing annual expenditure we have sharpened our focus on our core commodities and our high margin businesses. Fewer projects now pass through our tollgates, design inefficiencies are exposed and re-engineered and this has raised the bar and lowered capital intensity. As a result, you can see that the average rate of return for our favoured majored growth projects has increased, increased to the point where an average ungeared after-tax rate of return of more than 20% is achievable.

We also consider the value of future options very carefully as we must preserve their value at low cost. Our long-life Orebodies are predominantly located in OECD. This combination allows us to defer investment where appropriate so that we can optimise performance on the basis of our investment criteria.

Now in conclusion, we have delivered a significant increase in free cash flow. Our capital and exploration expenditure will decline by 25% this year as planned. An average ungeared after-tax rate of return of more than 20% is achievable for our favoured major growth projects. Our progressive base dividend is comfortably covered by free cash flow. Continued simplification of the portfolio will further strengthen our balance sheet.

Net debt of $27.1 billion is expected to approach $25 billion by the end of this financial year and with strong free cash flow, selective investment and continued simplification, we are well placed to extend our strong track record of capital management.

With that, I will hand back to Andrew.

Well, thank you Graham. It states in our charter that we are successful when our people start each day with a sense of purpose and end each day with a sense of accomplishment. There is no better illustration of this than the Company-wide adoption of our productivity agenda which is now fully underway. So our responsibility as management to provide the necessary tools and support so that our people feel empowered, to identify, implement the many improvements that maximise the value of our high quality Orebodies.

Our commitment to improve productivity across the organisation has the potential to create more value than anything else we do, so we're working our assets harder to generate additional value and to lower costs. Our many actions are individually tailored to the different opportunities and challenges at each of our operations.

At our briefing in December we described how our team's benchmark, the fastest drilling times for individual well segments, and this work has now reduced the days to drill a typical Black Hawk well by 35%.

At our Queensland coalmines the truck fleet in the pre-strip operations is the bottleneck and over the past 18 months the teams there have worked through less downtime on shift change, input refuelling and better planning and so increased truck performance by an impressive 40%.

At Western Australian Iron Ore the bottleneck was at the mines, are now no cost and low cost de-bottlenecking, we'll now move it to the port. By increasing through-put and improving reliability we have raised the overall performance of the mines or handling plants by 4%. With an EBIT margin of 57% every additional tonne produced from existing infrastructure like this creates significant new value for our shareholders.

The ultimate benefit of our productivity agenda will be measured in dollars and cents and for our coal business this translates to cost efficiencies of $1.7 billion. This has significantly increased our return on net operating assets. I recognise, however, that a 7% return on our coal business is just not acceptable. Coal will not receive another major investment beyond the projects and execution until we see a marked improvement in those returns.

At Western Australian Iron Ore, our productivity agenda, as you've heard, is in full swing. We're focused on costs but recognise that the addition of high margin volume at low cost can create substantial value. So we installed relocatable crushers despite the increase in operating cost so as to increase our volumes. Our productivity agenda has delivered an increase in return on net operating assets which is a true measure of our capital efficiency. While we're committed to drive down costs in iron ore, as in coal, iron ore's 57% return means we should invest in such low cost opportunities that add such valuable tonnes.

To repeat, not all businesses are the same and our productivity initiatives must reflect the context in which we operate in order to generate the best overall result for our shareholders. At the Group level, the success of our productivity agenda is ultimately reflected in our underlying return on capital which has risen to a competitive 22%. Further discipline and the completion of several major projects will continue to increase these returns further.

So let me now turn to our outlook for the global economy. Global economic conditions improved over the first half of the 2014 financial year. The stronger than expected performance of major developed economies means that the uncertainty in outlook is now, if anything, skewed to the upside. The US economy accelerated as housing and manufacturing sectors improved, unemployment declined and confidence and consumption grew. Europe has experienced a period of relative stability. Conditions for corporate investments have become better and growth is now likely to re-emerge.

We, however, remain cautious since underlying debt and economic imbalances are yet to be fully resolved. China remains the primary driver of demand. In the 2013 calendar year its rate of growth has stabilised but still remains strong. It's expected to remain above 7%. The government continues with its reform agenda which will move China towards a mature consumption led economy. There are some indications on this on the bottom right-hand side of the slide.

Over the next 15 years we expect the demand for our coal products to rise by up to 75%. Each commodity is, however, different. For example, in iron ore we expect significant growth in low cost supply that will exceed increases in demand from China and elsewhere. The cost curve as you see will flatten as higher cost marginal supply is displaced and this will lead to lower prices and lower volatility.

In the near term copper inventories are expected to remain at reasonable levels, but in contrast to iron ore, the long term fundamentals are attractive. Rising strip ratios and grade decline and the lack of high quality opportunities ready for development now will steepen the cost curve.

To allocate capital we used our well-researched and strong view for each of our core commodities. Now as you can see on this slide over the last five years we've steadily shifted investment towards high margin iron ore, copper and petroleum projects. At Western Australian Iron Ore after a decade of investment in major infrastructure our emphasis has now moved to low cost expansion to 270 million tonnes.

Given our confidence in the outlook for copper, we continue to invest in high return projects at Escondida that will maintain production at elevated rates. Similarly, in petroleum we're increasing our investment primarily in our high return Black Hawk acreage as well as in the development of low risk brownfield opportunities that maximises the value of our conventional business.

These shifts in how we allocate capital are aligned with our commitment to maximise shareholder value. We will continue to demonstrate a superior ability to discover, develop and operate large scale low cost Orebodies in order to meet the world's requirements for decades. We will deliver product safely and sustainably at the lowest possible cost so as to maximise the benefit to local communities, broader society and above all our shareholders.

More competition for capital has boosted the returns of our major projects -- our preferred major projects. The range and quality of our portfolio make all this possible. We have more choice than anyone else to direct capital to the most appropriate returns across steel making, materials, metals, energy and food. We're the only company with exposure to all energy commodities -- oil, gas, coal and uranium, as well as to the metals used in renewables and energy infrastructure, most importantly copper. So this positions us very well to respond as the world makes its energy choices. We will focus our efforts with greater force on fewer basins, on those basins where we can generate the highest margins and greatest value -- iron ore in the Pilbara, metallurgical coal in the Bowen Basin, copper at Escondida on the Andean copper belt, petroleum in the US and potash in Saskatoon.

We aspire to be recognised as much for our best in class operating performance and developments as for our great Orebodies. Our unique simple yet diversified footprint will accelerate our journey towards best in class performance. Greater focus will lead to lower capital expenditure and more selective investment, a simplified portfolio and largely brownfield opportunities will generate higher rates of growth, superior returns on investment and stronger free cash flow. This will strengthen our [differentiated] offer of strong growth in both capital and capital returns. They're not mutually exclusive and we must get this balance right.

We have delivered strong production growth and productivity gains of $4.9 billion while continuing to improve safety. We acted early to significantly reduce our capital spend. This has increased internal competition for capital and raised the average return of our major preferred projects to over 20%. The Group's continued pursuit of productivity combined with further simplification of the portfolio will sustain strong margins and deliver more free cash flow. Thank you.

So I'd now like to take your questions. I'm going to start here in Melbourne and then we'll move to the phone lines.

Thanks, morning Andrew, Craig Sainsbury here from Goldman Sachs. Productivity -- they were impressive numbers that you've delivered. So two questions that are from me, one is just how far do you think we are through the productivity cycle for you and how much more do you think you can drive out of these assets over the next two or three years and the second question from me is just looking at some of the ramifications that can come out into the market from those productivity gains? I mean you point towards better returns, costs are down 11%, flattening of cost curves and we've certainly seen in the coking coal market you still stay profitable with costs coming down but that's driven the coking coal price down. So what do you think the ramifications are going to be in terms of longer term commodity prices from this productivity led cycle that you're embarking upon and some of your peers out there and has that forced you to start to think about changing some of your medium to longer term commodity price decks because of those productivity gains you've been driving through the business? Thanks.

Well, Craig, we'll review our price decks during the course of the next few months as part of the planning exercise that we report some of the results over the full year. So we'll certainly take account of that but of course as much will depend on what our peers are doing as what we are doing and we do think what we're doing is quite distinctive, you know, that we have actually grown returns at a time of broadly speaking flat to slightly falling prices, if you look at our whole basket.

As we look forward, we've given you the guidance that we'll embed if you like a further $600 million by the end of the year. Most of that's cost out to get to $5.5 billion. This is about the whole culture of the Company, about the whole way we look at it and how we simplify our focus.

I think there's a lot more to go but my message has always been I'll give a little bit of indication as to how you can extrapolate, but we're learning as we go. We're ambitious and I stick with my mantra of track us don't trust us, but it's exciting the possibilities that we see going forward. We're just getting started and I think there's a lot more to come.

Andrew, Craig Campbell, Northcape Capital. A good result. A question relating to coking coal -- unfortunately it is one of the weaker aspects of the result and probably one of the weakest results we've seen out of coking coal for a while where there hasn't been weather-related events or anything like that impacting and I'm just wondering given the surplus in the market and it doesn't look like backing off, would you approach a strategy that was undertaken by BHP in the early 2000s in copper where BHP took an industry-leading position backed off copper production when there was a very high amount of surplus, coking coal prices -- sorry copper prices were at their weakest point? Could you back off maybe your coking coal production to bring the market back to balance and push prices back up and get a better return that way as a strategy?

The second question from me -- with regards to non-core assets particularly in petroleum, I imagine given the strength of petroleum prices globally at the moment you could probably release some capital through sale of those non-core assets. Is that something that's being actively explored at the moment and we could expect some release of capital through that?

Okay first of all to your question on metallurgical coal, it is not our policy to adjust production in order to achieve price results. Once we've installed something we believe in the interests of productivity and stability and our support of open markets and to satisfy customers that we maximise production. Of course as you've heard me talking about it, because of the margins in coking coal and the returns, we're unlikely to invest in further increases in production but we'll complete those underway and we'll ramp them up to the maximum extent possible.

I don't have quite such a negative outlook going forward. I would like you to think more positively about our result. I mean we've pulled out a substantial number of costs and Brendan's behind you, he can give you a lot of details about that, but I think has moved us up considerably.

There has been a lot of recovery in the market or in the production I should say from Australia because of the recovery from things like floods. That's coming to an end and as we look forward there's less growth in the next few periods. We've seen some announcements just overnight about some of the cost challenges that are being faced from competition in North America, some evidence of that slowing. The pickup in markets particularly in the developed economies and the growth in their demand for steel will almost certainly benefit metallurgical coal and we've started to see some quite good steel numbers coming out of India which in the long term has no metallurgical coal and will have to import.

We think under those scenarios we've got the best basin in the world, we've got the best quality of hard coking coal and we will continue with our productivity agenda to open up even bigger margins and allow us to make decent numbers even at these prices. So we're in for the long term.

I think on assets and petroleum assets you've heard my mantra on focus. That focus is partly on our coal basins but it's also on our tier one-ness. So anything that we have out there that we feel does not pass a very high challenge to be tier 1, clearly we look at whether other people may be better at owning that and would pay us a decent return for that, especially if it's something that is undeveloped and we don't think we're going to develop for a while. So we're looking at all of those things, but until I'm much closer or have concluded a transaction I can't say any more today.

I think we should take the first question from the phone.

Paul Young, Deutsche Bank.

Hi, Paul.

Morning, hi Andrew, how are you going? Great result. It's good to see the comments on the plus 20% project return target. I note --

Paul, can you maybe speak up a bit, we're not hearing you very well here in Melbourne.

Yes sure. Andrew -- yes can you hear me now?

Much better.

Okay. Great to see the comments on the plus 20% project return target but I do note that's an average, but I have some questions about your higher returning copper projects. There appears to be the potential for a production surprise over the medium term and just some more information on that. The Escondida OGP1 project appears to be 6 months early considering it was 60% complete at the end of December. In my view this means the Los Colorados concentrator could be run parallel with OGP1 for a period of time and also the Bechtel Construction Team could be rolled onto the Spence Hypogene project as soon as early 2015. Can you comment on the timing of OGP1 and also could we see a decision on Spence this year? Thank you.

Okay, soundly spoken as somebody who used to work at Escondida. You have all the details there. Look Paul, I think on the first question about the Los Colorados concentrator and whether we would continue to run that in parallel with the new concentrator at OGP1. Sure that is an option. You would not have a productivity agenda like ours with not wanting to look at that. We certainly, from the investments that you know we are making in power and in water have more than sufficient to run three concentrators. The considerations that we have to bring to bear though before we make that decision is clearly we would be moving a lot more dirt and that means a lot more trucks. Can we do this optimally and safely is point one. And secondly, as you know the Los Colorados concentrator sits on top of some quite high grade ore. And although we can nibble around it and look at some of the push-backs and so on the delay in getting to that is something we have to look at in a value sense. But I can assure you that is an option as part of productivity that we take very seriously indeed and it is certainly feasible.

I think as to what we might do with the project team at OGP1 and how -- whether they go forward. Really we only have one project team in base metals, that is the one area where we do everything centrally in a hub for all our copper assets. And absolutely a prime candidate for possible further investment beyond OGP1 is the Spence Hypogene. And certainly I would expect us to say a bit more about that in the coming months, possibly at the end of the financial year because as you are aware from the visits there it is a reasonably high return project. It has got even better through some of the things we have spoken about and would certainly fit within our desire to drive a basket of projects into IRRs north of 20%.

Maybe another one from the phone and then we will take one from here.

Clarke Wilkins, Citi.

Oh hi, Andrew, it is Clarke Wilkins here. Listen just in terms of the capital management side, is there a target for getting the net debt down to before that (inaudible). Also, in terms of the format or the form for capital returns in the future is there a preference at the Board level between buyback versus special dividends and mechanisms like that for returning excess capital?

Look, Clarke, the important thing we have to do is that we have to get to a point where we feel our balance sheet is robust and robust at a solid A. And then everything that you then talk about has to be debated about the Board. These are Board decisions and they are decisions that will be made when we are ready to consider them in a deep way. And we have certainly not really debated the form of additional, if you like, cash distributions to shareholders if the Board then decides to do that. Clearly the time for that as we have said and has been in general our practice is at the full year. And hopefully by then we are at the levels of debt we are targeting and those conversations will be real and we will give you the feedback on it.

Maybe I will take one more from the phone and then -- because there are a lot waiting. So go ahead, it is Lyndon I think.

Lyndon Fagan, J.P. Morgan.

Hi, Lyndon.

Hi, Andrew, thanks. Look my questions are on the Iron Ore Division. I guess at the quarterly we found out that strip ratios had risen. And I am just wondering if you can perhaps give us some more colour around that, perhaps what are they and how long will they stay high or is this a permanent shift upwards or just related to the mobile crushers? Just to help us I guess extrapolate that out. And then the next question is that there is certainly a lot of promotion around moving to 270 in iron ore which has been the case now for well over a year. And I am just wondering when we are likely to see some more project approvals or now that the port is the bottleneck, I guess just to get a feel for the timing of that production coming on. Thanks.

Lyndon, I do not exactly know the further development of the strip ratios and not just at Jimblebar but also at Whaleback that you are referring to. But I think through the detail of the presentations even though we have incurred slightly higher strip ratios given the kind of returns we get in this business it was worth continuing in those directions in the mining sense. Later this year we are having an investor tour to the Pilbara and I am sure we will be able to unpack that for you in quite a lot more detail.

As regards the journey to 270, we are doing so well with productivity as we talk about the no-cost, low-cost de-bottlenecks. A lot of these things are passing through without us having to take announcements. We talked about renewing two of the oldest ship loaders in the port partly for operational integrity reasons. But it also lifts a little bit of the production from that port as well. The more we can do that way the higher the capital efficiency of moving to 270. And we are taking our time, but as soon as we think we are ready and we need to make a more substantial investment in the port to get to 270 of course we will talk to you. And clearly the better job that we do through low and no-cost de-bottlenecks the higher the capital efficiency goes and the more attractive these things become. But some of them if we do good de-bottlenecks at the port may become redundant. So we will keep you posted but nothing more today.

So questions from Melbourne? Okay we will keep going from the phone then.

Paul McTaggart, Credit Suisse.

Hi, Andrew, a pretty quick and easy question. The (inaudible) contract related to the onshore gas business, I am just trying to reconcile those with the petrol account throughout. Did that charge go through in the fourth quarter -- well sorry in the fourth quarter of December or in the first bit? I am going to presume it has happened late in your half, obviously because [Petrohawk] was loss making in the [second] quarter? Would that be correct?

Graham, did you hear the question? It was -- can we put Graham up please?

-- second quarter but we can get Brendan to confirm that after and circle back.

Yes, Graham, you probably need to say that again, because we only heard about the last three or four words from you.

Look, Andrew I am pretty certain that actually occurred in the second quarter but we can -- just after this call, I will get Brendan to circle back and confirm that.

Thanks guys.

Okay, thanks, Paul, thanks, Graham. Anything from Melbourne yet? So next question from the phone.

Glyn Lawcock, UBS.

Good morning, Andrew, just two quick ones. You have said fiscal 2015 CapEx will reduce and you had previously said you think the right spend is up to [2015]. Can I nail you down to a more definitive target like your peers [are provided] to give? Because I mean it does help us understand what free cash flow generation you may have next year. And then the second quick question is just on the productivity measures. You have done a lot in coal. Strip ratio has gone up in iron ore -- are you -- is there any deferral of capital or lowering of strip ratio going on in coal? I know some of your peers are doing that to try and get unit costs down at the moment to battle the falling price? Thanks.

I think that the simple answer to your first question is probably not, Glyn. I think we have made it very clear that we think we can run this business for a long time optimally at or around current levels of CapEx $16 billion. I have said that it would be our intention to let it drift down a bit. We will be much more specific at the full year. I think on the answer that -- on the question you asked on coal. We might need to get you a bit more detail than I am able to provide right now. But in general we have been working very much on the costs of running our operations rather than changing our mine plans to deliver the returns that you have seen. But we will get you back some more detail on that because there may be some things at the margin that you might be interested to know.

Another question from the phone?

William Morgan, Intrinsic Investment.

Thank you. Andrew, you logically continue to comment about the long term trend in China and about the supply response. However, with respect to iron ore I wonder if you could please give us some colour about your measure of risk of shorter term shocks to demand, notably given solvency risks with the Chinese steel mills and the supply of capital to those mills?

Well, I can only speak broadly. There are a lot of people who look at that. I think we would say if anything in the next quarter probably the risks are maybe slightly to the upside. But then we take a longer term view going further quarters out and certainly towards the end of this calendar year where the very strong growth in supply is more than enough, if you like, to create a bit of an excess and therefore to drive price lower. Now whether that is aggravated by the things you are saying or not, I am not sure. There are a lot of things going on in China at the moment that do not always eventuate in quite the same reduction in steel production that you think. I mean there is a lot of work that the government is doing, in some cases using their control of the debt markets to lead to some form of restructuring of both the iron ore and the steel industry.

But ultimately we think we'll actually improve their move towards being a middle income economy, more competitive and more growth. And will therefore attract in the medium term more iron ore from us and other suppliers outside of the country which means that I don't think we are looking at big shocks if you like. But we can have our economists talk to you a bit more if you are interested.

I will take another one from the phone.

Adrian Wood, Macquarie.

Yes hi, Andrew. Just a couple of questions, first of all on Jansen. Could you please just give us a bit of an update on progress both in terms of just how deep we are in terms of the shaft thinking? And maybe perhaps a little bit of discussion around why you chose to delay drilling in what would have seemed to be the most productive drilling period of the year. But also progress on bringing in a partner. There has been some scuttlebutt coming out of Canada that perhaps you are closing in on a partner negotiations. And just wondered if you were looking at customers or whether you are looking at other product producers to bring into that?

And second just on costs, you seem to have now, for the first time, given a cost cutting target for FY14, so at least looking 6 months out. Whey can we not roll that over into FY15 and give us any guidance there as just how low costs could go?

Okay, I will probably do them in reverse order and then when I forget the first one you can remind me. But I mean we are now, Adrian, we are now almost two months into the second half of the year. I think all I am doing is, as I said I would at the outset, is help people with extrapolation of a relatively short term nature. We are learning how to re-tool the whole Company and how to deal with -- and how to deliver productivity. It is much more than a costs-out program. It is about energising everybody to do their jobs better each day. To make equipment more efficient, using our new systems and so on. I -- as I said in I think in response to an earlier question, I think the potential is large and we are only beginning a lot of the things that we want to do. But I am not really at liberty to start giving big, long range targets yet. I would rather deliver, show you it and help you a little bit with shorter term extrapolation as I have done today.

So let -- I am now speaking from memory, I have already forgotten the -- let me talk about Jansen first. I mean you did mention that this was the right season to do more. That only really applies for things like seismic and drilling, not for sinking shafts. I mean that is not such an issue that is seasonally dependent. So you have obviously picked up that we are taking our time through the early sections of both shafts. This is not on the critical path. We have not even decided when we want to even add a lot more investment to create a mine there. We always said we would wait and be ready to move quickly when the market was ready probably sometime in the next decade.

We are using a bit of new technology to create these shafts and we were a little concerned that we were not getting it quite right in the earlier part with some of the temporary liner. It was nothing serious so we said let's stop, think about it, figure out how we can do it better. We have done all that and we expect to recommence sinking of the shafts within a matter of weeks if not days, having taken stock. No real impact at all, actually costs will be lower because we have been moving at a slower rate, no impact on schedule.

Sorry, what was the middle part of your question?

Just on the progress with potential partners, that was (multiple speakers).

Oh yes, sorry about that. Yes you asked whether we were considering customers or competitors and so on? Yes we would consider them, we are talking to a number of players at the moment but quite a few of them are not in that category. There are people who would like to invest strategically alongside us in developing this operation.

Great, thanks very much.

Anything more from Melbourne? Good.

Craig Campbell, Northcape Capital again. One for Graham. On the Minerals Resource Rent Tax, Graham, you had a net benefit to the P&L in the current half just reported. Is that going to be repeated in this half or is there a reversal of that? If you could give us some guidance, please?

Look, obviously the guidance on the MRRT is always difficult because it is very much dependent on price and iron ore price expectation and coal expectation. But also on FX. I think the other challenge obviously is where do we end up with the MRRT. Is the actual law repealed or not. So I think at this stage we will give guidance when we get to the August full year result but nothing really to add at this stage other than to say, as I said in the past, it is a volatile tax.

Thanks, Graham. The next question from the phone?

Myles Allsop, UBS.

Yes, just a couple of quick questions. First of all could you give us a sense if you expect to see some major divestment in the calendar year 2014? Is there -- because obviously you have talked about what is core and what is not core. But is it actually possible to sell assets in the current environment of a scale that would be material for BHP? Also could you give us a sense as to what your longer term growth target is? Are you still thinking about 5% growth per year for the business? And then with these favoured major projects you have hinted they include Jansen, the Inner Harbour and Spence. Do they include any other projects like Cannington?

Okay, so let me, what was the first part of your question again, sorry I was -- oh divestments, yes.

Well just on major divestments.

Yes, no, no, it's fine, I've remembered it. So well I mean I think -- well there is $2.2 billion of divestment proceeds in these results. So we are able to continue in this market. I mean clearly you are right that some of the things that maybe are less core to our business are -- have relatively low stands in price and therefore there is always the concern that we would not realise their full value by taking the whole cycle into account if we try to sell things too quickly. You can see from the strength of our cash flow we do not need the money. So we can play the long game in order to do things. But even within our portfolio, and we talked earlier about non-tier ones, there are plenty of things that we can consider. But I have nothing further to announce today.

The second question again, just one word will remind me. Oh growth -- I am not going to comment any further on the growth target beyond that we are on track to deliver over this year and next year a growth in copper equivalent terms of 16%.

Was there anything else? Are you okay? Okay.

--as to what is included there?

Sorry? Sorry, Myles, did you have anything else you wanted to ask?

Which projects do you include as (multiple speakers).

Oh projects, yes. Well now you mentioned some of them. I mean I presume you are talking about the relatively small possibility of an open pit on expansion at Cannington? That is not -- there are several others there which are in there that are being considered but we have a very strict set of criteria to move things forward and to fit in what we think is an affordable level of capital. There are others there that are in there but I would rather not go into too much specifics at this stage. I mean clearly in there is our continuing development of the shale. Continuing, as we said in the talk, brownfields expansion of our conventional oil and gas business. Some of the others you mentioned are in there for sure.

I will take the next question from the phone.

Menno Sanderse, Morgan Stanley.

Yes, good morning, two brief ones please. One on working capital, there was quite a significant outflow of about $1.4 billion. I'm just trying to get a sense if this will be reversed in the second half? And secondly on the US Onshore operations, it states in the release that it should be profitable in the second half. Is it on underlying operations or are there some one-off gains in the second half that will drive that to profits?

No, no they -- you were on the tour, Menno, and we still expect it to be EBIT positive for the second half as we announced on the tour and cash flow positive by FY16 building it to FY20 to about $3 billion of cash per annum. I will get Graham to answer the question on working capital. Graham.

Andrew, look about $1.5 billion negative gearings for the half year on half year predominantly driven by timing of payables, receivables and build-up of inventory predominantly around Jimblebar. Probably worth noting that in January about $700 million of that $1.5 billion unfavourable variance reversed. So we do see a reversing.

Okay.

Okay.

The next question from the phone.

Peter Harris, JCP Investments.

Thank you for the presentation, Andrew. Just two questions. You mentioned potential productivity gains. Are you targeting in the medium term real cost deflation or inflation and does that vary between your basins? I imagine it is probably more easy to achieve in iron ore versus copper given the declining grade that you are facing in South America. And also you mentioned your light copper, on slide 27 you have got -- you talk about the refined copper market. But it seems to me people always overlook the scrap market and as that market goes into deficit just magically scrap appears from nowhere and fills that gap. But at the same time people have falling copper prices. So could you just talk about the role of scrap and also any comments you have got on the shape of that copper scrap cost curve and the impact that might have in the long run to cut the price?

Sure will, Peter. I expected to have you here in the room in Melbourne. We have come here to your home city and you are phoning in. Anyway, but good to hear to from you nonetheless. Just on scrap first of all, of course that acts as a bit of a buffer in the system as you described. That clearly if price starts to rise because of a lack of supply of primary copper from mines often that is enough to create more scrap. But it works the other way as well it smooths some of the price variations and we certainly handle that in our own projections in the way you describe.

Could you remind me of your first question?

Just on whether you are targeting real cost deflation --

Oh yes, now you see I have got it.

-- or inflation and does that vary between your basins or your primary focused commodities?

Well, we are targeting that everywhere and I think there are, as you say, opportunities that we are still working on and expect to do within iron ore. I would not rule out copper either despite some of the challenges you mentioned. Bear in mind that in the case of both Olympic Dam and where we currently are in Escondida we are not facing for the next few years any grade decline. But there is a variation between the basins but less driven by if you like the nature of the operations and more driven by the market. Where we have relatively low margins then it is less attractive to retain costs to grow volume than when we have high margins. You have seen that contrast that I have drawn in the presentation between coal and iron ore. That does not mean that there are not low cost expansions available in coal that we will go after and that there are not some significant cost-out targets in iron ore that we will go after. Of course we will do both.

But there is an individual tailoring depending on the margins obviously with a slight bias towards more volume and higher margins than the other way round in low margins.

Thank you very much.

Anything else from Melbourne? Okay, we will take one more question from the phone then.

Andrew Hines, CBA.

Thanks, Andrew perhaps a question for Graham. On the new capital allocations that have -- are processes and being focused on generating the best returns from that capital use. Can you talk a little bit more about how you rank capital returns in terms of buying back BHP equity compared to projects? It seems to me that with the share price a lot higher today than it was 6 months ago or even 12 months ago we are heading aback to an environment where potentially BHP is going to be doing a buyback at the top of the market which is what happened last time. If we have got new investment in projects generating 20% plus returns is that not going to be a better use of capital than buying back shares? And can you talk a bit about how you have changed the structure so that we do not continue to end up in environments where we end up with buybacks happening when the share price is high and not when the share price is low?

Okay, I mean I think -- I sort of answered that earlier. But maybe Graham can give a little bit more detail, but not much.

Look I mean the comment I would make is over the last 10 years we have done buybacks in excess of $20 billion and the buybacks as an average have had a share price around $25. But I think more importantly when we look at our portfolio we look at all the options as I spoke to earlier and rank them on a number of different criteria such as NPV, IRR, return on capital, how the portfolio looks, cash flow at risk. But understand that a lot of those decisions are interconnected and shares buybacks certainly comes as something we consider. But as you rightly point out a lot of our projects, they're located in OECD basins, our brownfield expansions they have very high returns. So we go through that constant process every year we do our planning cycle. But the other piece is as well look when we have excess cash at that time we will decide what is the right mechanism to look at returning cash back to our shareholders. So there are a number of different mechanisms.

Yes the trouble though is the excess cash always seem to come top of the cycle. So in other words at a time when the BHP share price is high. Is there some way that you have thought about breaking that disconnect between having the excess cash and the capital return?

I mean can I just jump in, we are not actually at the top of the cycle, Andrew, that this result that you have seen is primarily driven by our own self help and our own productivity. It does not negate from the challenge you have said. But clearly the ambitions that we have now for the performance of our Company the guidance that I have given you is happening. Then we certainly do not feel that as things sit at the moment we are finished with our productivity gains. And -- or that we are operating at the top of the cycle, so that would be my only other colour I would add. I do not know if you want to add to that, Graham?

No, nothing more to add, Andrew.

Okay. Okay anything else here? I think we will call it a day, thank you very much.