必和必拓 (BHP) 2015 Q2 法說會逐字稿

I'm now handing over to Jonathan Price at BHP Billiton Investor Relations.

(technical difficulty) our Chief Executive Officer in Melbourne; and Peter Beaven, our Chief Financial Officer, joining us in London. Andrew will make a few introductory comments, before we move to Q&A.

With that, over to you, Andrew.

Good morning, and welcome to our teleconference that follows the release of our 2015 interim results. I apologize, at the half year, the time differences between Australia, South Africa, and the UK makes it difficult for us to cover all the regions at the same time. I'm still in London, before I set off on a global road show at our global head office here; and Peter, as you heard, is in London with Jonathan.

As Jonathan also said, I'm going to just make a few initial points, and then we'll open up to questions, which Peter and I will handle.

Before doing this, however, I do think it's very important that we remind ourselves that in this financial year we have tragically lost two of our colleagues; one at our Worsley refinery in Western Australia, and the other at Olympic Dam in South Australia.

For us, and all of our management team, it's a very stark reminder that the health and safety of our people has to always come first. And although we are very pleased about these results, we achieve almost nothing if we don't achieve it safely and sustainably, first.

So, to the result themselves, I think what they show that in less than three years, which is how long we've been on this part of our agenda, we have improved the efficiency, not just of our operations but of our investments, by around 30%.

And this has caused us to increase free cash flow, despite the price falls, which have been particularly [steep away], but many of which we actually saw coming in the way we planned things. Although, I would stress, that this way of our acting on costs is as much a way of life for BHP Billiton now than it is a reaction.

But, as a result of this, despite the price falls, and certain issues to do with cost cutting that lead us to have a slightly higher working capital, we have still been able to secure the progressive base dividend and continue to be able to invest in a rich suite of higher return long-term growth prospects.

Finally, our demerger is on track. And we believe this will allow us to maintain the momentum of the gains we're talking about today. And we'll be able to do this because we'll be running both companies even better than it would be possible if we kept them together.

As a consequence, shareholders will effectively have a choice. You will retain in BHP Billiton with a very strong copper bottom to the progressive dividend, and our ability to invest further in growth. And that's something that we will be absolutely able to pursue without South32.

And then you'll have South32, which can either, of course, become a cash return, or you can retain what we think will be a very good company; it will also be paying a decent dividend.

So, let's just something a bit about the numbers. We achieved an underlying EBIT of $9.2 billion, and an EBIT margin of 32% in the period. And I think this demonstrates the strength of the strategy that I've just very briefly summarized and the resilience of our portfolio in the weaker markets of late.

Our productivity and flexible approach to investment, which I've just spoken about, has delivered an increase in free cash flow to $4.1 billion.

And our productivity gains, annualized since 2012, are now approaching $10 billion. And in the same period we've been able to reduce capital spending by almost 40%; the majority of it through capital compression, rather than deferring projects.

I think we are leading the industry in the pursuit of sustainable productivity gains, and I would say that both for the petroleum sector, as well as for the mining sector. As a result, we are finding that we're reducing unit costs faster than even we dared anticipate.

For example, in the last six months we cut unit costs at Western Australian iron ore to 29%; and it's approached, within the period, $20 per tonne. And that was an underlying EBIT margin at iron ore, despite the price fall, of 49%.

And we are, we believe, quickly advancing towards our objective of being the lowest all-in-cost supplier of direct shipped iron ore to China.

Similarly, we've been able to reduce our capital and exploration expenditure, for the half year just completed, by 23% to $6.4 billion. And with further improvements that I spoke of in our capital productivity, we now plan to invest only $12.6 billion this year, and $10.8 billion next financial year.

And we still have our portfolio, even with some of the price adjustments, with an average investment return of greater than 20% from our high quality development options.

We are committed to maintaining a strong balance sheet, and a solid A credit rating through the cycle. Our balance sheet is now strong with net debt at the end of the half year falling to $24.9 billion, despite the price falls, and a gearing ratio now of just over 22%. And recently, S&P reaffirmed our A+ credit rating as being appropriate for the way in which we are now running our Company, even at these price sets.

We've increased our base dividend by 5% to $0.62 per share. And that's a payout ratio of 62%, and is, as I said, covered by internal cash flow.

And we still are committed, for the foreseeable future, and remain so, to increase that dividend, or at least maintain it, over each period.

In fact, should our shareholders, as I said, approve the demerger, I repeat ,we will not debase or lower this dividend. We'll continue with that policy, which implies, all other things being equal, a higher payout ratio than we see today, before we add the values of the shares of South32 that will be dividended to the shareholders, and which you can either retain, and will represent additional cash returns to the shareholders, either in the form of the dividends you take, or through the cash value of the share.

We remain confident about the outlook for our Company. We have the best quality assets and operating capability; a deep understanding of global markets, which we're acting on in advance to protect and enhance value; a portfolio of very high return growth projects; a strong balance sheet; and we offer outstanding cash returns to shareholders.

The demerger will allow us to continue the process of building two organizations that will be truly unique in our sector, and both of which are well positioned for success, and even stronger competitive performance in the face of ever increasing volatility.

That's all I wanted to say by way of introduction. Maybe we can now spend the rest of the time on questions and answers.

(Operator Instructions). Jason Fairclough, Bank of America Merrill Lynch.

Congrats on the results, fantastic set of results. I just wanted to ask you a question that I asked your other large competitor in the Pilbara about 1 1/2 weeks ago. BHP is obviously a large producer of iron ore. You're delivering a lot of iron ore into the seaborne market, a lot of new products coming through, and obviously this is having an impact on the supply/demand balance. Do you feel any responsibility to play a role in balancing the market? So that's the first question.

If I can be a little bit cheeky and take two. Just a second one is, in terms of your CapEx going forward, to what extent is that dependent on near-term price outcomes for given commodities?

Can I just ask a little clarifying question, by near-term price outcomes, how long do you mean?

I guess, over the next two years to three years. And what I'm thinking here, Andrew, is that, let's say, for example, that iron ore were to surprise to the downside, at what point do you start cutting CapEx in iron ore, instead of cutting CapEx in oil?

Okay, I've got your point. On the first question, of course we feel a responsibility to our shareholders to ensure that we actually invest into markets for which there is a demand for our supply. There's only a limited amount that we can do to discharge that responsibility, and do it in the right way without in some way prejudicing returns, and possibly prejudicing a few other things as well.

We were very clear around 2012, and Marius at the time, of calling that this was the likely outcome in the iron ore market about this time. We're not surprised we find ourselves in that position. And that's why in 2012, at the beginning of it, was when we last sanctioned a major iron-ore project in the Pilbara. Since then, of course, we've been completing that project.

But much more powerfully, we've been substantially adding to the productivity of both the capital already invested and that going in through the programs that we have to reduce unit costs per tonne. But that, of course, is as much about adding volume by increasing the capacity of what we've installed, and were installing, as reducing the underlying cost of operating that. That has been a very, as you can see today, advantageous thing for our shareholders.

But as I look forward, I would say we are all but done on investing. We have a small amount of investment that we continue to consider that would give us very strong security of production at around 290 million tonnes per annum, that involves simply debottlenecking and making the port part of our system more reliable, and ensuring that we have a long-term supply of mines by creeping the capacity of the Jimblebar mine. Then we're finished. And we have yet to decide exactly when we'll make that investment.

However, I do fear that other competitors have an awful lot more of capital waiting in the wings to invest in expanding very low cost, direct ship iron ore. They don't have anything like the range of choices that we have to move with their investments across other avenues of growth, like petroleum; like copper; like, dare I say, long-term potash; and maybe at the very end of this, some small amounts of met coal.

And that's why we are likely to take more and more investment away from iron ore. But others won't. And, therefore, we do look to the future and see a degree of pressure downwards on iron-ore prices that may not relieve until such time as scrap is becoming more available in China, which will obviously compound the problem.

So, in any further investments, we'll look at that scenario very carefully versus returning the money to the shareholders, or investing in other businesses like petroleum.

In terms of near-term prices, well, it depends, actually. Obviously, as we are varying our production in the onshore, we can switch that on and off in a matter of months, or a year. And so, near-term prices are very important in making those decisions.

For longer-term investments, like iron ore, and clearly we take a slightly longer view, but probably not as long as the view we would take for copper, or even potash, because we've always said that, come the middle of the next decade, the substantial increase in the availability of Chinese scrap puts a lot more uncertainty in their market. So if we are going to invest the very small amounts of remaining capital we have in our plans around iron ore, we'll be looking for very short paybacks.

Jeff Largey,Macquarie.

Congratulations on the result. I had two quick questions. One was -- well, maybe not quick, but the first one's on CapEx. And when you talk about the flexibility that you have looking out over fiscal 2015 and 2016, obviously, some pretty big reductions from, say, the last set of guidance. But I'm just curious as to what, as you say in the presentation, that flexibility means. Are there certain levels or bands that you can bring this CapEx down, just, again, going back to the point on weakness in certain commodity prices?

Well, in theory, we could -- it's almost ultimately flexible. Of the $10.8 billion that we intend, at the moment, and guide, to spend in financial year 2016, only $2 billion is what I would regard as critical maintenance capital to ensure the integrity of plant and equipment so that we don't see any loss of containment, loss of reliability, or loss of safe working. The rest, to some extent, is discretionary.

Now, not quite as simple as that, because another $2 billion is very much assigned to projects that are very much underway. Therefore, if we chose to interrupt them in some way it would be hugely destructive of value. But beyond that, we get into some quite flexible territory.

The next, there's $1 billion for exploration. Now, there may be some well commitments, and so on, that are in there, but not so much.

And then, what remains really are the $2 billion that we're still doing in shale. Some of that could obviously be cut back. And one of the things that we would consider, at further [rolling] oil price would be not to frack our wells and leave the oil behind pipe, and have that ready to produce quickly if the price were to recover, for example.

Then, we have $2 billion on a number of small improvement projects. We don't -- and they're generally very high return projects, even at quite low prices, so it's unlikely we'd want to do too much with them because they include a lot of infill wells in a still very profitable conventional petroleum business.

And then finally, we have the long-term growth projects, which are in the study phase and getting ready to be part of the execution phase in FY 2016. And so that includes some of the iron ore stuff I've just been speaking about. It includes a couple of projects in the Spence copper field; one very high return project which uses our proprietary heap leaching approach to substantially improve ore recoveries by about 14%, and then getting after the Spence hypogene, which is another 50 years above supply potentially for the Spence operation.

We have in there as well our -- once we complete OGP1, which is one of the ongoing projects in Escondida, the option to then run three, rather than two, concentrators, and we call that Los Colorados extension.

And then, we have some of the thinking that we're doing around expanding Olympic Dam, and again, pushing the boundaries of our proprietary heap leach technology with trials, and so on.

And finally, we have the Mad Dog 2 development that we would do along with BP and Chevron.

In practice, I would say, apart from the maintenance capital, and the capital that's very much underway, almost all of it is flexible, but clearly some of them are very high return.

So we have a lot of leverage, if you like, in order to absolutely -- to protect the dividend of our Company; and also, to ensure that we retain a solid A credit rating for our balance sheet.

I should also say, of course, we have the opportunity to go the other way, particularly if oil prices were to recover quickly.

No, certainly. That's helpful. I guess this leads to my second question, which is, at the time of the South32 spin off -- sorry, the [docs] release in mid-March, obviously we'll get more color on South32 and that strategy. But can we also expect that around this time we'd get an update really on the sort of four-pillar strategy, going into more detail about some of the plans you just mentioned, as well as maybe the cost cutting and productivity initiatives?

Probably, not then. We'd like to just mainly concentrate on the answer to your first sub-question, which is just what's South32 going to look like, what will their plans be?

And some of the constraints of those things, maybe they won't be quite as expansive. But what I can promise, as a couple of themes from forthcoming attractions, is that both myself and Graham Kerr will be giving substantive talks at the Bank of America Merrill Lynch conference in May, when I certainly intend to speak to all the things you've asked me to speak to, then. And that's when we'll give you a lot more detail of the nature that you're requesting.

Fraser Jamieson, JPMorgan.

Andrew, a couple of questions. Firstly, on the iron ore unit cost side of things, which obviously you had a very impressive performance. I think back in October, at the site visit, you were talking about $20 a tonne being a medium-term target. So, presumably, at that point you weren't seeing the -- your ability to get to those levels as an average for the first half of this year. Could you maybe talk about what sort of changed in that intervening two-, three-month period to allow you to get down?

Obviously, oil prices came off, how quickly were those showing through in costs? The Aussie dollar, I guess, was a benefit as well. But it seems like even including all of that stuff there was -- something changed over those two to three months, so it would be interesting to get your insight on that.

And then the second question was just around the US onshore spend. You've indicated that that's going to fall to about $2.2 billion. Just assuming that spend and the market was never to be there to increase that spend again, how long could you maintain current production levels, etc., in the US onshore business? And could you ever see that business getting to a free cash flow positive position without an improvement in prices?

Okay, I'll try and hold that all in my head at once. On the iron ore price -- on the iron ore cost, sorry, Fraser, you've sort of answered your own question.

We did of course get help primarily from the foreign exchange and the weaker Australian dollar, and a little bit from some other consumables, like fuel costs. But we also did much better on our own self-help and our own productivity program than we had expected. And we continue to see a lot further progress being possible there, and that's why we are very confident that we're going to do quite a lot better than the $20 [per tonne], as we go forward, without any further help from external factors, like exchange rate and fuel costs.

On the shale question, well, at $2.2 billion, of course, we have done a couple of things there. We've high graded our investment into the most cash-rich activity, even at these prices, which is in oil-rich wells in the Eagle Ford, in the Black Hawk.

And at the same time, we've continued, relative to, say, where we were 18 months ago, and I think you were with us in Houston, to cut the cost of drilling the well by a considerable amount; 17% this year, but overall about 30%. Our unit costs are down 9%.

And so we'll be able to produce a lot more per unit cost of capital and operations costs than we saw about -- would have been about a 1 1/2 years ago, when we were in Houston. And that means that, that will be sufficient in the short term, we feel, to approach cash neutrality.

And should comment that our, basically, half year and half year EBITDA is up, from the shale business, about, let me get this right, 60%, $1.4 billion; and year on year, we'll do about 50% more liquids. And that is still very much the case, that liquid forecast, even with this level of investment.

Going beyond that, of course, and to doing it for the long term, we'll have to wait and see how well we improve productivity, the choices we make about further investment, and so on, and so forth. It's very much a -- it's a dynamic situation.

And certainly, by the time we get to the June operations report we'll probably update a lot more of that guidance, but that's about the best I can do for now.

Myles Allsop, UBS.

A few quick questions. First of all, on your net debt level, you've gone below the magic $25 billion that you've told us to forget about, and that's with a $1.4 billion working capital outflow in the first six months. Could you give us a sense, first of all, in terms of what you expect for working capital for the full year?

And also, in terms of capital management, obviously, given the South32 spin out, given the weaker oil and iron ore prices, is the market right to think that it's very unlikely that we'll see capital management in August? Or is there a small chance, when you're saying that your balance sheet is now strong, which implies that obviously we're getting closer and closer to that point where you can do capital management, like Rio Tinto?

And then also, on the CapEx side, the $10.8 billion, is that kind of a ceiling level as we look beyond 2016, because it's been achieved mostly from better capital efficiency? Or could CapEx creep above that level, longer term? Thank you.

Okay, can I -- I'll just put Peter on those, as he'll answer the questions on capital management; I think it's appropriate for him to do that.

But if I can just handle one or two of the other parts of your question, maybe the last one first, which was the issue of what is the long-range forecast for capital. I'm not exactly sure how that's going to turn out, Myles.

There's no doubt that in when we previously made calculations of what we thought was optimum to take BHP Billiton minus South32 into the future and get the right balance between long-term growth and the value of the -- in the value of the shares versus cash returns, we came on a number of about $14 billion. It's a little bit more precise than I'm making it sound, but not much more.

You're right that a good (inaudible) amount of what we're able to save on that to get down to $10.8 billion has been down to much more efficient allocation of capital, and more efficient projects; and some is the cancelling of some of the shale wells, as well. And so it's quite possible we might be able to live at a lower level than $14 billion going forward. But equally, we have so many good projects with the returns north of 20%, I wouldn't like to confirm that right now.

So within that zone, but maybe even lower than $10.8 billion if we get more efficient, or if we require to be more flexible, but I wouldn't impose that yet as the new ceiling. But we'll attempt to keep capital as efficient as possible.

I think, just as an introduction to the capital management question for Peter, just I make two points: is that I think it's important, when you compare us with others, to remind you that our payout ratio is 62% just from our progressive dividend, and so we are already returning significant cash to shareholders.

And the average payout ratio from this Company over the last 10 years was 50%. And that effectively was a $64 billion cash return to shareholders, of which $21 billion were buybacks bought at an average price of, I think, $25. Peter will correct me if I've got that one wrong.

The kind of compare and contrast you do with the South32, I would just point out to you that because of our performance on cash generation, that the share in BHP Billiton that remains is relatively unchanged in terms of its financial performance by the loss of South32.

We're not going to change the progressive dividend. We're demonstrating that we can continue -- I was saying we're not going to -- we're underpinning the progressive dividend, as it sits at the moment. And we're showing through our productivity performance, which we will only add to, enabled by, in some respects, by the South32 divestments, we're able to continue to invest in all of the important high return long -- high return long-term products.

In addition, you get a share in South32, which is, as I said, you can sell, or you can hold. I fully expect that they're going to pay a dividend as well.

So there's a fair chunk of capital management in all of that, before we get onto perhaps speculating when we may have excess cash that we would be prepared to buy back our shares with.

I would say, though, that we do test continually any investment we make against the investment of our own shares, and choose the one obviously with the highest return.

Peter, you might want to add to that. I said a bit more than I expected to, I'm sorry.

That's all right. We wouldn't speculate on whether we do or don't return additional cash to shareholders. Let me just reiterate what we -- our basic mantra on capital management, which is to make sure that through the cycle, looking forward, testing for the [low] that we maintain a solid A balance sheet; that we continue to selectively invest in our high return capital projects in order to ensure that we continue to grow; and that we meet our progressive dividend.

In the event, in the event that we have any spare cash, at that point, we would then flush that out to shareholders. We're not going to speculate, at this point in time, as to where we might be or not in six months time.

But I do think that Andrew makes an extremely important point, just to reiterate it, insofar as if -- any shareholders who buys BHP for yield and yield alone and we do not change the progressive dividend going forward, as we've committed to, then anything that you receive from South32 is additional.

Should you wish to sell that stock in its entirety, we don't speculate on what the value of South32 will be, but we do include, in our notes to the accounts, the fact that it's carrying at almost $12 billion of net assets. So should you wish to liquidate your holding in South32 that would represent a form of cash management, of cash return, should you so choose; very tax efficient, I might add.

The second question, or the first question, in fact, was really on working capital. Very comfortable where we are on working capital. We manage very closely our debtor days, our payable days, and our inventory days, and once that system forces us to do that it's a tremendous system in that respect.

So happens, in this half, that we've actually had a reduction in payables and in provisions by about [$770 million] in provisions, and about $1.4 million in payables. Those are the results of the lower costs that we've been speaking about from productivity feeding into lower payables. Provisions is a lower employee benefit, which, again, is related to the productivity benefit.

We did low down our debtors book by about $1 billion, and we reduced our debtors days, small uptick in inventory, but overall I think we're in good shape for where -- on working capital.

Historically, that sort of decrease in working capital has reversed, but I wouldn't speculate as to what might happen in six months time, or beyond that. I think it's even more remarkable that we've managed to increase our free cash flow to $4.1 billion, in spite of this natural reduction in our payables.

Menno Sanderse, Morgan Stanley.

Two small ones, please. First, on the US onshore CapEx, I'm a bit surprised it only declines to $2.2 billion. The previous guidance was $3.8 billion to $4 billion, the rig count comes down by 40%, rig rates have come down, contractor rates have come down a lot; why is it not dropping a little bit more than? That's the first one.

Secondly, on Olympic Dam, six month outage of one concentrator, smelter issues last year, it doesn't feel like this asset is where it needs to be and still the Company is considering putting significant amount of capital into it. Is that a wrong perspective, or am I on the right track?

It's a perfectly legitimate perspective, Menno, on Olympic Dam. It's a wonderful ore body, which we think will be very important as part of our unique and, we think, very special set of copper expansion opportunities. But rest assured that it has to perform, because we invest in the team as well as the asset, for us to consider expansion.

I'm actually sitting here with Danny Malchuk, who is just taking over as President of copper. And he knows that we absolutely need to get every single part of BHP Billiton performing at the level that you've seen parts of coal, most of copper, most of oil, and indeed iron ore performing today. We have the best people on the case to bring that through. That's a minimum requirement, before we go further with any of the investments. Your perspective is absolutely the right one.

I'm not sure I have quite enough handle on the detail of your question that you've asked on why we've only gone to $2.2 billion. I would guess, but I think Tim is going to be in London, and, if I'm right, maybe at some of the sell-side briefings that I think Peter will do, and he could probably explain a bit more.

But, of course, we have the rigs that we're retaining are drilling mainly oil wells, and the fracking. I think, from memory, they're a little bit expensive than drilling only gas wells, so that might explain a bit of it. But I would suggest, unless Peter knows the answer, that we make sure we get you to talk to Tim during his time in London, in the next few days.

That's right, I've got Tim next to me. But let's take that on over the next day, or so.

Are you sure you don't want to answer it now, Tim? Because if I've got it wrong. Okay, maybe let's leave it, let's leave it.

Anna Mulholland, Deutsche Bank.

Just [two] on the US onshore topic. Could you just talk about your decision to retain the Fayetteville acreage? I think that was a six-month process. You obviously either failed to get the right sort of value in bids, or decided to extract value yourself, if you could just talk about that.

And then, are there any other M&A decisions that you are looking to make in terms of restructuring that onshore portfolio? Thanks.

I'm not going to say any more about the second question, because these would be things that we would keep entirely confidential, until something happened.

On the Fayetteville, when we spoke in October and we looked at the ranking of gas projects that we were likely to sanction over a period of, say, 10 years, we felt that Fayetteville was quite close to the end of the queue. It's still a great asset. And by sanction, I mean significantly ramp up its development.

For that reason, for the delay, we were curious to find if someone in the market would be interested in developing it right away and, perhaps, split the time value of money with us in any purchase price. Clearly, since then, we've seen quite a reduction in US gas prices, way below where most people believe they're going to end up in the longer term.

And so the recalculation of what we're offered, given people are pricing a lot of things off current prices rather than, say, a more aggressive portfolio going forward, is that it's better for us to retain it for now and see, in the fullness of time, what is the best way to secure value for our shareholder.

Sylvain Brunet, Exane BNP Paribas.

Two questions on petroleum, if I may. The first one, looking at your slide 9, which is the waterfall, which shows petroleum no improvement in controllable cash cost, just wanted to get a sense of what was the contribution from price-linked costs, which should have been a relief; and why petroleum was the only division which didn't show progress on controllable cash cost?

Second question is more on the gas outlook itself. Given the talk in the industry on refracking, what are your thoughts there in terms of whether these new technologies might prolong the oversupply in the market compared to your initial expectations? Thank you.

I'm going to pass that question to Peter, and Tim, and they will decide how to handle it, in London.

Could you repeat the first part of the question?

On slide 9, for petroleum, the contribution from controllable cash cost is zero. I just wanted to understand what were the components there, and, in particular, why costs which are supposed to be linked to the price did not bring more of a relief in this first half.

Yes, I think you'll see that coming down with time. We've spent a lot of our time on the capital costs; you've seen that come down substantially. Andrew talked about a 30% reduction over the last several years.

We have a huge effort undergoing now on the cash costs. You're going to see that come down on a unit basis, and overall costs. The cash costs in the shale business are relatively low, compared to the minerals business. Having said that, it's still a large number. We're going to be targeting that, going forward, and you're going to see some things we do over the next 12 months to bring those costs down.

Quite frankly, when you look at our benchmarking costs, most of our fields, especially in the shale business, are top quartile on cost. We do have a few fields where we have some room on that, and we're going to do everything we can to bring that down. It won't deliver huge dollars, like the iron ore business, and some of the other businesses, but it's certainly a focus.

But where we put the most money back on the balance sheet is through our capital cost reductions.

Just a technical point: where we show the reduction in price-linked costs, that's shown in the price bar. So the price bar, in all of our charts, is a net of the reduction in the revenue, the price that impacts on our revenue, as well as then offset by price-linked costs associated with our operating [charges]. Just a technicality.

Tim Huff, RBC.

Questions on iron ore unit costs and onshore CapEx have been answered, but I guess two different questions. Andrew, I asked you a bit about working cap at the year end, and you clearly stated that productivity was going to be your focus, which is has been, and well done.

But from the way Peter was talking about the numbers that came in, you're absolutely right, the working cap outflow for the half was much more controlled than I expected. Is it fair to say that there's a greater focus on the working cap, going forward, even though you're not going to, I guess, put a number on what you're looking at, but it sounds like there's a better focus there?

And then the second bit, I guess, just a little bit in outlook. Your unit cost reduction is great in iron ore, the cost curves are coming down, and I'm just a little bit curious as to how you see things progressing over the next, maybe, 12 months. Obviously, 12 months is a long time in any of these markets, but if you could give us any color around the dynamics in the market, that would be helpful.

Okay, I think on the working capital, I'd just refer to Peter's answer to one of the earlier questions. We have, of course, unlike, I think, most of the people we compete against, a single system which manages our cash right across the Company, and gives very strong visibility, almost on a daily basis, as to where we stand in all of the categories of working capital. So this has always been managed very tightly.

And so we didn't have -- I wouldn't expect there to be some kind of working capital windfall by just suddenly cleaning up large parts of inventory, or so on. And I think when you look at it on a debtor days, or a payables days, or an inventory days, you will find that our performance is very strong, indeed.

That doesn't mean we can't do better, and we will. But I do want to draw a very strong comparison between, if you like, decent but, shall we say, moderate gains in working capital as a one-off saving in cash.

When we act on productivity, we take that cost out forever; and that cost has gone for, hopefully, an infinite period of years, where the savings are, obviously, multiplied by a very large factor. So that is where we will get the far and away the biggest bang for our value. And even if that means occasionally that we end up with slightly lower payables and higher working capital that is by far and away the right trade off in terms of value.

I think, looking forward on iron ore, we don't tend to try and do short-term price forecasting. But I think we would observe that in the next 12 months there's quite a lot more supply addition than there is likely to be growth in demand.

And although we see some loss of production, particularly from expensive Chinese iron ore in some countries, other than probably in Brazil and Australia, we still see a growing surplus of low cost supply; and, therefore, if anything, the pressure on the price is downward.

[Jatinder Goel], Citi.

It's actually Heath Jansen, Citi. I just wanted to ask a question just around diversification. If you look at your waterfall charts that you present in the slide pack, it seems that the only positive variance that you had coming in the half year was from aluminum, manganese, and nickel, which clearly you're divesting with South32.

I suppose the first question is, has it been a surprise to you in terms of what you see in terms of correlation with your other commodities, such as copper, coal, iron ore, and oil? Because, clearly, getting rid of South32 on the second-half numbers would have reduced your diversification, and I guess is that a concern for you, going forward?

And in term of incremental capital now, are you looking to balance that diversification? Or is it really just a function of targeting highest returning projects? Thanks.

When we look at diversification, Heath, we have to take the long-term view and to think about the covariance over several cycles, rather than just what's happened in a six month period.

I would put it to you that, even if we take the aluminum and nickel assets out of our portfolio, we're still left with a very diversified and balanced portfolio. And that's pretty much what people like the rating agencies tell us through -- and although it's not worked this time through having the counterweight of something like petroleum, or longer-term potash, to things like iron ore, met coal, and copper. So I think, on that sense, we're not concerned at all by loss of diversification.

The other reason for diversification is to be able to respond to changes, and secular changes, if you like, in patterns of demand, and where we expect that the -- if you like, [they will be extra bills] in workforce can make the greatest return for our shareholder.

And we have broad exposure, obviously, to steel making market uses; and in coal, wide range of energy, energy transport; and then potentially food; and, in technical knowledge terms, a wide exposure to different extraction styles onshore, offshore, open pit, underground mine, that create that kind of competence of extraction.

But much more importantly, I would say, in order to get that working, and so on, you actually have to be able to share best practice fast and quickly around your organization. And we think the much simpler company that we're creating will do that an awful lot better.

I think the only other counter I would say to you is these businesses that are in aluminum, manganese, and nickel, they're generally smaller scale; they're intermediate reserve life. And, as a unit, they're not likely to offer us material diversification compared to the rest of the portfolio, going forward, and more likely are to create the distraction, and we distract them, from maximizing productivity returns. I think both portfolios have sufficient diversification to even out things, so I think we're satisfied on that.

I'm not surprised by the performance of those businesses. Danny Malchuk is sitting opposite me; he's done a great job, and he's now going to work his magic on copper, and will continue to drive huge productivity gains there as well.

Andrew, if I could just add, we do analyze our diversification on a quantitative basis, quite exhaustively. And versus having a portfolio of iron ore, our total diversification reduces -- our diversification reduces our cash flow volatility by about 49%, and that's in FY 2014.

If you look for -- and out of that 49%, I think aluminum, manganese, nickel, plus energy coal only reduces the volatility by a further 2%, or so. So, it's relatively minor in terms of diversification.

As you look forward, say for the next 10 years, still very, very -- it's still basically exactly the same picture. The diversification, really, in our business comes from having the minerals side of things, offsetting the bulks, there is some diversification.

But the big one, of course, is petroleum. And in due course, we would expect that potash would add, again, a material diversification, a quantitative diversification to our portfolio. And yet again, South32 will have a minor impact on that. So, we look at it in a number of ways.

James Gurry, Credit Suisse.

Andrew, I've just got one question about CapEx, again. With the $10.8 billion guidance, I think, just confirm that, that does include South32. And if it does, is all South32's CapEx pretty much included in that $2 billion of critical maintenance CapEx? And, by deduction is it for the BHP, for the core BHP that's left behind after June? Invariably, it's a lot lower number that you've got going forward for that critical maintenance CapEx.

No, the $10.8 billion does not include South32, because by then South32 will have been demerged. But the $12.6 billion that we're guiding for this year does include South32; that's the difference.

The South32 capital spend at the moment is quite small, actually. I'm looking at Danny. I think it's, what, about --?

[No], because AMN was around [$450 million], or something like that, on an annual basis, but (multiple speakers).

I think it's about [$400 million-odd]. There is a note in the back of the financials. That's for the six months.

For the half?

For the half, yes. So, say, yes, [$800 million] for the year, probably less, when the new management team have got there.

Rene Kleyweg, Deutsche Bank.

Just going back to the cost-out progress, there's a clear impression you've surprised yourselves here. So, just between the productivity in terms of volume gains versus the plant availability and work at production improvements, where has the surprise come from, predominantly? And how far ahead of where you expected to be are you running?

And then just as a follow up, to try and understand the momentum that's in these numbers already, how much of that $2.4 billion was baked in, in terms of an exit rate from last year? I'm just trying to understand the profile of the cost out, and how much is almost baked in going into the second half of this year as a result of that $2.4 billion?

Well, I think in his talk yesterday, your time, Peter guided that we'll at least get to $3 billion by the end of this financial year; and then, we're well able, I think, to get to our $4 billion target by the end of 2017.

I don't want to make it sound as if we're stunned by our own success. We obviously will shoot for the stars, and do our very best. And a lot of the stuff is bottom-up, it's the way we motivate the team; it's not done by top-down edict.

So I -- the way we're travelling at the moment, and what I think will happen as a result of the stimulus of the demerger, is that I feel quietly confident that we're going to continue to maintain this momentum for a few years.

Andrew, can I just add, I think is there any -- the impact of FX was relatively minor. We guided at the -- when we did the site tour we were guiding based on an [AUD0.91] outlook, for Aussie dollar. For this half we've just reported on, we had an average of AUD0.89, so it's -- and I think strip ratios, again, were relatively constant through this period.

So, again, there isn't any magic here; this is just hard work coming through, not only in iron ore, but across all of our businesses. So, important to know.

Okay, I think that was the last question. Am I right, operator?

That was the last question, Andrew.

Okay. Well, thank you, everybody, for your attention. I'm sure Peter and Tim will get to see many of you who are on the phone from London, or in South Africa, in the next week or two. Well, Peter will be in South Africa with Jimmy Wilson. And I will be in London myself in March, and I'm sure I'll get to see you all -- those of you who are in London then.

So, appreciate your attention, and your understanding of some of the time-zone challenges.

I hope you see that we've had a, as I said, strong set of results: outstanding delivery of productivity, which we said we would do, that has enabled the full protection of our progressive dividend; and our investment program, as planned; and coming down the track, a demerger that should allow us to continue this strong track record, with even greater urgency.

So, look forward to hearing from you soon, and how you get on with Peter and Tim, and Jimmy in South Africa.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.