BHP Group’s portfolio positively leveraged to the megatrends of decarbonisation, electrification and population growth

Mining

BHP Group plc (LON:BHP) has announced its operational review for the year ended 30 June 2021.

Note: All guidance is subject to further potential impacts from COVID-19 during the 2022 financial year.

·    Record production was achieved at Western Australia Iron Ore (WAIO) and Goonyella. Olympic Dam achieved both the highest annual copper production since the acquisition by BHP in 2005 and the highest gold production ever for the operation. Escondida maintained average concentrator throughput at record levels despite a challenging operating environment in Chile as a result of impacts from   COVID-19.

·    Petroleum production for the 2021 financial year was slightly above guidance. Full year production guidance for copper, iron ore, metallurgical coal and nickel were delivered, as was revised guidance for energy coal.

·    Full year unit cost guidance(1) expected to be achieved for WAIO, Escondida and Queensland Coal (based on exchange rates of AUD/USD 0.70 and USD/CLP 769). Petroleum unit costs are expected to be slightly better than guidance. New South Wales Energy Coal (NSWEC) unit costs are expected to be marginally above guidance.

·    During the year, we successfully achieved first production at four major development projects, all of which were delivered on or ahead of schedule and on budget. The South Flank iron ore project in Western Australia and the Ruby oil and gas project in Trinidad and Tobago both achieved first production in May 2021. The Atlantis Phase 3 petroleum project and the Spence Growth Option copper project achieved first production in the first half of the 2021 financial year.

·    In exploration, we have continued to add to our early stage options in future facing commodities throughout the year, with the signing of an agreement for a nickel exploration alliance in Canada and of a farm-in agreement for the Elliott copper project in Australia. At Oak Dam in South Australia, next stage resource definition drilling to inform future design commenced in May 2021.

·    The financial results for the second half of the 2021 financial year are expected to reflect certain items as summarised in the table on page 3.

Production FY21(vs FY20) Jun Q21(vs Mar Q21) Jun Q21 vs Mar Q21 commentary 
Petroleum (MMboe)102.8
(6%)
27.0
6%
Increased volumes due to higher seasonal demand at Bass Strait and improved uptime at Atlantis.
Copper (kt)1,635.7
(5%)
403.0
3%
Higher volumes as a result of the ongoing ramp up of concentrate production at Spence following first production at the Spence Growth Option in December 2020. 
Iron ore (Mt)253.5
2%
65.2
9%
Increased volumes at WAIO reflects record quarterly production at Mining Area C, which included first ore from South Flank in May 2021, and continued strong operational performance enabled by improved supply chain reliability.
Metallurgical coal (Mt)40.6
(1%)
11.8
23%
Higher volumes at Queensland Coal reflects a strong underlying operational performance, including record quarterly production at Goonyella and BMA, following significant wet weather impacts in the prior period.
Energy coal (Mt)19.3
(17%)
6.3
31%
Higher volumes at NSWEC due to record wash plant performance and lower strip ratios, and significant weather impacts in the prior period.
Nickel (kt)89.0
11%
22.4
10%
Higher volumes due to planned maintenance undertaken in the prior period.

Group copper equivalent production for the 2021 financial year was broadly in line with the prior year. Group copper equivalent production for the 2022 financial year is expected to be in line with the 2021 financial year despite continued impacts from a reduction in operational workforces in our Chilean copper assets in response to COVID-19 and petroleum natural field decline.

 Summary

Operational performance

Production and guidance are summarised below.

Note: All guidance is subject to further potential impacts from COVID-19 during the 2022 financial year.

Production FY21 Jun
Q21 
FY21
vs
FY20 
Jun Q21
vs
Jun Q20 
Jun Q21
vs
Mar Q21 
FY22
guidance 
FY22e
vs FY21 
Petroleum (MMboe) 102.8 27.0(6%)2%6%99 – 106(4%) – 3%
Copper (kt) 1,635.7 403.0(5%)(3%)3%1,590 – 1,760(3%) – 8%
   Escondida (kt) 1,068.2 246.7(10%)(16%)(1%)1,000 – 1,080(6%) – 1%
   Pampa Norte (kt)   218.2 69.4(10%)27%33%330 – 37051% – 70%
   Olympic Dam (kt)  205.3 50.820%7%(8%)140 – 170(32%) – (17%)
   Antamina (kt) 144.0 36.116%103%4%120 – 140(17%) – (3%)
Iron ore (Mt) 253.5 65.22%(2%)9%249 – 259(2%) – 2%
   WAIO (Mt) 251.6 64.21%(4%)9%246 – 255(2%) – 1%
   WAIO (100% basis) (Mt) 284.1 72.81%(4%)9%278 – 288(2%) – 1%
   Samarco (Mt) 1.9 1.0100%100%17%3 – 455% – 106%
Metallurgical coal (Mt) 40.6 11.8(1%)2%23%39 – 44(4%) – 8%
   Queensland Coal (100% basis) (Mt) 72.5 21.10%2%22%70 – 78(3%) – 8%
Energy coal (Mt)(i) 19.3 6.3(17%)11%31%13 – 15(33%) – (22%)
   NSWEC (Mt) 14.3 4.5(11%)(8%)51%13 – 15(9%) – 5%
   Cerrejón (Mt)(i) 5.0 1.8  (30%)133%(1%)n/an/a
Nickel (kt) 89.0 22.411%(6%)10%85 – 95(4%) – 7%

(i)     We will no longer provide production guidance for Cerrejón reflecting the announced divestment of our interest in June 2021 and volumes will be reported separately from 1 July 2021 until transaction completion.

Summary of disclosures

BHP expects its financial results for the second half of the 2021 financial year to reflect certain items as summarised in the table below. The table does not provide a comprehensive list of all items impacting the period. The financial statements are the subject of ongoing work that will not be finalised until the release of the financial results on 17 August 2021. Accordingly the information is subject to update.

Description H2 FY21
impact
US$M(i) 
Classification(ii) 
Unit costs for WAIO, Escondida and Queensland Coal are expected to be in line with full year guidance (at guidance exchange rates), with Escondida tracking towards the low end of guidance and WAIO tracking towards the upper end of guidanceNote: stronger Australian dollar and Chilean peso than guidance rates in the period(iii)  Operating costs
Petroleum unit costs are expected to be slightly better than full year guidance driven by higher than expected volumes ↓ Operating costs
NSWEC unit costs are expected to be marginally above full year guidance largely as a result of lower volumes due to significant weather impacts and an increased proportion of washed coal in response to widening price quality differentials, consistent with our strategy to focus on higher quality products ↑ Operating costs
Increase in closure and rehabilitation provision for closed mines (reported in group and unallocated, approximately 75 per cent of the increase) and closed sites at Petroleum and WAIO375 – 425↑ Operating costs
Business development and evaluation expense for Petroleum90Development and evaluation expense
Exploration expense (including petroleum and minerals exploration programs)430Exploration expense
Higher depreciation and amortisation mainly at Yandi (due to a decrease in life of mine) and Bass Strait (due to a decrease in estimated reserves)450 – 500↑ Depreciation, amortisation and impairments
The Group’s adjusted effective tax rate for FY21 is expected to be within the guidance range of 32 to 37 per cent Taxation expense
Dividends paid to non-controlling interests~1,400 ↑ Financing cash outflow
Impairment charge related to the announced divestment of Cerrejón (after tax)~85↑ Exceptional item charge
Costs directly attributable to COVID-19 (after tax)(iv)150 – 200↑ Exceptional item charge
Financial impact on BHP Brasil of the Samarco dam failureRefer footnote(v) ↑ Exceptional item charge

(i)     Numbers are not tax effected, unless otherwise noted.

(ii)    There will be a corresponding balance sheet, cash flow and/or income statement impact as relevant.

(iii)   Average exchange rates for FY21 of AUD/USD 0.75 (guidance rate AUD/USD 0.70) and USD/CLP 746 (guidance rate USD/CLP 769).

(iv)   Relates to additional costs incurred at our operated assets for the increased provision of health and hygiene services and the impacts of maintaining social distancing requirements. For example, additional accommodation and cleaning costs at the Spence Growth Option project and additional port costs at WAIO due to quarantine restrictions.

(v)    Financial impact is the subject of ongoing work and is not yet finalised

Major development projects

During the year, we successfully achieved first production at four major development projects, all of which were delivered on or ahead of schedule and on budget.

The Atlantis Phase 3 petroleum project and the Spence Growth Option copper project achieved first production in the first half of the 2021 financial year.

During the June 2021 quarter, the South Flank iron ore sustaining project in Western Australia and the Ruby oil and gas project in Trinidad and Tobago achieved first production. Given this, South Flank and Ruby project progress will not be reported in future Operational Reviews.

At the end of the 2021 financial year, BHP had two major projects under development in petroleum (Mad Dog Phase 2) and potash (Jansen mine shafts), with both of these tracking to plan.

The Jansen Stage 1 project in Canada remains on track for a go or no-go decision in the next two months.

Corporate update

On 28 June 2021, BHP announced that it had signed a Sale and Purchase Agreement with Glencore to divest its 33.3 per cent interest in Cerrejón, a non-operated energy coal joint venture in Colombia, for US$294 million cash consideration. Subject to the satisfaction of customary competition and regulatory requirements, we expect completion to occur in the second half of the 2022 financial year. The transaction has an effective economic date of 31 December 2020. The purchase price is subject to adjustments at transaction completion, including for any dividends paid by Cerrejón to BHP during the period from signing to completion. A further impairment charge related to Cerrejón of approximately US$85 million post tax will be recognised as an exceptional item in the financial results for the second half of the 2021 financial year. For the 2021 financial year, BHP will continue to report Cerrejón, including the impairment charge, in its Income Statement within profit/(loss) from equity accounted investments. It will continue to be reported within our Coal segment and asset tables. On the Balance Sheet, it will be reclassified as an asset held for sale. Beyond the 2021 financial year, BHP expects the sale of Cerrejón to complete with no net impact on BHP’s Income Statement and, as a result, we would no longer report it in our Coal segment or asset tables.

The broader carrying value assessment of the Group’s assets is ongoing with a particular focus on Jansen and NSWEC, and will be finalised in conjunction with the release of the financial results on 17 August 2021.

On 9 April 2021, Samarco announced that it filed for judicial reorganisation (JR) with the Commercial Courts of Belo Horizonte, State of Minas Gerais, Brazil (JR Court). On 12 April 2021, the JR Court accepted the case and appointed four judicial administrators. On 5 July 2021, the judicial administrators filed a revised list of creditors with the JR Court, which kept shareholders’ claims as listed by Samarco, with the Renova Foundation not listed as a creditor. This excludes the Renova Foundation’s funding and programs from the JR. The revised list of creditors is not final as it is still open to discussion before the JR court. The JR is a means for Samarco to restructure its financial debts in order to establish a sustainable independent financial position for Samarco to continue to rebuild its operations safely and meet its Renova Foundation obligations. Samarco’s filing follows unsuccessful attempts to negotiate a debt restructure with financial creditors and multiple legal actions filed by those creditors which threaten Samarco’s operations. Samarco’s operations will continue during the JR and restructure process. The JR does not affect Samarco’s obligation or commitment to make full redress for the 2015 Fundão dam failure, and it does not impact Renova Foundation’s ability to undertake that remediation and compensation.

In addition, negotiations are ongoing with State and Federal Prosecutors and certain other Brazilian public authorities on the review of the Framework Agreement. The Framework Agreement was entered into between Samarco, Vale and BHP Brasil and the relevant Brazilian authorities in March 2016 and established Foundation Renova to develop and implement environmental and socio-economic programs to remediate and provide compensation for damage caused by the Samarco dam failure.

We will provide an update to the ongoing potential financial impacts on BHP Brasil of the Samarco dam failure with the release of the financial results on 17 August 2021. Any financial impacts will continue to be treated as an exceptional item.

We have continued to take action to support the reduction of value chain greenhouse gas emissions. On 21 April 2021, we announced the signing of a Memorandum of Cooperation to become one of the founding members of the Maritime Decarbonisation Centre to be set up in Singapore. The Maritime Decarbonisation Centre will be a focal point for the global maritime industry’s efforts in both decarbonisation and innovation, bringing together experts and the industry, including start-ups to develop technologies and co-create innovative solutions. BHP is the only resources company that is part of the alliance.

Average realised prices  

The average realised prices achieved for our major commodities are summarised below.

Average realised prices(i) Jun H21 Dec H20 FY21 FY20 FY21
vs
FY20 
Jun H21
vs
Jun H20 
Jun H21
vs
Dec H20 
Oil (crude and condensate) (US$/bbl)63.0541.4052.5649.536%68%52%
Natural gas (US$/Mscf)(ii)4.863.834.344.048%29%27%
LNG (US$/Mscf)7.044.455.637.26(22%)2%58%
Copper (US$/lb)4.343.323.812.5052%82%31%
Iron ore (US$/wmt, FOB)158.17103.78130.5677.3669%106%52%
Metallurgical coal (US$/t)114.8197.61106.64130.97(19%)(5%)18%
Hard coking coal (US$/t)(iii)118.54106.30112.72143.65(22%)(11%)12%
Weak coking coal (US$/t)(iii)104.4073.1789.6292.59(3%)24%43%
Thermal coal (US$/t)(iv)70.8344.3558.4257.102%27%60%
Nickel metal (US$/t)17,53715,14016,25013,86017%41%16%

(i)     Based on provisional, unaudited estimates. Prices exclude sales from equity accounted investments, third party product and internal sales, and represent the weighted average of various sales terms (for example: FOB, CIF and CFR), unless otherwise noted. Includes the impact of provisional pricing and finalisation adjustments.

(ii)    Includes internal sales.

(iii)   Hard coking coal (HCC) refers generally to those metallurgical coals with a Coke Strength after Reaction (CSR) of 35 and above, which includes coals across the spectrum from Premium Coking to Semi Hard Coking coals, while weak coking coal (WCC) refers generally to those metallurgical coals with a CSR below 35.

(iv)   Export sales only; excludes Cerrejón. Includes thermal coal sales from metallurgical coal mines.

The large majority of oil sales were linked to West Texas intermediate (WTI) or Brent based indices, with differentials applied for quality, locational and transportation costs. The large majority of iron ore shipments were linked to index pricing for the month of shipment, with price differentials predominantly a reflection of market fundamentals and product quality. Iron ore sales were based on an average moisture rate of 7.3 per cent. The large majority of metallurgical coal and energy coal exports were linked to index pricing for the month of shipment or sold on the spot market at fixed or index-linked prices, with price differentials reflecting product quality. The majority of copper cathodes sales were linked to index price for quotation periods one month after month of shipment, and three to four months after month of shipment for copper concentrates sales with price differentials applied for location and treatment costs.

At 30 June 2021, the Group had 323 kt of outstanding copper sales that were revalued at a weighted average price of US$4.25 per pound. The final price of these sales will be determined in the 2022 financial year. In addition, 304 kt of copper sales from the 2020 financial year were subject to a finalisation adjustment in the current period. The provisional pricing and finalisation adjustments will increase Underlying EBITDA(2) by US$47 million in the 2021 financial year and are included in the average realised copper price in the above table.

BHP Group Chief Executive Officer, Mike Henry:

“BHP safely delivered another year of excellent operational performance and its second consecutive financial year with zero fatalities at our operated assets. We set several production records and brought on four major projects safely, on schedule and on budget.

This strong performance is a reflection of the capability and commitment of our employees and contractors, the strength of our systems and the support of our business partners.

We achieved production records at our Western Australia Iron Ore operations and the Goonyella Riverside metallurgical coal mine in Queensland. We maintained all-time high concentrator throughput at our Escondida copper mine in Chile. Olympic Dam in South Australia had its highest annual copper production since BHP acquired the asset in 2005, and its best-ever gold production.

South Flank, the largest and one of the most technically-advanced iron ore mines in Australia, began production in May and will boost the overall quality of BHP’s iron ore product suite. In the same month, the Ruby project in Trinidad and Tobago started production. Atlantis Phase 3 in the Gulf of Mexico and the Spence expansion in Chile began production in the first half of the year.

BHP is in great shape. Our operations are performing well, we continue our track record of disciplined capital allocation, and our portfolio is positively leveraged to the megatrends of decarbonisation, electrification and population growth.”

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