Company Interview / BHP: profit down, copper future bright?

Key points:

BHP's (ASX: BHP) financial performance with exceeded underlying profit expectations and record production volumesBHP's resilience and consistent cash flow recordsBHP's future prospect for growth in "future-facing commodities" like copper and potash

Vandita Pant, chief financial officer of BHP (ASX: BHP), mentions that despite a decrease in annual net profit, its underlying profit surpassed expectations, and total revenue increased by 3%. Vandita emphasises that BHP's (ASX: BHP) assets have performed exceptionally, with record production volumes from their Western Australian iron ore assets and a growth in copper for the second consecutive year. She shares that operating cash flow from their businesses exceeded $20 billion last year, which enabled dividend payments totaling US$7.4 billion.

Vandita acknowledges the surfeit in the iron ore market and suggests it may affect earnings. However, she remains confident in BHP's (ASX: BHP) position due to their cost-effectiveness as a producer. Vandita argues that their C1 cost of only $15.84 per tonne illustrates that iron ore will continue as a lucrative business for BHP. She also mentions BHP's (ASX: BHP) consistent cash flows for the last 15 years, demonstrating their resilience towards market volatility.

In terms of future prospects, Vandita states that their focus will shift towards "future facing commodities" such as copper and potash. She highlights BHP's (ASX: BHP) vast copper resources and mentions plans to double their copper production by the mid-next decade. While Vandita mentions the potential for acquisitions to fuel growth, she reiterates that BHP's (ASX: BHP) primary avenue for growth is their productivity and inherent growth options. Vandita finalizes by illustrating BHP's strong and resilient balance sheet that enables concerted investment for value growth while continuing robust cash return to shareholders.

Full unedited transcript below:

0:11

BHP has posted a full year net profit of 7.9 billion USD. That's down 39% year on year, while booked underlying profit of 13.7 billion US, which was ahead of estimates. The mining giant declared a final dividend of 74 US cents a share when added to February's interim dividend. Shareholders will receive $1.46 lower than the $1.70 paid to investors last year. Overall, the group saw revenue rise 3% to 55.7 billion USD. It has improved its net debt position to be carrying 9.1 billion US, and the company says the external operating environment remains volatile, with demand for commodities being relatively soft over the calendar years 23 and 24. It expects copper to be in marginal surplus, while China's iron ore demand is forecast to be lower than it is today.

1:01

Well, let's get some further detail on that. BP's chief financial officer and did a punt. Joins us now. Vanita, welcome. Thanks so much for joining us. Congratulations on the results. There's a lot of gloom being priced into iron ore at the moment. What did iron ore deliver for the company and shareholders over the past year?

1:24

Thank you Andrew. That is oodles of cash. We have performed really well this year with the strong financials and operations coming through. As you mentioned, underlying profit being 2% higher year on year and earnings per share being higher 2% as well, year on year. And all that is happening because we have great assets like Western Australia, iron ore that you mentioned, and our team do an incredible job of running them really well with real cost discipline as well as our cost capital allocation, which really is very thoughtful around putting money back into the balance sheet, giving solid returns to our shareholders and going for value adding growth. If I talk about our assets, what what operationally went well? Iron ore, Western Australia iron ore assets, which are a flagship asset for us,

2:24

delivered another record production volume. And not only that, for the fourth year running, Vale operations are the lowest cost iron ore producer globally, which is a fantastic place to be in in copper. Also, the company did very well. We have had second consecutive year of 9% growth in copper and next year we are forecasting another four years. And what what does this mean? This means that overall operating cash flow from the business was more than $20 billion last year. And all that resulted into dividends offer 7.4 billion USD, which equates to a full year dividend of $2.16 for our 17 million Australian shareholders, either directly or those who hold us through their supers. You say you expect the iron ore

3:24

market to be in surplus this calendar year. What impact is that going to have on earnings?

3:30

So we do expect that I know market will be a little bit in surplus this year. But if I step back, this is a view we have had for a very long time. And as the plateauing of steel demand in China happens, the the overall surplus in iron ore continues. However, however, quite a few of the end users of steel are doing very well in China. Infrastructure, machinery, auto. Shipbuilding, the sector which is weak, is property and that is only 20% of the overall steel demand in China. But if I were to step back on, what does this mean for BHP? We are in fantastic shape because being the lowest cost producer of iron ore and this year actually widening our gap with our next best competitor, we are at C1 cost of only US

4:30

dollar 15.84 per tonne. This means that iron ore business will continue to be a great business for us. If I step back, I think the hallmark of BHP has been our consistency and delivery. So for the last 15 years, our cash flows have been more than $15 billion, except for one year. And that is the consistency that you need when there is volatility and market dynamics. Can change. And that's the resilience that BHP offers. So given that forecast of surplus for iron ore, what's your production guidance. Because certainly some analysts perceive your result here. And what you've had to say is that this essentially is the end of the iron ore booms. Is that the way you see it?

5:24

Well, when you are a lowest cost producer of iron ore, this is not the end of the story at all. In fact, I would say that after the fourth year record production, we are looking to creep up to three zero 5 million tonnes over a period of time with very low cost and low capital intensity iron ore volumes to come in. So expanding that with that view, because this is a real cash flow business, which is very generative. Equally, we will continue to be very disciplined on cost in iron ore. But iron ore is one part of the big story for us And very clearly, as you would have seen today, we have announced quite a few details of our copper business and very excited about attractive returns in copper, which is a critical of the critical minerals we have in South Australia, in Chile, and with

6:24

the investment which we have recently done in Argentina. Well, in fact, at that point, then where do you think BHP's future lies? Is it less about iron ore and perhaps more about those future facing metals such as copper?

6:40

So iron ore will remain a fantastic business for BHP for decades to come. But as we have always said, that we also want to grow into future facing commodities. That's copper. That's a potash. Potash project in Canada is going very well. And first production of Jansen is less is almost two years away and hence it will come in and we will be at the lowest end of the cost curve in copper, which we really like as a commodity, because not only for our traditional way of living, but also from the world which is decarbonising, as well as more use of AI and data centers. All of that requires a lot of copper. So we are really attracted to that commodity, and it's fantastic that we are the largest holders of copper resources in the world. Not only that, in the last two years we have added

7:39

300,000 tons of production in copper, being already one of the largest copper producers. But what we are really excited about, Andrew, is the growth which is coming. We haven't we have today given details that here in Australia, in South Australia, copper, Essar Asset, we are looking to grow from our three, 23, 40,000 tonnes to almost doubling that copper production by middle of next decade. And in Chile, where we have a fantastic copper business as well, looking to grow over this period as well, and that would make that we could go towards a 2 million ton production for copper in in a decade or so. So very excited about future facing commodities. Are you still keeping options open as far as perhaps some acquisition or growth in the copper space?

8:38

Given your failed bid for Anglo American, would you be willing to return, uh, to that once that, uh, that, um, is becomes available again, given UK regulations where you can return to that bid, I guess in in November, you're still keeping your options open there or perhaps looking elsewhere.

8:59

So, Andrew, uh, we were disappointed that that deal did not go through because it did have a strategic logic to it. Um, not only that we were very clear that that combination could really unlock a lot of value for our shareholders and for their shareholders. But since then, they are executing their plan. And as you can see in our own results today, we are executing our plans. We have always said that BHP's biggest lever of growth is our productivity, as well as our own organic growth options, and that is a very big landscape for us to grow, from which we are doing equally. Since then, as you would have seen, we have also increased our stake and looked at acquisition now, which is still to close on Filo, which is a which could become a real world class, multi-generational copper basin in Argentina. So very

9:59

excited about our copper plans. And so then did you feel as though shareholders be willing to sacrifice some dividends there to fund your your future growth, and also see that you'd be happy to move above your net debt target temporarily, you say, to execute a value accretive opportunities. So on both fronts, um, you're happy with that position.

10:23

So we know how important dividends are to our shareholders. So this is a very important consideration we keep in mind. But equally as you yourself said Andrew, our balance sheet is really resilient and strong. Just $9.1 billion of net debt, which means that we have a lot of flexibility on really investing for value for attractive options in growth, but equally being able to robustly continue to do short share cash returns to our shareholders, very mindful of that. And for that, we have an approach which is called capital allocation framework, which makes sure we maximize use of our capital available every six months.