BHP Billiton S Africa : Our strategy delivers value and returns

**Check against delivery**

CEO Andrew Mackenzie

Speech given at Bank of America Merrill Lynch Global Metals, Mining and Steel Conference, Barcelona

Good morning ladies and gentleman. It is a pleasure to be here with you once again in Barcelona.

Before I begin please note the disclaimer.

At BHP our focus is clear. To maximise cash flow, maintain capital discipline and increase value and returns.

We have demonstrated this is the right formula for our shareholders. Our strategy provides the framework to deliver this as we make the most of our portfolio and develop options to secure future success.

We have created a simple and diversified portfolio as we aspire to have the best assets across the best commodities with the best culture and capabilities.

Just one of these elements alone is not enough. It's the combination of all three that will set us apart and deliver a competitive advantage and sustainable long-term value and returns.

We have shaped our portfolio around the right commodities, with attractive fundamentals.

Our assets are world class. And we hold exploration licences and development options in some of the world's premier copper, oil and potash basins.

Above all else, it is now the transformation of BHP that will take our company's unique portfolio to the next level. So we have developed a culture based on trust and collaboration and given our people more say, new capabilities and tools, and new avenues for technology and innovation to make sure we realise this prize.

Our culture and partnerships are driven by authentic engagement. We seek to make a valuable contribution to the communities where we operate and to society as a whole.

Without this contribution we cannot create value for our shareholders. As custodians of natural resources it is imperative that we shape the future to create prosperity for shareholders, and our communities and society.

If we do not do this well our ability to attract the right employees and secure access to capital, resources and markets will be hampered.

But what is considered going above and beyond today will become the base requirement in the future.

Our industry must be proactive and shift our mindset beyond social licence to the genuine and sustainable creation of value that benefits society.

This work is the bedrock from which we can grow our business. From carbon capture and storage research to indigenous peoples advocacy our actions will set us up for sustained shareholder returns.

These returns are also made possible by our Capital Allocation Framework.

We have institutionalised strict financial discipline and requirements through a transparent and consistent approach to capital allocation and other uses of cash. This applies to every decision we make.

Our Capital Allocation Framework transparently directs cash to its best use, be that development opportunities, the balance sheet or returns to shareholders.

Since 2016 we have:

• strengthened our balance sheet through a US$16 billion reduction in net debt;
• reinvested US$20 billion in development options;
• and importantly, returned more than US$25 billion to shareholders.

To secure the prosperity of our company we must optimise our present portfolio as well as maintain the right options for the future.

We operate in an uncertain world. Developments such as climate change and dramatic shifts in technology present both challenges and opportunities.

To make sure our portfolio remains resilient over the long term, as Peter described in our Capital Allocation Briefing last November, we regularly test our current assets and future options against many divergent scenarios and hypotheses that aim to predict how the world will look well into the future.

Our hypotheses examine the upside and downside risks to commodity markets under a range of extreme but plausible scenarios. This allows us to identify strategic options, develop action timeframes, and establish the capabilities we will require to outperform.

Decarbonisation, the electrification of transport, the future of work and food security are examples of strategic themes that we monitor.

While nobody can predict what will happen with absolute precision, I am confident BHP's portfolio can thrive under almost all possible outcomes in this changing world.

At this conference in 2016, I outlined our plans to grow value and returns. Since then, we increased volumes, reduced costs, and kept our people safer at work. We invested through the cycle and grew our exploration pipeline in petroleum and copper. These actions lifted return on capital by around 50 per cent.

We also completed the sale of our Onshore US assets for US$10.8 billion and returned the net proceeds to shareholders.

Despite these strong outcomes, there is more to do across all our major assets.

In Conventional Petroleum, strong operational performance and high-return development projects give us confidence, that in the medium-term, we can hold production decline to around 1.5 per cent, and unit costs below US$13 per barrel.

At Escondida, the Remote Operations Centre will unlock bottlenecks and lift throughput at our three concentrators so that, despite the decline in head grade, we expect to maintain medium-term copper output at an annual average of 1.2 million tonnes and at a cost of below US$1.15 per pound.

At Western Australia Iron Ore, we expect to reach an annualised run rate, by the end of this year, of 290 million tonnes. Through the development of South Flank, and the roll out of autonomous haulage, we expect to produce higher-quality volumes at below US$13 per tonne.

Finally, at Queensland Coal, through increased stripping productivity and blending strategies, we expect our medium-term annual production to grow to between 49 and 54 million tonnes of high-quality metallurgical coal, at a unit cost of US$57 to US$64 per tonne.

Now I will outline our plans for the future.

First, we will unlock the next wave of productivity through transformation and technology.

Our Transformation office, established last year, will help us simplify the way we work, take work away, lift the capability of our workforce and establish strategic and innovative partnerships.

We will empower our people to boldly seize opportunities amid the rapid pace of change. And together create a culture that could be impossible to replicate.

Our first 'innovation mine', located at Eastern Ridge in Western Australia tests new solutions and mining innovations, and develops workforce capability so that our people are ready to respond to the technological changes ahead. And when our trials are successful they're designed to be quickly replicated across our other operations.

The combination of these transformation and technology initiatives will create more stable and predictable operations and could unlock value worth tens of billions of dollars.

Secondly, the broad suite of options within our portfolio provide further ample choices to grow value.

In copper, we have debottlenecking and latent capacity opportunities in Escondida and Spence, the Brownfield Expansion option at Olympic Dam and the longer-term Resolution project in Arizona.

In Nickel, a commodity we will now retain in our portfolio, Nickel West offers numerous development options and potential enhancements to its resource position through exploration and processing innovation.

In Petroleum, we have close to 30 brownfield projects and seven major projects with strong internal rates of return.

We continue to study Jansen Stage one and finish the shafts to optimise returns and de-risk this multi-generational potash project - work that continues to go well. As our thinking around the project's initial scope has evolved, I acknowledge we over-invested to date. However, Jansen remains an attractive option for BHP given its strategic fit, risk-return metrics and the longer-term optionality the initial investment would create.

Our exploration programs also have the potential to generate significant value:

• 10 of our last 13 petroleum wells have been successful;
• the Oak Dam discovery south of Olympic Dam shows early signs of promise; and
• we have added significant petroleum interests in Mexico and Eastern Canada as well as interests in copper prospects in Ecuador and Quebec.

These options span a range of commodities and geographies, and if successful, will contribute to longer-term value growth and high returns.

As always, we will be guided by our Capital Allocation Framework, which means we will only invest in the best of these options. Combined with our focus on capital efficiency we expect annual capital and exploration expenditure to remain below US$8 billion in the 2020 financial year.

This slide shows some of these opportunities in terms of risk, returns and optionality. A world-class resources company should have projects in each of the four quadrants.

Our exploration pipeline largely sits in the top left quadrant. These higher-return, but higher-risk projects, have the potential to become the tier one assets of the future. Nickel West projects also sit in this quadrant. The scale of resource, cost curve position, and reliance on third party ore sources explains its higher-risk position. While its higher-return potential as a future growth option is linked to the expected growth in battery markets and the relative scarcity of quality nickel sulphide supply.

The top right quadrant contains higher-return, lower-risk projects like the South Flank iron ore replacement mine in Western Australia, which we expect to complete by 2021.

The bottom right quadrant comprises greenfield projects like Jansen. Most of our current assets started life in this quadrant. These projects tend to have lower operating costs and significant capital efficient opportunities for future growth.

On the other hand they also typically have a large initial capital cost, slower payback and possible impacts on the market which means we must be thoughtful, and cautious, about how we proceed.

Finally, the lower-return, higher-risk projects in the bottom left. It is important to have these options in our pipeline. They are low cost to hold and we can study them and reduce their risk profiles, or improve their returns over time to make them viable.

Earlier I spoke about our scenario analysis. These scenarios help us better assess our development options not only on an individual basis, but in the context of our diversified portfolio and investment decisions.

So in summary, BHP is well placed in the short, medium and longer term.

Through transformation initiatives and technology we will be safer, increase production, reduce costs and unlock value from our existing assets.

These transformation opportunities and our attractive pipeline of options which, if successful in the competition for your hard-earned cash, could unlock value in the many tens of billions of dollars.

Our plans will increase return on capital employed by the 2022 financial year to 20 per cent and generate value and returns for our shareholders well beyond.

We have:

• a resilient portfolio;
• a transformation agenda ready to deliver the next wave of productivity;
• a suite of options and ideas to create future value at the right time; and
• an institutionalised Capital Allocation Framework.

Regardless of how the world evolves BHP is set up for a strong future.