Oil yes, copper, yes, gas, a yes, nickel a yes; coal and iron ore are right and lithium, well there’s quite a lot of that around the world and especially in Australia, so no real interest.
According to a strategy briefing, yesterday from BHP Chief Financial Officer, Peter Beaven oil will remain an attractive commodity for “several decades” to come despite the swing to electric vehicles.
The global resources giant is also keen to add more nickel sulphide resources to its portfolio, chief financial officer, Peter Beaven suggested at an investor presentation on Wednesday.
But ruled out were any more interest in iron ore or coal, apart from wringing more production from existing operations.
BHP shares rose 0.3% to $38.70.
BHP stressed in its briefing that business risks associated with carbon-exposed commodities such as oil and coal were “offset by upside to copper and nickel”.
And even though BHP is continuing to spend money on its Jansen potash project in Canada, its future remains unclear with Mr. Beaven pointing out that it still has to pass through the company’s capital and return measures. In other words, it could easily be abandoned.
Last week it reconfirmed to the market that it was keeping its Nickel West business and is now looking to grow it.
“Our portfolio is in great shape today,” Mr. Beaven said in the briefing. “Through a series of well-timed divestments and the demerger of South32, we have simplified our business to create a focussed portfolio of attractive commodities and high-quality assets.”
And there were “great new opportunities” coming up, he said. “So we need more options in the commodities that we think will be most attractive in the long run.”
Here’s part of his address to the strategy conference:
We can, with a degree of conviction, say that adding options in copper and nickel sulphides (as opposed to laterites) are likely to be a sound investment. Demand will grow and, at the same time, new supply sources will be hard to discover and permit, and will be more expensive to develop. Grade decline is an inherent feature of the existing mines so that just maintaining existing production capacity is a challenge.
While demand for batteries will drive lithium and, to a lesser extent, cobalt demand, we also believe that abundant supply of the former, and substitution of the latter, reduce the attractiveness of these commodities for us.
Steel production growth is expected to remain marginal, and increased recycling and long term slower growth in infrastructure will challenge even these low possible growth rates. Our iron ore and metallurgical coal assets, being low cost, will likely continue to offer attractive margins and returns. But cost curves are also likely to flatten compared to today, and the end markets will remain concentrated on China (although less so for metallurgical coal).
Energy demand will rise as populations grow and living standards increase.
Hydrocarbons demand is expected to be tempered by increased renewables in the energy mix. Thermal coal should remain a large market – but over time we expect it to plateau and then decline, as headwinds strengthen.
Field decline in oil will ensure that new capacity will be required, notwithstanding demand destruction due to EVs. New discovery trends are not strong. It is likely that attractive rent will continue to be available for well-placed assets.
Clearly, there is a growing market for gas in the medium term. But there are abundant new supply options and a possibility that gas is bypassed as a transitional fuel to renewable energy in emerging markets in the longer term.
The world will consume more food and will demand higher quality. Competition for land is intensifying. And mitigating historical unsustainable land and water use in certain regions will be a challenge.
Demand for potash should continue to grow in line with established historic trends. However, there is today material existing latent potash capacity. We expect this existing latent capacity will be utilised by the middle of next decade given this demand growth. This is likely to cap prices in the near term. Thereafter, new greenfields projects will be required.
It is vital, therefore, that we always have options in different quadrants of this matrix. An unbalanced portfolio overweight with long-term options will penalise near to medium-term returns to shareholders. While a portfolio with only near-term, low-risk options, will jeopardise the long-term value and dividend growth.
So, assuming the projects pass the Capital Allocation Framework tests, strategically our options make sense.
Copper via Olympic Dam expansions, Resolution, Ecuador or Oak Dam; Finding and developing more nickel resource in Western Australia; Developing oil projects in the US and greater Gulf of Mexico, and Canada and investing in gas close to ullage in existing downstream LNG facilities, as it can provide a relatively quick payback.
We have options in copper and oil, but we need more. And we are interested in adding more nickel sulphide resource to our portfolio. So we should continue to add exploration options in these areas.
We do not need to do M&A. But we never discount it as a way to acquire great resource bases, especially early in the life of a project when the optionality is not necessarily fully understood or valued.
We are unlikely to add significant new capacity in iron ore or metallurgical coal beyond productivity tonnes. We should squeeze the maximum value out of the existing invested capital. 11
Our energy coal exposure is just 3 percent of our asset base. But it is made up of two very high-quality mines which generate high margins. Our focus will be on maximising value to shareholders, whether we are long term owners or not.
Jansen makes sense on a strategic level. It creates a high-margin, long-life asset, with multiple, basin-wide, expansion opportunities. But as existing excess supply capacity will only be utilised by the middle of next decade, so the first production from Jansen could only arrive in that time frame. The end markets represent significant diversification from current exposures.
But this is a large investment and the first stage has to pass the risk-return hurdles in the Capital Allocation Framework. And that has not yet happened.
As always, we will be guided by our Capital Allocation Framework. It demands that investments in these projects will always be compared with cash returns to shareholders.
We will not invest in markets that do not require additional capacity. But we must be prepared to invest counter-cyclically.
We may conclude that we like the commodity and the resource characteristics, but the individual project does not pass the Capital Allocation Framework test.
So it is both our strategy and our Capital Allocation Framework that govern what we do.
