BHP Group Limited
Q1 2013 Earnings Call Transcript

Published: 20 Feb 2013

[Marius J. Kloppers:]

Ladies and gentlemen, welcome to today's presentation of BHP Billiton's interim results for the December 2012 half year. I'm speaking to you from Sydney. Our Chief Financial Officer, Graham Kerr, joins us from London. We're also joined on the telephone line by other members of the management team. I'd like to thank you for accommodating a 1-hour delay that was required as a result of our announcement on CEO succession. I would like to personally congratulate Andrew Mackenzie on his election, and I welcome him to Sydney, where he joins me for today's presentation. I'll come back to Andrew's appointment in due course, but I would firstly like to focus on the strong results we've delivered in what has been a more challenging environment for the industry. Before we begin, I would like to point you to the disclaimer and remind you of its importance in relation to today's results. With regard to the format, I will give a general overview of performance. Graham will then review our financial results. I will then conclude by discussing commodity outlook, as well as our unchanged strategy, which has been the cornerstone of our outperformance for more than a decade. As we present results today, I'm sure you will notice the congruence between our operating performance and the primary focus areas of the group are -- as articulated. I'm proud to say that we are delivering on the commitments we've made. We've reported strong and predictable operating results, and our production guidance remains intact. We recognized a changed environment earlier than others in our industry. As a result, our usual focus on costs has been intensified over the last year on an -- and on annualized basis, we've already reduced controllable cash costs by $1.9 billion. Our project slate remains on schedule and budget. We've made good progress on the ongoing simplification of our portfolio, and we remain confident of the outlook for our business. This focused approach and our well-established and unchanged strategy ensures that BHP Billiton is very well positioned to continue to outperform its peer group. But let me begin, as I always do, by discussing one of our core charter values, sustainability. The basic premise of putting health and safety first, being environmentally responsible and providing support for the communities in which we operate is intrinsically tied to our license to operate. In this regard, our total recordable injury frequency rate for the December 2012 half year improved by further 2% from the already record-low level achieved in our 2012 financial year. And considering a slightly longer time horizon, our total recordable injury frequency rate over the last 5 years has declined by 38%. Regrettably, however, we suffered the tragic loss of 2 of our colleagues during the financial year. The impact of these losses on family, friends and colleagues is -- are immeasurable and only reinforces the continuing need to eliminate fatal risks in our business. Turning to our financial results, the first half of our 2013 financial year was characterized by slowing global growth and a heightened sense of economic uncertainty. Commodity markets were volatile and a substantial reduction in our realized prices, as well as a persistent strength in producer currencies, weighed heavily on profitability. Strong operating performance across our assets and a material reduction in cash cost were not sufficient to offset these price and currency imposts. More specifically, EBITDA declined by 29% to $13.2 billion, while underlying EBIT declined by 38% to $9.8 billion. Attributable profit declined by 58% to $4.2 billion, and that is inclusive of exceptional items totaling $1.4 billion. Net operating cash flow declined by 48% to $6.4 billion. Pleasingly, however, cash generated from operations before working capitals declined by a more modest 29%, a strong performance, particularly relative to profit variance or price driven profit variance, and this again, illustrates the strength of our portfolio and strategy, which emphasizes asset quality and diversification. Ongoing portfolio simplification realized significant value for shareholders, with transactions totaling $4.3 billion announced or completed during the period. Consistent with our disciplined approach, these transactions were priced at a substantial premium to what the value -- to the values ascribed to these assets by the market. Capital and exploration expenditure was according to plan at $12.2 billion, and our full year guidance is unchanged at $22 billion. Our 20 relatively low-risk, largely brownfield projects, remain on budget and on schedule, with the majority, as previously scheduled, to commence production before the end of our 2015 financial year. With gearing of 31% at the end of the December 2012 half year, the capital structure remains strong and within the parameters defined by our solid A credit rating. And today, we declared an interim dividend of $0.57 per share, extending the unbroken track record of our progressive dividend. I would now like to discuss our production results in a little bit more detail, which continue to meet or exceed previous guidance. The chart on this slide shows and clearly illustrates the strong and consistent performance of our operations in the December 2012 half year. At Escondida, copper and concentrate production increased by 70% as we transitioned to higher ore grade and as we completed major maintenance programs. We're confident that we will achieve our targeted 20% copper production increase at this asset this financial year, and confident that we will grow production to over 1.3 million tonnes in our 2015 financial year. In our petroleum business, liquids volumes increased by 4% during the period. Development drilling at Shenzi, the recommencement of production in our Gulf of Mexico joint interest operations, and a more than 100% increase in the liquids contribution of our Onshore U.S. business, offset natural field decline elsewhere. Our plan to increase total petroleum production to 240 million barrels of oil equivalent this financial year is unchanged. At Queensland Coal, metallurgical coal production had largely recovered to supply chain capacity by the end of the year -- by the end of the calendar year, I should say. The associated increase in productivity, broader economies of scale and closure of high-cost capacity is expected to deliver significant reduction in unit cost over the remainder of the financial year. Substantial effort is underway to ensure that this business returns to profitability even in the absence of higher prices. Our single largest earnings contributor, Western Australia Iron Ore, maintained its strong momentum, delivering a 12th consecutive December half year production record. The recent commissioning of our fifth car dumper at Port Hedland ensures that this business remains well positioned for future growth. In this regard, we now estimate that car dumper, ship loader and rail capacity to be about -- around 300 million tonnes per annum, and in due course, we look forward to approving what could be one of the lowest capital cost expansion opportunities in the industry as we add mining capacity to match that logistics chain. We are, therefore, on track to grow our copper equivalent production volumes at a compound annual growth rate of 10% this year and next year -- financial year, that is, in line with previous guidance. More broadly, record production at 5 operations, together with the release of latent capacity that I just referred to, as well as the decisive action that we've taken to arrest and then reverse cost inflation will continue to support margins and returns. While external factors, particularly price, were therefore less than supportive in the reporting period, we continue to deliver on those things we can control

[Graham Kerr:]

Think you, Marius. I'm pleased to be here today to present our results for the December 2012 half year. As Marius mentioned, this period has been characterized by significantly weaker commodity prices, which had affected the profitability of the industry. While our profits have declined as a result of these weaker prices, I hope that by drilling down into our financial results with you today, I can highlight the strong underlying performance of the company and the success we have had in managing those things that we control. In this section of the presentation, I would like to cover 4 major topics

[Marius J. Kloppers:]

Thank you, Graham. I'd now like to focus on the factors influencing commodities demand before discussing our unchanged strategy that uniquely positions us for ongoing rebalancing in commodity markets. As mentioned, the start of our 2013 financial year was characterized by global growth slowing and a heightened level of economic uncertainty. As a result, commodity markets were volatile. Since then, the American economy has made steady progress, partly driven by an improvement in the housing market, in combination with loose monetary policy. China's recovery is also in place. Consequently, the world seems set to benefit from a period of improving economic growth as highlighted on the top right-hand slide -- graph of this slide. From a commodities perspective, China, of course, continues to be the primary driver of underlying demand, and while many commentators were, perhaps, too bearish on the prospect for China sometime ago, during the reporting period, in particular citing rising inflation and the real estate bubble, our view China has remained largely unchanged throughout. We continue to believe that measured stimulus, rebalancing of the Chinese economy and the underlying trends of urbanization and industrialization will sustain the Chinese GDP growth rate at the government's target rate. However, just as I've said that many commentators have been too pessimistic on China in the recent past, we would caution those who now expect growth rates in China to rise significantly from this point onwards. Rather, we see infrastructure investment and fiscal policy as measures to be adjusted in the measured manner to underpin stable growth in China rather than cause a sharp acceleration in activity from here onwards. Furthermore, as we've articulated before, the ongoing broader rebalancing of the Chinese economy suggests that the resource intensity per unit of GDP will eventually consolidate at a fraction of GDP, not at a multiple of GDP. As a result, demand growth rates for many of our core products within China are expected to remain within a range of 2% to 4% per annum, as illustrated on the bottom part of this slide. And given those growth rates that we've expected, that are unchanged essentially from what we've articulated before, the differential supply response across the various commodities is likely to play an increasingly important role in price formation. For copper, a robust supply growth in the very near term is expected to result in a more balanced market despite numerous past project delays and curtailments. The longer-term outlook for copper price, however, continues to be underpinned by operating and capital cost pressure associated the rising strip ratios and declining grade at existing operations, as well as the scarcity of advanced, high-quality development opportunities. As such, the demand for new copper capacity, if supply is to meet demand, suggests that the price in the medium- to long-term will need to be supported at a level high enough to induce these lower grade, higher cost supplies. In iron ore, there is no apparent scarcity of high-quality resource. Rather, the barrier to entry relates to the large scale -- the substantial cost of developing, particularly greenfield capacity and the time frame. The rate of underlying growth is, therefore, particularly important as it governs the ability of low-cost producers to keep pace with demand. Over the last decade, high demand growth rates in China, associated with that steel-intensive phase of development, at times overwhelmed the capacity of the -- or the capability of the low-cost producers to expand. And instead, higher cost capacity was induced, sort of in an opportunistic manner. This led to a steepening of the global cost curve as schematically illustrated on the top right-hand side. This steepening of the cost curve and the addition of low-cost capacity since then has led to the accentuated price volatility as cost customer stocking cycles now have a more significant impact on price formation. Now given our belief in the continuing decline in steel intensity per unit of GDP growth, that we referred to previously, significant low-cost supply planned in Australia and Brazil, particularly in the second half of this year and beyond, will eventually meet and then exceed incremental Chinese demand. As this trend becomes increasingly established, high-cost supply will continue to be displaced off the top of the cost curve -- the cost curve will flatten and prices will tend to mean revert over time. The supply side equation is arguably even more important for metallurgical coal, given the relatively low demand growth rates of the traditional markets. And as you can see on this slide, the sharp rise in the price of metallurgical coal in 2011 induced a substantial production response from the traditionally higher cost swing supplies, primarily located in the United States, as we can see here. As a result, the market rebalanced and the price declined. And at today's level, the price appears to be well supported by the cost of Australian production which is, of course, increased quite dramatically given the strong Australian dollars and the very significant increase in Queensland royalty rates. Any sustained price increase beyond what we've got today, however, is likely to just draw U.S. supply back into the market. This suggests that in the absence of a very major supply disruption of some kind, the price of metallurgical coal is likely to be range-bound going forward. The longer term supply-demand fundamentals for aluminium, if we contrast it to what we've just discussed in copper, stand in stark contrast. Whereas 1 million tonnes of new copper capacity will be required each year, the aluminium market is forecast to remain in overcapacity throughout the forecast period. Whereas the next generation of copper mines are likely to be lower grade and higher copper -- sorry, operating and capital costs, actually, in contrast, Chinese aluminium capacity appears to be progressively moving down the global cost curve. The likelihood of a further flattening of the aluminium cost curve and in expectation that overcapacity will constrain the price on average to below the marginal cost of production to be quite impactful for producers, given the relatively capital-intensive nature of the aluminium industry, enhance our long-standing approach to de-prioritize these areas for investment. These differences in supply and demand fundamentals, as we look through the various commodities explain why it's so important for us to plan for the longer term, and why BHP places such value on both diversification and asset quality. Now talking about that strategy. Our diversified and high-quality asset portfolio is a function of our unique resource endowment, and I should point out again that, that endowment is largely placed within the OECD. On this slide, we've displayed our global operating footprint, the size of the various bubbles reflect the relative contribution of each asset, expressed here as copper equivalent units in our 2012 financial year. And the shade of the bubble represents the rate of production growth in that 2-year plan that we've outlined for you. In simple terms, blue denotes rapid growth. And what should be immediately apparent when looking at this slide is the dominant contribution of our major basins in 4 key commodities that are key to current production and future growth. And those are

[Paul Young:]

Marius, Paul Young from Deutsche Bank. A couple of questions, first one, is on costs. If I look at your cost reduction targets, to me it's all about reducing controllable, fixed costs, because variable costs are difficult to cut and unit costs are purely an outcome of cost control or cost-cutting and increasing asset utilization. So if I look at your fixed controllable cost base, which in FY '12 was around $20 billion, and majority of your fixed costs were in met coal, iron ore and copper, which are about $3.5 billion each...

[Marius J. Kloppers:]

That is correct.

[Paul Young:]

I just want know what programs you have in place to reduce that $3.5 billion for both -- for those 3 divisions, and can you quantify your targets? And second question is actually on growth and high-returning growth, because I noticed the bubble chart you put up there really is just projects in execution. I just want to understand the thinking in this -- probably Andrew, into the Q&A as well, is about a high-returning growth such as the Permian and Spence Hypogene, which on my numbers are 15%, 20% IRR plus, where do they fit in? So why aren't they achieving incremental dollars, and where do they fit in the future of the company? And they could be probably, represent all of the high-returning growth going forward.

[Marius J. Kloppers:]

Paul, let me first describe our program on how we address costs. So when I stood here last time, I explained to all of you how we prioritized our capital, and I remember spending a lot of time with Warren [ph] going through the details of a bottom up program on capital allocation. We're just entering into that part of our budgeting cycle again, and at the full year results, that's going to result in the capital budget. One of the things I've spoken about passionately is a very boring project -- topic, which is the systems to create cost transparency from the bottom up. See, you must understand that our process is perhaps that we're following for cost reductions, is perhaps different from our -- from what our peer group has described. It is not, and I repeat, not a top-down process. It is a bottom-up process, following from deep and detailed data that is available, and that flows up through the organization. We expressed a desire to do 2 things for you as we move forward. We expressed a copper-equivalent unit cost target and our stated objective was to arrest the cost increase and then to decline, and our stated objective was to keep our cash cost per unit of copper production at nominal U.S. dollar flat terms. Now if you go and do the numbers today, and you strip out the implementation cost that Graham has spoken about for those closure costs, you will see, which is not a large amount, you will have seen that we achieved about a 2.5% nominal U.S. dollar cost reduction target. It's perhaps 1 of 2 other things that, if you permit me, I just want to continue to dig in on cost because cost is the theme of the day. And I just want to say, we led that. We led that, we made that call first. Embedded in our cost numbers -- so if I step back and I look at our results, we came in at about 3% above consensus on underlying EBIT, which means that we came ahead of analyst average expectations for costs savings, because we're all working on the same price stick. What is not in that underlying EBIT number is that nearly $600 million of adverse DIE on the balance sheet that Graham said is once-off, $164 million of costs in iron ore, which is directly associated with the ramping up stuff, and then $270 million of restructuring costs. If I add all of those things and all of that actually are impacts that in a real underlying sense, I think we feel that we've delivered and we feel that we've delivered on cost targets that are measurable from our results, off a known base. However, that's only the start. The objective here was to arrest and then to decline. And there is no doubt that if you look at the -- for example, wage settlements in Chile. Chile is still coming off the investment peak in copper and wage settlements there were still very strong. What I think the management team's deep, deep transparent systems are going to deliver is very clear transparency on where we -- where we're going from here. We really wouldn't like to nominate a number that cannot be verified from a top line. And we really wouldn't like to put a big target out there. We'd like to stand up here in 6 months again and increase on the $2 billion number. I also want to note that our approach is not to include the noncontrollable costs in that target. I mean, energy and royalties, quite frankly, are just things that are -- yes, unit usage, a little bit, the other things are just not in our control. So we'd like -- we're going to come back here again and again, and I know I speak for Andrew as well, and focus on delivery, verifiable cost savings and we're going to move that on from where we are today. But I don't want to be drawn on more -- elaborating another dollar target. We want to continue to decrease, therefore from this point onwards, our unit cost per copper equivalent unit as expressed in U.S. dollars, which is the currency in which we do our books. In terms of growth, there is no change from what we said in the previous period. Clearly, the near-term cash generation started changing some 18 months ago. And you have seen, we made a significant adjustment in our forward options portfolio. Some of those options are very valuable options, but got pushed out over a 5-year period. We are long options, and given the gearing and given the cash flow in the corporation, we have no change guidance today on a 5% growth rate that we articulated forward in the past. That is unchanged. We did, however, also articulate that on balance, instead of approving new projects this year, and project approvals will come later, and that as part of our cash flow generation, we do want to pay some debt down on the balance sheet. Again, that remains unchanged. So I think that these options for growth, we are blessed to have options for growth, that substantially out -- exceed what we believe our cost of capital to be. They will keep, we're not going to overextend ourselves and we will do them later if time requires. For now, I think I don’t recollect the exact words that Graham used, but he said we don't give guidance at this point in the year because our budgeting cycle is not complete, but given the trends that we see in capital approvals and so on, we see lower CapEx expenditure next in our FY '14 than we've seen in FY '13. I'm sorry for the comprehensive answer, but I'm hoping that I covered off some of the questions that others wanted to ask as well. So if we can have the next question, please.

[Lyndon Fagan:]

It's Lyndon Fagan at JPMorgan. First question is on the U.S. onshore business. After you made the acquisitions, you outlined a plan of either $20 billion of CapEx, with some longer dated production targets. Right now all we're really being given is the Eagle Ford production target longer term. Just wondering if you can perhaps give us a bit more detail on the other assets and what level of CapEx is it, is it $4 billion a year, is it more?

[Marius J. Kloppers:]

Lyndon, let me just give you a little bit more in detail insight into our strategy than we shared in the presentation here today. How does Mike look at his petroleum business? He looks at one curve that is backward-dated, oil, and he looks at another curve that is in contango, gas. And so he concludes that what he wants to do is, he wants to produce the barrels in the commodity that is backward-dated as soon as possible in order to get the highest price for them, given that the market price is the best indication. And he wants to produce the barrels in the market that is in contango later on. And that's what resulted in the prioritization that we've seen. We reassess that over time, and if I look at where the contango and backwardation curves have looked and the well yields and the well productivities are going in that business, I think on balance without wanting to call this completely, Andrew is going to stand up here next time and tell you that we've continued to prioritize oil and we've continued to de-prioritize gas over the year -- over the next financial year. And again, I don't want to make an exact prediction of that because things will change between now and then, but that is what has happened. Which means that the activity rates that you're seeing at the moment is kind of the activity rates that at least for the foreseeable future, you should model, at that $4 billion or maybe a little bit more run rate. As to the Permian, which was another part of the question that Paul asked, we are still in appraisal there. It's looking good, there is some more appraisal to be done. We -- you've got a Chief Executive that is more qualified than I am to update you in the future on exactly what he's seeing there. But the way I look at it is that there's still some infrastructure missing there, there are still some appraisal to be done, and I should stress that in the 2 -- in the Permian and the Eagle Ford combined, we probably had a 100 wells, which at period end were drilled and completed, but not yet tied in. Which means that the business is really probably on balance, on target and on budget, but probably in terms of activities completed, I would say that, Mike, as usual, has probably done a little bit more than he set for himself as a target. There, I hope that helps. Craig?

[Craig Sainsbury:]

Craig Sainsbury from Goldman Sachs. Two questions. One is just on Jansen, that's sort of fallen off the bubble chart, that's probably the only mega project that you haven't yet totally walked away from, I think there's meant to be a board approval or board announcement on some side of that this year. I was wondering if you can give a bit of an update on where Jansen is sitting in the growth profile. And then second question is probably a bit more for Graham. You mentioned 53%, I think it was, dividend payout ratio for the half. I know you guys don't model on dividend payout ratio, it's a progressive dividend, but I was just wondering from a financial perspective, is there an upper end of that range where you start to get a little less comfortable from a sustainability standpoint? And is it a 60, 65 and is there a gray band there where you would start to say, "Look, that dividend payout is actually getting a little bit too high, we'd step back from it."

[Marius J. Kloppers:]

So I can confirm it's the next Chief Executive that will have the Jansen project, so there's no change in guidance from we won't approve it in this financial year, Craig. We like the product. We like the country. We like Saskatchewan as a place to do business. The project continues to track tremendously well. I'm sure that Tim and Andrew, in due course, will update you on our shaft-sinking activities there, which -- where the shaft borers continue to look very good. We continue to be very optimistic that, that project, even in the first phase, is going to clear the financial hurdles and the risk hurdles that we've set. So you are correct in assessing that the teams are working tirelessly there to do that, to do that project. However, they've been handed down a pretty strenuous set of metrics to achieve. And before they achieve those, we're not going to approve it. And it's certainly not within this year. But we do think that, that product is an important part for us in the diversified portfolio in due course. On dividend payout ratio, you're right, we don't model it like that. Instead, what we look at is sort of the at long run prices, and at the trend growth of the portfolio size, what the cash generation for the assets could be. Clearly, we understand that there comes a point where a cent of dividend paid makes us postpone the types of projects that Paul has spoken about that. And I think that you, from the dividend announcement today, you are correctly assuming that we're saying, "Well, perhaps we've just got to see where everything is going before we take another step here." Because we have a finite appetite for CapEx, and that finite appetite next year is lower than the appetite this year. We would, on balance, like to pay some of the debt back over time. And obviously, the dividend decision coming to that as well. Let me perhaps just go to the lines for just 1 or 2 questions, and then I will come back here. Operator, can I have the first question please?

[Operator:]

Your first question comes from the line of Clarke Wilkins from Citi.

[Clarke Wilkins:]

Marius, just a couple of questions sort of further to your comments on the market. That sort of main reversion in the iron ore prices, do you think that has changed at all in terms of the time frame we take to get there, given the volatility we've seen in iron ore and also some of the projects being pushed out? Also, just on the comment on aluminium, obviously, quite various comments on the markets. In terms of maintaining the aluminium assets within the company, it clearly doesn't fit with those comments, so what sort of options would a divestment of aluminium sort of take? Would you look at in-specie or an IPO of those assets to sort of get them out of the company?

[Marius J. Kloppers:]

Our view on iron ore probably hasn't changed that much over the last 18 months or so. We saw the destocking cycle in China for exactly -- I think I'm on the record as just saying the end of the destocking cycle will come. However, we have indicated that we think that the absolute global iron ore market starts declining in around 2025 or so in absolute size and continues to decline for a significant period. In terms of -- so no change in that. We do believe in mean reversion, our long-term prices take that into account. We haven't materially updated either the long-run addition of capacity, nor have we made any changes as a result of remodeling to the long-run demand. We more or less where we were 6 months ago, and 6 months ago we were more or less where we were 12 months ago. But a little bit shorter term, order of magnitude, I think, in this year, our expectations are -- and we don't want to make any forecast, is that they will be, from this level onwards, quite a substantial increase in steelmaking capacity in China over the next 6 months. But overall, across the year and across future years, we think that the steel demand growth rate will be at that sort of 0.5 of GDP in China that we've articulated to you earlier. That means order of magnitude, there's maybe -- I don't know, 60 million tonnes of incremental iron ore required on that trend growth. And again, there'll be a difference between the front and back ends of the year. And there's 100 million tonnes of capacity in iron ore that is coming on, and pretty definitively coming on seeing who's building it, who's supplying it and so on. These are projects that are well advanced. So I think that our base outlook is basically the same for the iron ore business as the market, the now efficient -- or reasonably efficient market tells us that we will have higher prices nearby and the price decline following that, because this is a non-storable commodity and therefore volume and -- there's no inter-temporal arbitrage here. So that's a more or less where we are. In terms of the aluminium assets. For us, value is paramount. We probably, at any given moment in time, worked a dozen transactions. Some of them go on for years, some of them complete very quickly. I wouldn't like to call it on aluminium assets, I think, suffice it to say, that they are not call for new capital addition, but I'd be a foolish CEO if we just hoof assets out of the portfolio at whatever price the market will bear. I mean, you've seen us work some assets for a long time, and I think that that's what we will do in those assets and other assets that we may be looking at. If I can have the next question, please. Operator can I have the next question, please.

[Operator:]

Your next question comes from the line of Per Gullberg from Churchill Capital.

[Per Gullberg:]

I was wondering if you could perhaps comment a bit further on the capital management, following on from that previous question on dividends. And at this point in time, how do you look at the decision on whether to return cash to shareholders via buybacks as opposed to dividends. Do you feel that you have the capacity to launch a new buyback program if you chose to do so? Or should shareholders rather expect to receive distributions via dividends in the short to midterm?

[Marius J. Kloppers:]

Firstly, I would say that we've been at pains to stress in the last period, and I want to stress this period, that our capital priorities are unchanged. Invest in our business, maintain the balance sheet, grow the progressive dividend, return surplus cash. That has always been our priority, and that is going to continue to be our priority. We reprioritized our CapEx, we're going to reprioritize it again over the next couple of months. I've indicated that the second priority, which is to maintain the strong balance sheet, will probably receive a little bit more focus as we make those project decisions. So if you put those together and you add the progressive dividend in there, I don't think that we should expect, over the next short to medium term that there is the capacity available for additional buybacks. And then we get to the question of how do we return capital if there is surplus cash available. There are some investors that would like to see a dividend, and there are other investors that would like to see a buyback. Seeing that as equivalent. Mandates differ. Some funds cannot sell into a buyback and therefore would like a dividend. On balance, the value-maximizing equation for us, given per the peculiarities of the Australian franking credits system, which is available only to Australian taxpayers, but can be utilized in a buyback in a way that it benefits all shareholders. On balance, our bias is towards that. And again, if you call our Investor Relations people, they'd be very happy to take you through the mechanics of that. But it's largely a point that's probably a little bit moot between now and the next period. Let me come back to Melbourne and take another couple of questions here, then I'll loop back to the phones again.

[Paul McTaggart:]

Marius, it's Paul McTaggart from Credit Suisse. We talked a little about aluminium and whether it should or shouldn't be in the portfolio. I just want to get a sense, please, of how you're thinking about bauxite. We talked earlier about -- you talked about China explaining aluminium production. Obviously, there's a potential that Indonesia may not export bauxite, how does the company think about that and does that impact on your view on how the value of aluminum assets plus alumina might change?

[Marius J. Kloppers:]

Paul, I think your best guidance is what Graham said today in his speech, and he said we have great foresight on aluminium. We wish we had as much foresight on alumina, and one should never -- the retrospectroscope is a remarkably effective instrument. But I did pull out some time ago, an e-mail that I wrote to our aluminium team long before I became CEO, more than 10 years ago now. And it basically said, through decreasing capital costs, things that didn't -- that aren't considered as resource in China will become resource which, in hindsight, is exactly what happened in the alumina business. Now personal view, perhaps not a company view, I do think that we've probably reached some sort of an end point in that process, or we're perhaps a little bit closer to an end point in that process than we are in aluminium. In aluminium, the march goes on. In alumina, maybe the capital cost reductions that could have been made have been made. And there's probably on balance a little bit of upside on the pressure, as a result of those exact factors that you've got. Is that enough to change our view on alumina? No. Are you going to see us invest in alumina? No. Are we, on balance, set for a future with those product -- that product becomes a smaller proportion of the portfolio over time? Yes. So no change there.

[Phillip Chippindale:]

Marius, Phil Chippendale from CIMB. A couple of questions, firstly, you referred to a willingness to pay down some debt over time. I think the gearing level at the moment is around 31%. Can you sort of guide us to where you view an appropriate level of gearing for the company? That's my first question. Second question on met coal. You highlighted in the presentation that you believe that met coal prices over the near term are range bound. Can you just make a comment as to what extent your -- if I can put it as cooling towards the met coal business is based on your outlook for the price versus your own cost structure?

[Marius J. Kloppers:]

Sorry, Phil, my brain goes -- I wrote down the note here that I can't -- what was the first part of it?

[Phillip Chippindale:]

Gearing.

[Marius J. Kloppers:]

So our gearing is within the parameters. We always say strong A, and if you run our beta through a conventional model, you'll find that we're very comfortable. However, we've had volatile times and I think while the world is on balance poured a lot more money into equities, the reality is that the underlying situation in the world has probably not changed as much as the equity markets reflect. I think that our comments on balance paying down some debt, and I don't want to sort of say we're going to stop investing and pay down all of the debt because we're comfortable with the gearing. But on balance, we probably want to carry a few more options, and one option that you carry is balance sheet capacity. So I wouldn't say that it's from a point of discomfort, but it's more from a point of prudence, given what volatility we've seen. On met coal, last period in the --- particularly in the one-on-ones, we said that met coal is the product where we've had the greatest strategic reappraisal of where that product is heading. Let me just recap. We did a longer-term met coal forecast than we historically had and extended our model, maybe 18 months ago, 2 years ago, to extend to 2040, where previously our models had largely gone to 2025. Met coal curve basically looks the same as the iron ore curve in terms of overall demand. It flattens out in 2025 or 2030, around there. The met coal curve stays flat. So it doesn't decline like iron ore, but it tops out and then is flat. And getting there, we've got about -- from memory again, please don't quote me, but I can supply the exact number if needs be because we shared that before, about a 1% rate of met coal growth over the period until it gets to the plateau. That is not a high growth rate. So the combination of changes in our model for steel intensity in India and so on, and so on, the longer-term forecasting meant that met coal you were in a window, the same as you are in iron ore, which then biases us not to new geographies and new places, but really optimizing the backyard. And so Hubie and Steve Dumble, and all of the other guys are doing exactly the same as Jimmy out West which is to say, "How do I not build new things but get more out of the existing structure?" That's a change. The second huge change is that the royalty structures had been punitive in Australia, and punitive. That together with the higher exchange rate has moved the overall Australian met coal business into a different place on the cost curve. That changes your investment behavior and certainly, as we do our bottom up pecking order changes the pecking order where those products go. The third element is that the U.S. exports have become more competitive, the same way the Australia exports have become less competitive, the U.S. exports have become more competitive, and that means that the cap comes on in a different place. You add those 3 things together, and we've seen that -- probably, the only real strategic reappraisal of a business over the last 12 months in that business. So I hope that answers your question. Let's please take one more question here, and then I'll try the phones again. And somebody must just indicate to me when I've got to stop, please. Is there a next question here? Sorry, from the phones, operator?

[Operator:]

Your next question comes from the line of Ephrem Ravi from Barclays.

[Ephrem Ravi:]

Just a quick question on the timing of the divestments of your assets. The outlook for nickel is not getting any better at least according to us, because of the RKEFs and aluminium, as you mentioned, the Chinese are going down the cost curve. The longer you wait, the more difficult it gets to kind of get a fair price for the assets. Is there any timeline that you've set for these divestments, just so that you can clean up your portfolio and look forward?

[Marius J. Kloppers:]

No. We don't have a timeline. Our experience is that assets that are sold in distress or in haste, you often repent at your leisure, Ephrem. And I think it's not only the price prognosis, and in nickel I suspect we won't be making big changes to our price protocol this year. There are also things like operational results and expiration results in the business to take into account when maximizing value, and the nickel business has actually done a great job of both exploration results, as well as reducing cost. So that clearly -- not that we want to invest fresh capital in that business, but which changes our value attribution to that business to the positive. If I can have -- I've got a signal here that it's time. My apologies that it's the end of our session. Andrew, do you want to make a few comments?

[Andrew Mackenzie:]

Okay. Thanks, Marius. I'm just going to make a few remarks. Some of them I covered off earlier in the media briefing we did about my appointment. Look, it's great to see so many familiar faces, so we're obviously -- we've already gotten to know each other quite well, I'm going to get to know each other a lot better, I'm sure. I'm obviously extremely honored by the appointment. BHP Billiton is an enormous and truly great company, so it does humble me greatly. Marius referred to the fact that he persuaded me to join the company about 5 years ago and since then, of course, I've had a huge experience, the great pleasure and privilege working with him, the board, the top team and thousands of talented employees across BHP Billiton. And Marius has prepared me, I believe, exceptionally well for the possibility that I might take over from him. Just a tribute to Marius, we spent a bit more time on the press conference. I mean, I strongly believe, as a great CEO, he has left the company in much better shape than he found it, which is a phenomenal platform on which I can build. And you've heard a bit more about that in the results today. I mean, some of the things that I particularly have a passion for, because of my background, I will say more about that in a moment, we've built real momentum around issues of cost control and capital discipline. And as some of you know, I spent quite a bit of time in the chemicals industry, where we rarely see the kind of margins that occasionally visits parts of the resources industry, and that's where I honed many of my skills. So I'm extremely keen, Paul and others, to your comments to really continue to build on that momentum as I go forward. Now of course, the strength of that platform means that there's a lot of things that I'm not going to change, I mean, we're very committed to -- I am, to the strategy it served us extremely well, our shareholders well, as well. And as Marius introduced his remarks, we will maintain this undying focus on improving the health and safety of our employees. I mean, what I will do in building on this momentum is really provide an even sharper focus in how we execute against that strategy and extend our pressure on costs and our commitment to real capital discipline to drive us or keep us, in many cases, at the bottom of cost per mined tonne, and at the upper ranges of capital productivity. And there, of course, I am committed to extending Marius', as he reported through the results, fantastic track record of sector leading the terms to shareholders. I mean, a couple of you asked questions about some of the cost issues and targets and clearly, I'm not going to say too much today. I think the only thing that I would add to Marius' comments about -- track us, and we will give you a lot of transparency to track us. And this is probably just the beginning of things that we're going to do. I and the team have lots of new ideas. I mean, the one thing we perhaps didn't mention in our bottom-up approach is the importance of forensic benchmarking. The systems that Marius has introduced allows us to be extremely detailed in finding the best-in-class performance in our company and therefore, inducing, causing and inspiring the people who work for us to move their performance to the best-in-class of the company and therefore, move the mean of the company to best-in-class. And that's not something that requires any new technology or anything like that, it's just about the motivation and the leadership to get there, and you can count on me applying that. And of course, we'll take a lot of that benchmarking well beyond the boundaries of our company into many other competitors and so on, where we can get access to it. And that's probably particularly applicable in the areas of capital, where perhaps unlike some of the operations piece, we do have the think about ways in which we can pull through new technology and change the way for the better in terms of performance that we run our business. The company is unquestionably one of the world's great resources companies. We are, as you all know, the world's biggest mining company. We have, as Marius referred to, the license to operate some of the best ore bodies in the world, some of the best opportunities in oil and gas. So that gives us, if you like, a critical role on a sort of broader stage, if I might, in ensuring that the world has the supplies of the basic commodities it needs to grow, both in terms of its served population and in wealth. And Marius, through his time, has made a very successful contribution that way through applying some of the leading edge management techniques, the systems that he referred to and indeed, technology to make sure that, that supply that the world needs often for peaceful and harmonious reasons is there, and I fully intend to continue that success. We said a little bit more about the process itself. So I mean, it's obviously perhaps a little bit biased of me to say it was a great process, given that I kind of liked the results. But one of the really nice things about it is that Marius is not rushing away. As he said, he's committed to raise the bar relative to Chip, to work with me. He's going to spend the next 2.5, 3 months in the job where I can apply, get up to speed. And I'm going to take the opportunity very seriously, it's a great luxury. I mean, I will pay tribute to you. I mean, I've had a lot of opportunities over the last year to talk to many of you collectively and individually. You've given me a lot of good ideas, I've listened quite hard and some of them are built into my thoughts for the future, and some of them are yet to come. But I want to carry on listening for just a little bit longer, until I sit in the seat. We'll meet one-on-one, and we'll meet and inquire and deliberate, and really try to refine my ideas, of course. With my background experience, I've already got quite a lot of thoughts. Most of them are extensions, but I think they will benefit through further airing, and particularly with you and obviously many of our shareholders and owners. And I'm looking forward to a similar dialogue with other important stakeholders. Obviously, in a job like this, we've talked about over 100,000 people working for the company. As many of you know, you get a meet a lot of them when you go on our site tours and on so, they're incredibly talented and it's certainly a real privilege that I get to lead them, to inspire them and push them along this direction of productivity, both in the operational realm and the capital realm. But we have a broader role to play that I described already about supply, but also to ensuring that we really are a force for good in all the communities in which we operate. I guess, I will see a lot more of you guys because I'm going to move to Melbourne pretty sharply. I kind of made a comment that it's sort of probably a little bit insensitive here in Sydney to say that my wife, Liz, and I are really pleased that Melbourne has just been voted the most livable city in the world, but we completely understand within our family the tension between great cities that are next to one another. I'm from Glasgow, my wife is from Edinburgh, and I tend to think Glasgow is more Sydney, and Edinburgh is more Melbourne. So even though I'll be kind of Melbourne-based, I will still have an interest in sticking up for Sydney and getting to know the city even better as well. I mean, this is a fabulous opportunity for me. This is one of the world's great companies and I want to keep it that way and build on that, and make sure it's appreciated as such because I know you are, and I will be to, down to the hard numbers, so there's a lot of benefits that flow from that, I think, in a global sense, but also I think to our home here in Australia. There's no other job I'd rather do, so I'm really looking forward to the dialogue that's coming up that I'm going to have with you so that we make sure that we extend Marius' track record and run the company with ever-increasing attention to excellence. So thank you, and thank you for listening to us today and I look forward to it.

[Marius J. Kloppers:]

Thanks, Andrew. Andrew and I plan on spending a substantial chunk of our shift with shareholders over the next period as I hand over. So we, obviously, are going to run into a lot of you around the world and so on. So with that, I'd like to close the session. Thank you again for being with us this morning. Thank you very much.