Behind the bumper dividend, a new BHP is emerging
Behind the stunning 2021-22 BHP profit and dividend is the emergence of a new era in the life of “The Big Australian”.
The BHP that is emerging from the bonanza of last year will place much greater emphasis on capital investments, with two of its three new major projects in Australia. And, as I will explain below, in my view there is no certainty that the new BHP will include OZ Minerals.
To underline the looming change in BHP we need to set out just what happened in 2021-22. Using numbers that include oil, which has been hived off, the company’s cash flow rose from $US27.23bn to $US32.20bn and the final dividends paid out rose from $US7.9bn to $US17.8bn. The company started the year with net debt of $US4.1bn but that was reduced to just $US333m and almost certainly the company’s recent cash flow means it now has no debt whatsoever.
BHP has said that its comfortable with debt of between $US5bn and $US15bn but in fact, given the state of the BHP balance sheet, if the returns from a project were high enough it could borrow much more. And it would almost certainly do so.
So, with 2021-22 behind it BHP is like a coiled spring looking for opportunities to be released. The company last year invested around $US7bn and now plans to lift that by 42 per cent to $10bn, and I suspect that if the opportunity arose it would go higher. And that $10bn doesn’t include any acquisitions such as OZ Minerals.
BHP, like many other companies, now realises that the giant automotive industry is going to switch to electrical vehicles at a much faster pace than previously thought, so demand for copper and nickel will explode. BHP proudly claims that it has the largest copper “endowment” of any company in the world. A large slab of the “endowment” is of course in Chile with Escondida. But the biggest single “endowment” is at Olympic Dam and at nearby Oak Dam.
In recent years the company has spent large sums trying to leach copper out of the Olympic Dam ore but failed to make it economic. It now plans to build a giant smelter next to its current smelter to extract copper, uranium, gold and other minerals from the giant Olympic Dam/Oak ore bodies using underground mining.
The plans have not yet been signed off by the board and require the usual approval processes, but it is a stunning switch in strategic thinking by BHP, which previously rejected duplicating the current smelter built by Western Mining many years ago.
The company says it has the “second-largest nickel sulphide endowment globally”. Nickel is going to be essential in batteries and there is a looming world shortage.
BHP is planning to substantially increase its nickel output from the nickel deposits in areas that were household names during the Poseidon nickel boom. It is as though the 1970s nickel boom was half a century too early.
The Olympic Dam smelter will probably cost in the vicinity of $US2bn to $US3bn, or roughly half the investment in the Canadian potash development.
BHP is also looking to speed up potash so as to get it to market faster.
In non-oil areas the company has not had a great success rate in exploration and now boldly claims that it will achieve growth “through exploration focused on copper and nickel”. Around the world small explorers are achieving better results than the giants so this is a bold claim by BHP.
OZ Minerals is clearly an excellent acquisition for BHP because it has great copper potential in both South Australia and WA. But I sense the culture of the two companies are different and it will be hard to gain agreement unless BHP is prepared to pay a price that is so good that OZ Minerals shareholders have no choice but to accept. The current offer is not at that level.
BHP has evolved into a high-performance company that looks at everything from a return basis. This is very different to the BHP of previous decades, which was about the increasing the ore reserves of the company.
OZ Minerals is more like the old BHP and has a culture where employees are incredibly frank about their love for the company. It created a cultural corporate island which will almost certainly extend to the board. In the end shareholders will decide but the bid will need to be high.
Looking forward to the current year, the BHP profit powerhouse — iron ore — achieved its stunning results on the basis of an iron ore price around the current market level and so, theoretically, if iron ore stays at the current price then BHP will repeat its 2021-22 revenue line. The company has warned that costs are rising around 6 per cent, led by raw materials and labour. Of course, if the iron ore price was to fall, say to $US80 a tonne, that would impact revenue sharply.
The company exported 290 million tonnes of iron ore and in the next few years will increase that to around 330 million tonnes but no drastic increase.
The Chinese want to diversify their supplies and are very anxious to develop the Simandou mine in Guinea, Africa. Rio Tinto is no certainty to be involved but that won’t stop the Chinese pushing forward. The Simandou rival to Australian iron ore will take many years to come into production and will operate at a much higher operational and environmental cost.
ROBERT GOTTLIEBSEN
BUSINESS COLUMNIST