At the Bank of America Global Metals, Mining and Steel Conference earlier this week, BHP Group Ltd. (BHP, Financial) CEO Mike Henry presented an update on the world’s largest mining company’s strategy.
Henry discussed the favorable macroeconomic drivers of growth in BHP’s business, emphasizing that China is expected to play a stabilizing role in global economic growth and commodities demand in the near term, along with India, contributing approximately half of all global economic growth in the current year. He also noted that consensus forecasts for 2023 have been revised upward, indicating a growing agreement on China's positive outlook.
As such BHP anticipates the second half of the year will be better than the first, particularly for construction and the steel value chain.
Macro tailwinds
Henry expressed confidence in China's economic prospects after visiting the country for the first-time post-pandemic. He highlighted the upturn in leading indicators of resource-intensive activity and the positive conversations BHP's management had with partners in China, which boosted their confidence.
Looking ahead to the long term, he remains optimistic, noting the global economy is projected to be 2.5 times larger by 2050, with China expected to double in size and India anticipated to undergo a four-fold expansion, making significant contributions to this growth. In terms of capital investment, which is the most resource-intensive segment of the economy, China is expected to drive significant change, given its large base, while India is also expected to experience growth.
Henry also spoke about BHP’s work in assessing the potential physical impacts of climate change worldwide, suggesting the global economy may become even more capital intensive in the future. As such, the company predicts increased capital stock turnover and a greater emphasis on defensive investments to mitigate climate risks. The CEO emphasized that substantial infrastructure will be necessary to support decarbonization efforts.
Considering population trends, Henry said the global population is expected to increase by around 25% by 2050, with the urban population projected to grow from 4.4 billion to 6.6 billion. He highlighted the implications of this growth, including increased incomes, consumption patterns and dietary changes, as well as the resulting demand for housing, commercial floor space, transportation and logistics infrastructure and power and utilities. These factors are expected to drive higher demand for the products BHP produces.
The decarbonization megatrend
Henry went on to say the megatrend of decarbonization is likely to further amplify demand for BHP’s commodities. Combined with the challenges of bringing new supply online, this positive outlook indicates a favorable future for the markets it specializes in.
He highlighted the efforts made by BHP in recent years to create a portfolio consisting of best-in-class assets in commodities that offer potential in a rapidly decarbonizing world.
Under the Paris agreement 1.5-degree scenario, BHP anticipates a nearly twofold increase in global steel demand, mined copper demand and potash fertilizer demand as well as a fourfold increase in primary nickel demand over the next three decades compared to the previous 30 years. Important scenarios presented by organizations such as the UN's Intergovernmental Panel on Climate Change and the International Energy Agency affirm the need for a substantial increase in the supply of metals to support a successful energy transition.
Mining supply issues
The CEO then raised a pertinent question regarding the origin, timing and cost of this increased supply. Using copper as an example, BHP believes the current level of capital being invested in the industry falls short of expected demand. According to BHP’s estimations based on a plausible upside case within the 1.5-degree scenario, the mining industry may require approximately a quarter of a trillion dollars in growth capital by the end of the decade. However, currently committed projects only amount to around $40 billion to $50 billion over the same period, revealing a significant shortfall.
Henry acknowledged higher metal prices will incentivize further investment and increase the supply. However, he emphasized this process takes time. He said BHP believes governments possess the necessary tools to expedite the introduction of fresh supply of critical metals to ensure economic viability of the world’s decarbonization path. Governments can streamline permitting processes, making them faster and more predictable. He also used the platform to call for maintaining stable fiscal settings. Any instability in these settings increases investment risk, raises required returns, prolongs project timelines and even jeopardizes their realization, ultimately leading to costlier supply.
Another challenge faced by the mining industry was also addressed, which is the limited number of economically viable discoveries. Henry noted the scale of new copper discoveries has declined since the 1990s, when the South American copper belt was flourishing. Many of the major operational assets that currently contribute to the industry's supply were discovered several decades ago, making them mature and susceptible to grade decline. Consequently, a significant amount of capital will be required in the coming decade just to maintain the current production levels.
Even though new copper mineralization continues to be discovered, Henry noted the occurrence of large economically viable deposits is becoming increasingly rare. Greenfield discoveries tend to be deeper and more complex, while technically attractive deposits with higher grades and closer proximity to the surface are often found in challenging operating jurisdictions. As a result, greenfield projects are becoming more difficult to find and develop, posing technical challenges, increased costs, higher risks and longer development timelines.
Henry then said brownfield expansions or projects near existing operations can face obstacles in terms of permitting, opposition from local stakeholders, rising costs in the current inflationary and labor market climate and an increased likelihood of project delays and budget overruns. The mining industry has experienced multiple instances of projects exceeding their timelines and budgets in recent years, while operational disruptions have roughly doubled compared to the late 2010s.
BHP's strategy
BHP's strategy is designed to overcome these challenges. Henry highlighted the company's unique portfolio of leading basin plays, supported by its advanced operating system and robust capital allocation framework, which provide a competitive advantage. BHP's incumbent position and large resource base, including the world's largest endowment of copper and the second-largest nickel sulfide resource, along with the development of a significant potash resource in Saskatchewan, Canada, also contributes to its advantage. Additionally, BHP possesses significant holdings of iron ore and higher-quality metallurgical coal, further enhancing its propects.
Commodity producers are simple stocks to understand fundamentally. Revenue is price multiplied by volume. The forecast for the prices of BHP’s commodities is rather robust in the long term. So what about volume? Henry explained that BHP's primary focus for growth is enhancing productivity from its existing assets, which represent the largest value opportunity within its control (as commodity prices are not in the company's control, though it has positioned the portfolio to be “future facing”).
At the same time, BHP is exploring new avenues for resource base expansion and production growth. The metals exploration team has recently achieved technical success with discoveries of new copper mineralization at Oak Dam in Australia and, more recently, at Ocelot in Arizona.
Regarding greenfield exploration, Henry says BHP continues to search in highly prospective geological environments worldwide, leveraging innovation to gain new insights. He highlighted the company's Xplor and Ventures teams, which are establishing partnerships with companies across various jurisdictions and technologies, demonstrating progress and activity in innovation.
Value over volume
Henry also reminded the audience that BHP is already a significant producer of many mined commodities. While the company is always looking for ways to expand production, its focus is not on growth at any cost. He was clear that BHP will only pursue growth opportunities where it believes long-term value can be delivered to shareholders.
BHP recently finalized the acquisition of OZ Minerals and has expedited studies on various brownfield projects across its assets. This effort aims to gain a better understanding of the available options for future development.
Looking ahead to 2030, Henry said BHP possesses several organic opportunities that could contribute to meaningful volume growth, even after considering the challenges of mine depletion and grade decline.
In addition to these near-term prospects, the company has a significant pipeline of long-term options actively under consideration. These options hold the potential for substantial growth and additional upside for the Australian company.
Henry proudly highlighted BHP's successful track record in delivering projects on time and within budget, stressing again that productivity is a major focus as it represents the most significant opportunity for value growth. He also emphasized the importance of the BHP Operating System in achieving this objective.
BHP's big growth projects: Iron ore and potash
Two specific growth options in the near term that BHP is currently advancing are focused on iron ore and potash. Henry spoke about BHP's Western Australia iron ore business, which distinguishes the company as the lowest-cost global producer of iron ore. The business was initially designed with a capacity of 240 million tonnes per annum and is currently producing approximately 280 million to 290 million tonnes per year. He attributed this achievement to the strong focus on productivity improvements and incremental debottlenecking across that business. BHP aims to further increase production to 300 million tonnes per annum over the medium term through initiatives such as further debottlenecking port and rail systems, implementing autonomous haulage trucks and implementing other ongoing productivity enhancements.
Regarding potash, Henry said he is excited about the growth projects in BHP's pipeline. The long-term market fundamentals for potash are compelling and have improved since the sanctioning of BHP’s Jansen Stage 1. The CEO reported that Jansen Stage 1 remains on track and on budget, with first production expected to be accelerated from 2027 to late 2026. Blasting and excavation efforts have already commenced at the bottom of the shaft, so BHP looks forward to a productive summer construction season, focusing on civil and mechanical construction activities both on the surface and underground.
Henry said the studies on Jansen Stage 2 have been accelerated, so an investment decision for the second stage is expected to be considered within the 2024 financial year. He said all major permits for Stage 2 are in place, and the necessary port capacity is available. Although the studies are not yet complete, the capital intensity for Stage 2 is projected to be between $1,000 to $1,200 per tonne, which is lower than Stage 1.
If BHP decides to proceed with Stage 2, it will add an additional 4 million tonnes per annum of potash capacity. The estimated first production for Stage 2 is anticipated to be around the 2029 financial year, coinciding with the completion of the ramp-up for Jansen Stage 1. BHP envisions a timeline where the ramp-up for Stage 1 begins in 2026 and is followed by the implementation of Stage 2.
Copper
On May 2, BHP successfully completed the acquisition of OZ Minerals, a development that presents an opportunity to unlock synergies and further expand copper and nickel production.
By combining assets such as Olympic Dam, Carrapateena, Prominent Hill and Oak Dam, BHP aims to create a tier one copper province in South Australia. The company believes having operations near each other, as demonstrated by the Western Australia iron ore and BHP Mitsubishi Alliance, also known as BMA, operations, brings significant benefits. These advantages include the utilization of shared infrastructure and relationships to enhance productivity and foster long-term growth.
BHP's focus is on building scale and optionality across this newly formed province. While the acquisition of OZ Minerals immediately added about 120,000 tonnes of copper production, it also brings the potential for further growth in copper and nickel production both in the near and longer term. Studies are currently underway to assess the next steps for Olympic Dam, as the integration of OZ's assets progresses and the exploration program at Oak Dam continues.
The company plans to provide more detailed information in the future regarding the growth prospects in South Australia. Conceptually, its aspires for its South Australian copper assets to eventually reach a production level of 500,000 tonnes per annum of copper cathode, or even more.
Smooth operator
According to Henry’s presentation, BHP's ability to pursue growth is underpinned by its reputation as a reliable operator, which not only leads to higher margins but also instills trust among shareholders.
Over the past several years, BHP has consistently demonstrated its operational prowess. Despite the disruptions caused by the Covid-19 pandemic and other challenges, the company has outperformed its competitors in terms of production guidance. Furthermore, BHP has excelled in cost guidance, surpassing the expectations of most of its industry peers.
The company's commitment to operational excellence was recently acknowledged by the Shingo Institute, an organization dedicated to helping companies achieve operational excellence based on the principles of the Shingo Model, which include cultural enablers, continuous improvement and enterprise alignment. BHP's cathodes team at Escondida was honored with the prestigious Shingo prize for their operational excellence, highlighting the company's focus on maintaining high standards.
In addition to being a leading operator, BHP recognizes the importance of successfully designing and executing major capital projects. The company has proven its project capabilities through recent achievements such as the South Flank project in Australia and the Spence Growth Option in Chile. Despite the challenges posed by the pandemic, both projects were completed on time and within budget. BHP's ability to learn from these experiences has positioned it well for future projects, including Jansen. Henry informed attendees that the individual who led the successful South Flank project is now overseeing the development of Jansen, enabling the replication of valuable lessons from one project to another.
Conclusions
In my view, BHP continues to diligently execute the strategic plan it has laid out, staying true to its commitments and delivering on its promises. The company's performance remains consistently strong, generating attractive returns for its shareholders.
With a firm focus on the megatrends of decarbonization, urbanization and population growth, BHP has positioned itself favorably for the future. The company has built a portfolio of world-class assets that are not only low-cost, but which also offer expansion opportunities. Its efficient operational management further enhances its ability to deliver on cost and capital targets, while recognizing the importance of generating ongoing social value, which gives it its social license to operate.
Recognizing the critical importance of the commodities it focuses on, BHP acknowledges the increasing awareness among governments worldwide about their essential nature. Consequently, governments are taking steps to expedite approval processes, provide fiscal certainty, enhance competitiveness and attract investments from aligned businesses like BHP.
Henry said BHP's commitment extends beyond what it does to how it does it, positioning the company as a preferred partner to governments and other stakeholders. Responsible and sustainable business practices are at the forefront of its approach, ensuring enduring benefits for all partners and stakeholders, with shareholders being a central consideration.
With its strong positioning, BHP is poised to deliver long-term value and returns, both presently and well into the future. As such, I am bullish on the stock.
