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BHP CEO: Shale not a long-term goal, potash has potential

Mining giant not impressed with Elliott's attempts at 'financial engineering'

KAORI TAKAHASHI, Nikkei staff writer | Australia, New Zealand, Pacific Islands

MELBOURNE -- As it celebrates 50 years of business with Japan, BHP Billiton mulls the future after four years of restructuring that left "a stronger, simpler company", according to Chief Executive Officer Andrew Mackenzie.

In a wide-ranging interview, The Nikkei spoke with the CEO about BHP's proposed divestments, possible growth areas and Elliott International's failed proposal to shake up the multinational.

Q: This year BHP celebrates the 50th anniversary of business relationships with Japan. What is your commitment to sustainable supply to Japan?

Andrew Mackenzie, BHP's chief executive officer

A: I think 50 years is a long time. So I think the recognition of the longevity of our business and our assets is quite important. The relationship with Japan is probably broader than any relationship we have with any other country in the world. Of course, we have seen the rise of China, but this is mainly about 50 years of supplying iron ore.

Of course, we're a very important supplier to Japan of coal in both forms, of nickel, uranium and petroleum products, especially LPG and LNG. We have very successful joint ventures with Mitsubishi Corp., Mitsui & Co. and Itochu. As well as selling product, we enjoy the strategic investment. And then, quite a few of the things we send to Japan turn into things that we then buy back. So we have very important suppliers in the form of Komatsu and Bridgestone, to name but some.

Q: The West Australian government is suggesting a new tax on big resource companies. Do you think this will affect supply to Japan?

A: I'm sure the Japanese customers and investors have [thought] that spontaneous changes in tax to their disadvantage are probably not things that we should do too often -- I'm talking to Australia rather than BHP -- if we want to maintain a relationship of trust and a sense of security of supply. But I don't think we should get too alarmed by it. The $5 per ton tax that was proposed in the Western Australian election did not win success at the ballot box, and the more recent rumors are more thoughts that were inevitably going to emerge because the [West Australian] budget is under stress. But I see this as a consultation that should last for some time, where many parties have to be drawn in; all of industry in West Australia.

Q: How have the various operating restructures and portfolio changes that happened in the last three to four years contributed to BHP's growth?

A: When I became CEO, we did a very rigorous review of the portfolio. As a result of that, we concluded that in the longer-term future of BHP, we wanted to base our company primarily on very high-quality, long-lived assets -- principally iron ore, metallurgical coal, copper, oil and, to a lesser extent, gas. And then, maybe in the future, with the possible growth in potash.

We've moved towards that portfolio through a combination of the demerger of South 32 and the divestment of those businesses which weren't part of that idealized core. That work is almost done. There are a still a few shorter-lived assets and some gas businesses that probably do not fit long-term with the portfolio, and so as prices have picked up more recently, we've resumed our divestment program.

Q: What's BHP's strategy with U.S. onshore shale?

A: I think first we'd have to say two things about our shale portfolio: It is a great shale portfolio, and we operate it as best as anyone in the industry. However, a number of people are somewhat critical of this portfolio, and that's primarily for reasons of price. Since we bought this portfolio, we've seen steep reductions in the price of U.S. domestic gas; and then, with the collapse of OPEC, steep reductions in the price of oil. [Thus], some of the potential we saw for this portfolio when we bought it -- [it] would be six years ago now -- is very hard to realize, even though we've got great reserves and we've got tremendous operating capability.

So, we have to think about what this means for the long term. We did a big study not long after I became CEO, looking at the potential worldwide for shale, and we concluded that this was not a business we wanted to take globally. [Regarding] gas, the advent of shale gas now means that gas has become a very abundant commodity with very low barriers to entry.

So, this is not a long-term business for us. As we seek to grow our presence in petroleum, principally oil, we'd rather go back to our conventional business and operate more effectively in deep-water opportunities. And we recently acquired the opportunity to do so in Mexico -- the first foreign business to get that in 80 years.

Q: Which assets are priorities for the divestment of shale?

A: We did try and sell -- earlier on in my period -- the Fayetteville position, but we were unable to achieve the price. So, in this one we've said we still would like to sell the Fayetteville and parts of the Hawkville. In those two cases, these are areas which we don't think will ever compete for investment relative to the other things we can use our money for, including returning money to the shareholders. And, so, if somebody would like to develop them sooner, they may be willing to pay us more than what we think [they are] worth. But we have to see that price eventuate.

Q: Are you confident about the price of oil in the long run?

A: By long run, I mean in the next few years. I think we have a reasonable understanding -- probably better than most -- [of] the potential of the shale business. And we think that the very low level of investment that has been happening in oil development -- we've done one, that's Mad Dog with BP -- is inadequate for future supply to meet future demand. We think as that gap becomes more apparent, we'll see oil prices rising [higher than] those we see today.

Q: Will potash be a new growth area?

A: We haven't yet decided to invest, but this is a business that we believe has a multidecade set of options, and through a combination of exploration success and acquisition, we've acquired some phenomenal ore bodies. We think we have the best undeveloped ore bodies in the world. At Jansen, we are sinking two shafts. They're about three-fourths of the way done, which means they're around about 700 plus meters deep. They don't both have to go to 1km, but one will and one will be a bit shy of that. And we've already gone through the technically difficult parts with some very new technology.

Having built those shafts, do you want to build a mine at the bottom of those shafts? We have to start having open conversations with investors about whether we should make that investment. At first it will be around 4 million tons a year, but it's going to have a lot of new technology and new thinking in it. So, it's going to be able to deliver much higher capital efficiency and much lower operating costs than probably people would consider when they [think] about things from a more conventional or historical [point of view].

But we want to build into a market that will be able to absorb, and we're going to have to take a longer-term view on price. Because even if, in the next year or two, we were to sanction a mine, we wouldn't be producing any potash until 2023. So, no decision has been made yet, but we are clear that a decision has to be [made].

As we look at it today, there does seem to be a path through to a profitable and competitive investment in the next two years that would allow us to continue the work of construction, but we still have to [make] that decision, and that means we have to keep looking at the potash market.

Q: How will BHP achieve low-cost potash?

A: As we do with many things. A lot of it is about internal synergies and sharing. So, a lot of the appraisal and quite a bit of understanding the mechanics of sinking the shafts has actually been enhanced using some knowledge from petroleum; using some seismic and understanding the stress states you have around wells when you drill deep wells in the Gulf of Mexico.

Then a number of techniques to optimize how they line the shaft in probably a more proficient way than it's been done in the past. But it comes to actually running the mine. We've obviously chosen those ore bodies because they're nice and flat, which means we can make much better use of automation. Then we're using primarily ideas we have from the rest of the mining [field], probably more from coal than anywhere else, and separation techniques more related to something like copper. [However,] we're looking at conventional separation of potash from salt in the first phase, but latterly looking at other ways, which might lead to a big reduction in processing cost.

And the whole point is this would be a first investment. But because of the ore bodies that we own -- and we have 200 years of resource there -- we're thinking [that] under some circumstances we might start to grow potash to be the size of our iron ore business today. It's taken us 50 years to create our iron ore business today; it will be another 50 years to create a potash equivalent. So, you have to start somewhere.

Q: How would you like to finish with these demands from Elliott Associates? Is there anything you learned and made use of?

A: I think ... I have to say in a direct sense, no. Everything they've come to speak to us about are things we've been thinking deeply about for a long time. And I initially thought -- because most companies would not welcome the arrival of someone like Elliott; I wasn't like that -- I actually thought, "Hmm, I love ideas, I want our shareholders to give us some good ideas." And, therefore, I was quite hopeful.

But I'm afraid at the end of that debate, they didn't change their initial ideas very much, and we've thought a lot about them and, in my view, they add very little, if any, value to the company. And I said: [Their idea is] mainly advocating a form of financial engineering with a lot of execution risks and a lot of question marks about whether that would add value. And, as far as I'm concerned, I'm running a program about real engineering. Or if you like, the hard work of BHP men and women that can add 50% value to the base value of the company and double our return on capital employed. And that is something that I think is much more concrete than the possibility of changing the ownership of assets, or altering some aspects of our capital allocation framework which, to me, [is] something that is unlikely to add a lot of value. 

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