BHP: A diversified portfolio

BHP’s diversified portfolio and high quality assets, together with a strong balance sheet, have made the company resilient in the face of the ongoing market uncertainty caused by the COVID-19 pandemic

Mining is an uncertain and risky business at the best of times, and the last six months have not been the best of times, by a long way.

The global economy has been seriously compromised by COVID-19, with demand for resources collapsing as industries were put on hold. Mining activities have been curtailed in some countries, while those that continued mining have had to find new ways of operating to protect their workforce and local communities.

The pandemic is far from over, of course, and it would be rash to suggest that anything will ‘return to normal’ in the near future, but considering the speed at which the virus spread and the measures that had to be taken to limit its impact, BHP has shown remarkable

resilience in terms of production at the end of its financial year. In its Operational Review for the year ended 30 June 2020, BHP attributes its strong performance to “the commitment of our workforce, our disciplined controls and financial strength,” which “enabled us to continue to safely operate through the COVID-19 pandemic.” Some mining jurisdictions were affected more severely than others, and the company’s performance reflects that, but BHP still managed to meet its full year production guidance for iron ore, metallurgical coal and its operated copper and energy coal assets. Production was lower than guidance at the Antamina copper and zinc mine in Peru and at the Cerrejón coal mine in Colombia, following the temporary

“Mining activities have been curtailed in some countries, while those that continued mining have had to find new ways of operating to protect their workforce and local communities”

suspension of operations due to COVID-19, but both operations are now ramping back up. Amazingly, record production was achieved at Western Australia Iron Ore (WAIO), and at Queensland Coal’s Caval Ridge and Poitrel mines, despite impacts from wet weather and COVID-19. Record coal was also mined at Broadmeadow in the Bowen Basin and in Chile, record average concentrator throughput was delivered at the Escondida copper mine.

Copper

With higher production at Escondida and Olympic Dam offset by lower production at Antamina, BHP reported group copper equivalent production for the 2020 financial year broadly in line with the previous year, but volumes are expected to be slightly lower in 2021. In Australia, Olympic Dam copper production increased by seven per cent to 172 kt, supported by solid underground mine performance, record grade and the prior period acid plant outage. This was partially offset by the impact of planned preparatory work undertaken in the September 2019 quarter related to the replacement of the refinery crane and unplanned downtime at the smelter during the March 2020 quarter. The physical replacement and commissioning of the refinery crane is expected to be completed in the March 2021 quarter. Underground development into the Southern Mine Area progressed to plan over the year, and provided access to higher copper grade ore. Production for the 2021 financial year is expected to increase to between 180 and 205 kt. Production for the 2022 financial year is expected to be lower as a result of the major smelter maintenance campaign planned for the first half of the year. For the majority of the June 2020 quarter, BHP’s Chilean assets operated with a reduction in their operational workforces of approximately 35 per cent to incorporate measures in response to COVID-19. The company expects the operating environment to remain challenging, with workforce reductions likely to remain at a similar level during the September 2020 quarter. Nevertheless, Escondida copper production increased by four per cent to 1,185 kt, with record June 2020 quarter concentrator throughput of 382 ktpd lifting annual concentrator throughput to a record 371 ktpd. This offsets the impact of a three per cent decline in copper grade, stoppages associated with the social unrest in Chile and the reduced workforce. BHP said the new records were achieved through continued improvements in operational and maintenance practices leading to increased availability and utilisation at the site’s three concentrators. Also in Chile, Pampa Norte consists of two wholly owned operations in the Atacama Desert – Spence and Cerro Colorado. Here copper production decreased by two per cent to 243 kt, with strong operating performance offset by grade decline of approximately

bhp a diversified portfolio

14 per cent. Production for the 2021 financial year is expected to be between 240 and 270 kt, reflecting the reduced operational workforce due to COVID-19, the start-up of the Spence Growth Option Project and expected grade decline of approximately seven per cent. Cerro Colorado is adjusting its mine plan to meet operational requirements for the remaining period of its current environmental licence, which expires at the end of 2023. The adjustment to the mine plan will result in reduced operations and reduced headcount. The resizing measures will be implemented over the next four months. Cerro Colorado is, however, also exploring development options that could allow mining operations to continue beyond the end of 2023, including the preparation of new environmental studies required to apply for new permits. In accordance with BHP’s water stewardship commitments, any continuation of production beyond 2023 would be performed using seawater as a replacement for freshwater usage.

Iron Ore

With Brazilian operations at Samarco suspended after the failure of the Fundão tailings dam and Santarém water dam on 5 November 2015, all of BHP’s iron ore has been produced in Australia. Operational readiness activities for Samarco’s restart have been slowed by a reduction in the workforce, as part of the COVID-19 response. Restart can occur when the filtration system is complete and Samarco has met all necessary safety requirements, and will be subject to final approval by Samarco’s shareholders. In FY20, total iron ore production increased by four per cent to a record 248 million tons. BHP expects production of between 244 and 253 Mt in the 2021 financial year. Western Australia Iron Ore (WAIO) is an integrated system of four processing hubs and five mines, connected by more than 1,000 kilometres of rail infrastructure and port facilities in the Pilbara region of northern Western Australia. At each mining hub – Newman, Yandi, Mining Area C and Jimblebar – ore

from mines is crushed, beneficiated (where necessary) and blended to create high-grade hematite lump and fines products. WAIO’s performance included record production at Jimblebar and Yandi. Weather impacts from Tropical Cyclone Blake and Tropical Cyclone Damien were offset by strong performance across the supply chain, with significant improvements in productivity and reliability following a series of targeted maintenance programs over the past four years. This enabled WAIO to produce at a record annualised run rate above 300 Mt during the June 2020 quarter.

Queensland and New South Wales. Metallurgical coal production was down three per cent to 41 Mt in FY20 as a result of significant wet weather events in the prior quarter and geotechnical constraints at South Walker Creek. Production is expected to be between 40 and 44 Mt in the 2021 financial year. Queensland Coal comprises the 50/50 BHP Mitsubishi Alliance (BMA) and BHP Mitsui Coal (BMC) assets in the Bowen Basin in Central Queensland. BMA is Australia’s largest coal producer and supplier of seaborne metallurgical coal. It is owned 50:50 by BHP and Mitsubishi Development. BMA operates seven Bowen Basin mines (Goonyella Riverside, Broadmeadow, Daunia, Peak Downs, Saraji, Blackwater and Caval Ridge) and owns and operates the Hay

“Some mining jurisdictions were affected more severely than others, and the company’s performance reflects that, but BHP still managed to meet its full year production guidance for iron ore, metallurgical coal and its operated copper and energy coal assets”

Point Coal Terminal near Mackay. With the exception of the Broadmeadow underground longwall operation, BMA’s mines are open-cut, using draglines and truck and shovel fleets for overburden removal. BMC owns and operates two open-cut metallurgical coal mines in the Bowen Basin – South Walker Creek Mine and Poitrel Mine. BMC is owned by BHP (80 per cent) and Mitsui and Co (20 per cent). South Walker Creek Mine is located on the eastern flank of the Bowen Basin, 35 kilometres west of the town of Nebo and 132 kilometres west of the Hay Point port facilities. Poitrel Mine is situated southeast of the town of Moranbah and began open-cut operations in October 2006. At Queensland Coal, strong underlying

operational performance, including record underground coal mined at Broadmeadow and record annual production at Caval Ridge and Poitrel, was offset by planned major wash plant shutdowns in the first half of the year and significantly higher rainfall during January and February 2020 compared with historical averages. Blackwater, the company’s largest mine, was the most severely impacted by flooding, with mining operations stabilised during the June 2020 quarter and a return to full capacity expected towards the end of the September 2020 quarter. Technology has played an enormous role in recent operations by allowing several mine sites to work remotely in response to the challenges of the COVID-19 outbreak. Some of the specialised equipment and computer programs required to carry out the work were too large and complex for conventional laptops, which had previously restricted remote working. In March, BHP’s Resource Engineering team launched the Technical Computing Environment (TCE) project to make some of these programs available off site by hosting them in an online data centre that the teams could access remotely. This proved a game changer for the mine scheduling teams across the Queensland Coal business. Hayden Bachmann, the Scheduling Manager at BMA’s Blackwater coal mine in Queensland, says the transition from site to remote working has been seamless. “We have access to the TCE from home which gives us access to the programs we need to do our jobs,” he said. “The team has set up their home offices which include large monitors and ergonomic work stations as most of the design work they do requires a large monitor to fit the design work on. Absolutely no one works from the kitchen table.” Jonathan Regan, the Mine Scheduling Manager at BMA’s Caval Ridge coal mine, manages a team of around 20 engineers and has been impressed with how they’ve taken to remote working. “We’re still in regular contact with the execution teams on the ground,” he said. “The move to working from home hasn’t impacted the performance of the team at all. I think they’ve taken it as an

bhp a diversified portfolio

opportunity to show that there’s a way of being flexible on the frontline.” Energy coal production decreased by 16 per cent to 23 Mt in 2020. Production is expected to be between 22 and 24 Mt in the 2021 financial year, while NSWEC production decreased by 12 per cent to 16 Mt as a result of the change in product strategy to focus on higher quality products and unfavourable weather impacts from December 2019 to February 2020. This was partially offset by a strong performance in the June 2020 quarter driven by record truck utilisation. Production is expected to be between 15 and 17 Mt in the 2021 financial year. New South Wales Energy Coal (NSWEC) consists of the Mt Arthur Coal open-cut energy coal mine in the Hunter Valley region of New South Wales, Australia, which produces thermal coal for domestic and international customers in the energy sector. Earlier this year Reuters reported that BHP was looking to reduce its exposure to fossil fuels by trying to find a buyer for the Mt Arthur operation. In Colombia, production at Cerrejón decreased by 23 per cent to 7 Mt due to a temporary shutdown during the June 2020 quarter in response to COVID-19, as well as a focus on higher quality products, in line with the mine plan. The temporary shutdown lasted for approximately six weeks and allowed for completion of COVID-19 control measures to meet the Colombian Government’s regulations. Production is expected to be approximately 7 Mt in the 2021 financial year. Cerrejón is owned in equal parts by subsidiaries of BHP, Anglo American and Glencore.

Nickel

All of BHP’s nickel operations (mines, concentrators, a smelter and refinery) are located in Western Australia, where Nickel West is a fully integrated mineto-market nickel business. Nickel West production decreased by eight per cent in FY20 to 80 kt due to the major quadrennial maintenance shutdowns at the Kwinana refinery and the Kalgoorlie smelter, as well as planned routine maintenance at the concentrators in the December 2019 quarter. Operations ramped back up to full capacity during the March 2020 quarter

and ran at full capacity during the June 2020 quarter. With the major planned maintenance and the transition to new mines now complete, total nickel production is expected to increase to between 85 and 95 kt in the 2021 financial year. In June this year BHP agreed to acquire the Honeymoon Well Nickel Project comprising the Honeymoon Well development project and a 50 per cent interest in the Albion Downs North and Jericho exploration joint ventures from MPI Nickel Pty Ltd, a wholly owned subsidiary of Norilsk Nickel Australian Holdings BV. BHP Nickel West is already a 50 per cent shareholder in the Albion Downs North and Jericho Joint Ventures. The combined tenement package is located

in the northern Goldfields region of Western Australia, approximately 50 kilometres from BHP’s Mt Keith mine and 100 kilometres from its Leinster concentrator. “This is an exciting opportunity to enhance our world-class nickel resource base in Western Australia,” said BHP’s Nickel West Asset President, Eddy Haegel. “Proximity to our existing facilities makes us the natural owners of these deposits, and provides potential options to bring the undeveloped resources to market.” “Nickel continues to be an essential input into new technologies that will improve the battery storage needed for renewables and electric vehicle manufacturing. Consistent with our strategy to invest in future facing

“Operations at Nickel West ramped back up to full capacity during the March 2020 quarter and ran at full capacity during the June 2020 quarter”

commodities, this transaction gives us access to explore and develop these prospective nickel sulphide tenements.”

Development projects

At the end of the 2020 financial year, BHP had several major projects under development in copper, iron ore and potash. The Spence Growth Option Project in Chile is continuing to progress on budget, with the overall project 93% complete, but as a result of measures put in place to reduce the spread of COVID-19, the first copper production is now expected between December 2020 and March 2021. After a reduction in the on-site workforce, the desalination plant will be commissioned in the first half of the 2021 financial year. BHP holds various exploration permits and mining leases for the Jansen Potash Project, covering 9,600 square kilometres in the province of Saskatchewan, Canada. Jansen’s abundant resource allows for it to be developed in stages, with anticipated initial capacity of four million tonnes per annum. The service shaft and production shaft are 1,005 metres and 975 metres deep, respectively. In March this year, final shaft lining work on the two shafts was restricted to one shaft at a time, with reduced crews, as part of the company’s COVID-19 response plan to reduce the on-site interprovincial workforce. Work was resumed on both shafts, however, in June. Timing for completion of the shafts continues to be under review while BHP assesses the impacts of COVID-19 and the temporary reduction in construction activity. Potash is a potassium-rich salt, mainly used in fertiliser to improve the quality and yield of agricultural production. As such, it is a vital link in the global food supply chain. With demands on that supply chain intensifying as the global population rises, the strains on finite land supply mean sustainable increases in crop yields will be crucial. Potash fertilisers will therefore be critical in maintaining soil quality. Construction began in July 2018 on BHP’s US$3.6 billion South Flank iron ore project in the remote Pilbara region of Western Australia. When operational, South Flank will be one of the largest iron ore processing hubs in the world. The project will include a crushing and screening plant, an overland conveyor system and rail-loading facilities. The overall project is 76% complete and remains on schedule for first production in the middle of the 2021 calendar year. It is expected to produce 80 million tonnes per annum, replacing volumes from Yandi which will reach the end of its economic life in the earlyto-mid 2020s. As at the end of March 2020, approximately 80 per cent of the contracts awarded are being performed in Australia, of which 95 per cent is within Western Australia. Some interstate employees have relocated to Western Australia to help with the project delivery. Over the life of the

bhp a diversified portfolio

project, it is expected that more than 9,000 people will be engaged in the South Flank work force. The project is using modular construction techniques to speed up the build and the modules are some of the biggest ever delivered into the Pilbara. Around 1500 units of all shapes and sizes are arriving into Port Hedland, but with many up to 15 metres wide, and the largest weighing 354 tonnes, getting them 350 kilometres from Port Hedland to South Flank is a highly complex road transport job involving two years of planning. The modules are assembled into convoys on heavy-lift sleds at Boodarie by transport specialist Mammoet. They travel to site at 40 kilometres per hour, but anything more than 8.5 metres wide has to move at night. In July this year, with ore already being hauled and stockpiled, the mine’s massive primary crushers were slotted into the cliff-like walls of the two run-ofmine (ROM) pads. Over 26 kilometres of high-tech overland conveyors, designed and built in WA, stretch away from each crusher across the undulating Pilbara landscape. In the Operational Review for FY20, BHP’s Chief Executive Officer, Mike Henry, summed up the company’s approach to a difficult year. “BHP safely delivered a strong operational performance in the 2020 financial year,” he said, “achieving record production in a number of our operations, and an improved cost base. This performance, achieved in the face of COVID-19 and other challenges, is a result of the outstanding effort of our people and the support of our communities, governments, customers and suppliers. “We continue to focus on becoming even safer, delivering exceptional operational performance, maintaining disciplined capital allocation, creating and securing more options in future facing commodities and building social value. We have learned new ways of working, both internally and with others, through the COVID-19 pandemic. We will seek to embed these in a way that helps to reinforce these priorities.”