BHP Group Regulatory News (BHP)

BHP OPERATIONAL REVIEWFOR THE YEAR ENDED 30 JUNE 2018

· Met or exceeded full year production guidance for petroleum, copper, iron ore and energy coal. Met revised guidance for metallurgical coal.

· Group copper equivalent production increased by 8% in the 2018 financial year, with annual production records at Western Australia Iron Ore (WAIO), Queensland Coal and Spence.

· We expect to achieve full year unit cost guidance at our major assets (based on 2018 financial year guidance exchange rates of AUD/USD 0.75 and USD/CLP 663).

· Group copper equivalent production for the 2019 financial year is expected to be broadly in line with the 2018 financial year(1).

· The exit process for Onshore US is progressing to plan. Bids have been received and we aim to announce one or more transactions within the coming months, targeting completion of any transactions by the end of the 2018 calendar year.

· In Petroleum, the Victoria-1 exploration well in Trinidad and Tobago encountered gas and theSamurai-2 well in the US Gulf of Mexico encountered hydrocarbons in multiple horizons.

· The South Flank sustaining iron ore project was approved during the June 2018 quarter.

· We expect the financial results for the second half of the 2018 financial year to reflect certain items as summarised in the table on page two.

BHP Chief Executive Officer, Andrew Mackenzie, said: "We have delivered a strong finish to the 2018 financial year with an eight per cent increase in annual production and record output at Western Australia Iron Ore, Queensland Coal and at our Spence copper mine in Chile. We further simplified the portfolio with the announced divestment of Cerro Colorado in Chile and Gregory Crinum in Australia and our investment in South Flank supports our ability to supply low cost, high quality products into Asia.

Good prices and our culture of continuous improvement give us positive momentum into the 2019 financial year."

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Production for the 2018 financial year and guidance for the 2019 financial year are summarised in the table below.

(i) Other copper comprises Pampa Norte (including Cerro Colorado production for the first half of the 2019 financial year), Olympic Dam and Antamina.

(ii) Excludes production from Samarco, Haju (IndoMet Coal) and New Mexico Coal.

(iii) Given our intention to exit Onshore US, no annual guidance for the 2019 financial year for these assets will be provided; however, until completion, we expect a production run rate broadly consistent with the second half of the 2018 financial year.

BHP expects its financial results for the second half of the 2018 financial year to reflect certain items as summarised in the table below. The table does not provide a comprehensive list of all items impacting the period. The financial statements are the subject of ongoing work that will not be finalised until the release of the financial results on 21 August 2018. Accordingly the information is subject to update.

(i) Numbers are not tax effected.

(ii) There will be a corresponding balance sheet, cash flow and/or income statement impact as relevant.

(iii) The total financial impact on BHP Billiton Brasil of the Samarco Dam failure is expected to be US$650 million in the 2018 financial year (H1 US$210 million and H2 US$440 million).

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The average realised prices achieved for our major commodities are summarised below.

(i) Based on provisional, unaudited estimates. Prices exclude sales from equity accounted investments, third party product and internal sales, and represent the weighted average of various sales terms (for example: FOB, CIF and CFR), unless otherwise noted. Includes the impact of provisional pricing and finalisation adjustments.

(ii) Includes internal sales.

(iii) Hard coking coal (HCC) refers generally to those metallurgical coals with a Coke Strength after Reaction (CSR) of 35 and above, which includes coals across the spectrum from Premium Coking to Semi Hard Coking coals, while weak coking coal (WCC) refers generally to those metallurgical coals with a CSR below 35.

(iv) Export sales only; excludes Cerrejón. Includes thermal coal sales from metallurgical coal mines.

The majority of iron ore shipments were linked to the index price for the month of shipment, with price differentials predominantly a reflection of product quality and market fundamentals. The majority of metallurgical coal and energy coal exports were linked to the index price for the month of shipment or sold on the spot market at fixed or index-linked prices, with price differentials reflecting product quality.

At 30 June 2018, the Group had 364 kt of outstanding copper sales that were revalued at a weighted average price of US$3.01 per pound. The final price of these sales will be determined in the 2019 financial year. In addition, 254 kt of copper sales from the 2017 financial year were subject to a finalisation adjustment in the current period. The provisional pricing and finalisation adjustments will increase Underlying EBITDA(3) by US$2 million in the 2018 financial year and is included in the average realised copper price in the above table.

During the June 2018 quarter, the BHP Board approved US$2.9 billion (BHP share; US$3.4 billion 100 per cent) in capital expenditure for the South Flank sustaining iron ore project in Western Australia. A US$122 million increase in the budget of the Jansen project to US$2.7 billion has been incorporated to fund support services at the site as work continues on completion of the shafts. The forecast for the North West Shelf Greater Western Flank-B project has been reduced by US$98 million to US$216 million as the project is tracking ahead of schedule.

At the end of the 2018 financial year, BHP had five major projects under development in petroleum, copper, iron ore and potash, with a combined budget of US$10.6 billion over the life of the projects.

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On 25 June 2018, Samarco, Vale and BHP, together with the Federal Government of Brazil, the states of Espirito Santo and Minas Gerais and the Public Prosecutors agreed an arrangement which settles the BRL20 billion Civil Claim, enhances community participation in decisions related to the remediation and compensation programs, and establishes a process to renegotiate those programs and to progress settlement of the BRL155 billion Civil Claim (Governance Agreement). The Governance Agreement is conditional on the Federal Government of Brazil signing the Agreement and ratification by the 12th Federal Court of Minas Gerais.

On 29 June 2018, BHP announced a total of US$211 million in further financial support for the Renova Foundation and Samarco until 31 December 2018. This comprises US$158 million to fund the Renova Foundation which will be offset against the Group's provision for the Samarco dam failure and a short-term facility of up to US$53 million to be made available to Samarco.

Unrelated to the new Governance Agreement, BHP expects to recognise an income statement charge in the second half of the 2018 financial year of US$440 million in respect of the Samarco dam failure. This charge largely reflects updated assumptions relating to the continuation of the fishing ban, the number of eligible claimants, and the timeline and technical scope for resettlement of the communities.

The US$440 million income statement charge will be recognised as an exceptional item in the June 2018 half year.

The net increase in the provision is approximately US$250 million due to the offsetting impact of payments to the Renova Foundation to fund remediation and compensation Programs under the Framework Agreement. 

Petroleum

Petroleum - Total petroleum production for the 2018 financial year decreased by eight per cent to 192 MMboe.

In our Conventional business, volumes are expected to decrease to between 113 and 118 MMboe in the 2019 financial year as a result of additional downtime from planned dry dock maintenance at Pyrenees and natural field decline across the portfolio. Given our intention to exit Onshore US, no annual guidance for the 2019 financial year for these assets will be provided, however until completion, which we are targeting by the end of the 2018 calendar year, we expect a production run rate broadly consistent with the second half of the 2018 financial year.

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In the June 2018 quarter, BHP agreed to sell its 90 per cent interest in the Minerva Gas Plant in Victoria to the Casino Henry Joint Venture. The agreement provides for the transfer of the plant and associated land after the cessation of current operations processing gas from the offshore Minerva gas field, and remains conditional on completion of regulatory approvals and assignments.

Petroleum capital expenditure for the 2018 financial year increased by five per cent to US$1.6 billion.

Onshore US drilling and development expenditure for 2018 financial year was US$0.9 billion. Our operated rig count declined from seven to five during the June 2018 quarter.

(i) Includes land acquisition, site preparation, drilling, completions, well site facilities, mid-stream infrastructure and pipelines.

(ii) Can vary between periods based on changes in rig activity and the inventory of wells drilled but not yet completed at period end.

The exit process for our Onshore US assets is progressing to plan. Bids have been received and we aim to announce one or more transactions within the coming months, targeting completion of any transactions by the end of the 2018 calendar year.

Exploration and appraisal wells drilled during the June 2018 quarter are summarised below.

In the US Gulf of Mexico, we increased our equity interest in the Murphy operated Samurai prospect (GC432 and GC476), the northern extension of the Wildling sub-basin, from 33.33 to 50 per cent. The Samurai-2 exploration well was spud on 16 April 2018 and encountered hydrocarbons in multiple horizons not previously observed by the Wildling-2 exploration well. As reported in the March 2018 Operational Review, we were the apparent high bidder on three blocks, EB914 and EB699 in the western Gulf of Mexico and GC823 to the west of the Mad Dog field, which we co-own with BP and Chevron. All three leases were awarded by the Regulator during the June 2018 quarter.

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In Trinidad and Tobago, following the gas discovery at LeClerc, we commenced Phase 2 of our deepwater exploration drilling campaign to further assess the commercial potential of the Magellan play. The Victoria-1 exploration well was spud on 12 June 2018 and encountered gas. Following completion of the Victoria-1 well, we expect the Deepwater Invictus to drill the Bongos prospect in Northern Trinidad and Tobago.

In Mexico, we expect to begin drilling the first appraisal well at Trion in the December 2018 quarter.

In Australia, the fast track of the Exmouth sub-basin 3D seismic data has been received. The final processed data will be delivered during the September 2018 quarter.

Petroleum exploration expenditure for the 2018 financial year was US$709 million, of which US$516 million was expensed.

Copper

Copper - Total copper production for the 2018 financial year increased by 32 per cent to 1,753 kt. Total copper production of between 1,675 and 1,770 kt is expected in the 2019 financial year.

Escondida copper production for the 2018 financial year increased by 57 per cent to 1,213 kt, reflecting a full year of production following the industrial action in the previous year and supported by the start-up of the Los Colorados Extension project on 10 September 2017. Production of between 1,120 and 1,180 kt is forecast in the 2019 financial year, as higher expected throughput is offset by a significant decrease in average concentrator head grade consistent with the mine plan. The existing agreement with Union N°1 will expire on 1 August 2018 and negotiations for a new agreement are in progress. The Escondida Water Supply Extension (EWSE) is in execution phase and will deliver first water production in the 2020 financial year.

Pampa Norte copper production increased by four per cent to 264 kt supported by record production at Spence of 200 kt reflecting better recoveries and higher utilisation of the solvent extraction and electrowinning plants. On 19 June 2018, BHP entered into an agreement to sell Cerro Colorado to EMR Capital(4). The transaction is expected to close during the December 2018 quarter, subject to financing and customary closing conditions. Production at Spence is expected to be between 185 and 200 kt in the 2019 financial year, with volumes weighted to the second half as planned maintenance in May and June 2018 resulted in a lower stacking rate. During the period, we successfully completed the advanced negotiation with Spence Union N°1 (operators and maintenance) with the new agreement effective from 1 June 2018 for 36 months. An agreement was also reached with the Cerro Colorado Union N°2 (supervisors and staff) on the terms and conditions for a new collective agreement, effective for 36 months from 1 July 2018.

Olympic Dam copper production decreased by 18 per cent to 137 kt as a result of the planned major smelter maintenance campaign in the first half of the 2018 financial year and a slower than planned ramp-up. The operation returned to full capacity during the June 2018 quarter. Production is expected to increase to between 200 and 220 kt in the 2019 financial year reflecting improved operational stability and higher ore grades from the Southern Mine Area.

Antamina copper production increased by four per cent to 140 kt and zinc production increased 37 per cent to 120 kt due to higher head grades as mining continued through a zinc-rich ore zone. Copper production is expected to remain at similar levels in the 2019 financial year at approximately 135 kt, while zinc production is expected to be approximately 85 kt, consistent with the mine plan.

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Iron Ore

Iron ore - Total iron ore production for the 2018 financial year increased by three per cent to a record 238 Mt (275 Mt on a 100 per cent basis). WAIO production of between 241 and 250 Mt, or between 273 and 283 Mt on a 100 per cent basis, is expected in the 2019 financial year. A program of work to optimise maintenance schedules across our supply chain and improve port reliability and performance is planned for the September 2018 quarter, with a corresponding impact expected on production and unit costs.

At WAIO, increased production was supported by improved productivity and stability across the supply chain, including both rail and port, which has enabled record production at Jimblebar and Mining Area C. This was partially offset by the impact of lower opening stockpile levels following the Mt Whaleback fire in June 2017 and unplanned car dumper maintenance in the March 2018 quarter. WAIO produced at record annualised rates of 289 Mtpa (100 per cent basis) in the June 2018 quarter.

On 14 June 2018, the BHP Board approved US$2.9 billion (BHP share; US$3.4 billion 100 per cent) in capital expenditure for the South Flank project. The South Flank project will fully replace production from the 80 Mtpa (100 per cent basis) Yandi mine, with first ore targeted in the 2021 calendar year. South Flank will contribute to an increase in WAIO's average iron grade from 61 per cent to 62 per cent, and the overall proportion of lump from 25 per cent to approximately 35 per cent.

Mining and processing operations at Samarco remain suspended following the failure of the Fundão tailings dam and Santarém water dam on 5 November 2015.

(i) Includes initial funding of US$184 million announced on 26 June 2017.

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Coal

Metallurgical coal - Metallurgical coal production for the 2018 financial year increased by seven per cent to a record 43 Mt. Production is expected to increase to between 43 and 46 Mt in the 2019 financial year, with volumes weighted to the second half of the year. An extensive maintenance program is planned for the first half of the 2019 financial year, with a corresponding impact expected on production and unit costs.

At Queensland Coal, record production for the 2018 financial year was supported by record stripping performance, increased truck hours and higher wash-plant utilisation from low-cost debottlenecking activities. Production records were achieved at Peak Downs, Saraji, Caval Ridge, South Walker Creek and Poitrel. In the June 2018 quarter production increased by 16 per cent from the previous quarter following improved operational conditions at Blackwater (geotechnical issues) and Broadmeadow (challenging roof conditions), increased feed rates at the Caval Ridge wash-plant, and utilisation of additional wash-plant capacity at Poitrel following the purchase of the remaining 50 per cent of the Red Mountain processing facility.

On 30 May 2018, BHP announced it has entered into an arrangement to sell the Gregory Crinum mine, which was placed into care and maintenance in January 2016, to Sojitz Corporation(5). Completion of the sale is subject to the fulfilment of conditions precedent including customary regulatory approvals, which could take several months.

On the Central Queensland Coal Network, where Aurizon is the rail track provider, we continue to engage with stakeholders and encourage Aurizon to ensure infrastructure productivity is maximised while they await the Queensland Competition Authority's final decision in respect of Access Undertaking 5 (UT5).

The Caval Ridge Southern Circuit project is progressing according to plan, and is expected to ramp-up early in the 2019 financial year. A longwall move at Broadmeadow is scheduled for the December 2018 quarter.

Energy coal - Energy coal production for the 2018 financial year was flat at 29 Mt. Production is expected to remain broadly unchanged at approximately 28 to 29 Mt in the 2019 financial year.

New South Wales Energy Coal production increased by two per cent, supported by record production and sales volumes during the June 2018 quarter from improved stripping performance, utilisation of raw coal inventory build from the prior quarter and additional bypass coal. Increasing stripping requirements in the September 2018 quarter are expected to result in lower production rates for the quarter compared to the remainder of the 2019 financial year. This was offset by a three per cent decline in Cerrejón production due to unfavourable weather impacts on mine sequencing, equipment availability and higher strip ratio areas being mined.

Other

Nickel - Nickel West production for the 2018 financial year increased by six per cent to 91 kt, with increased production at the Mt Keith and Leinster operations supporting record metal production. Nickel production for the 2019 financial year is expected to remain broadly unchanged from the 2018 financial year.

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Minerals exploration

Minerals exploration expenditure for the 2018 financial year was US$165 million, of which US$124 million was expensed. Greenfield minerals exploration is predominantly focused on advancing copper targets within Chile, Ecuador, Peru, Canada, South Australia and the South-West United States.

Variance analysis relates to the relative performance of BHP and/or its operations during the 2018 financial year compared with the 2017 financial year, unless otherwise noted. Production volumes, sales volumes and capital and exploration expenditure from subsidiaries are reported on a 100 per cent basis; production and sales volumes from equity accounted investments and other operations are reported on a proportionate consolidation basis. Copper equivalent production based on 2017 financial year average realised prices.

The following footnotes apply to this Operational Review:

(1) Excludes production from Onshore US and Cerro Colorado.

(2) Excludes production from Samarco, Haju (IndoMet Coal) and New Mexico Coal.

(3) Underlying EBIT and Underlying EBITDA are used to reflect the underlying performance of BHP. Underlying EBIT is earnings before net finance costs, taxation and any exceptional items. Underlying EBITDA is Underlying EBIT before depreciation, amortisation and impairment.

(4) On 19 June 2018, BHP announced it has entered into an agreement to sell the Cerro Colorado copper mine in Chile to EMR Capital. The total cash consideration consist of US$230 million to be paid to BHP after the closing of the transaction, plus approximately US$40 million in proceeds from the post-closing sale of certain copper inventory, and a contingent payment of up to US$50 million to be paid in the future, depending upon copper price performance.

(5) On 30 May 2018, BHP Billiton Mitsubishi Alliance (BMA) announced it has entered into an agreement to sell the Gregory Crinum coal mine in central Queensland to Sojitz Corporation for A$100 million (100 per cent basis). In addition to the sale of the mine to Sojitz, BHP will be providing appropriate funding for rehabilitation of existing areas of disturbance at the site, with all rehabilitation liabilities transferred to Sojitz on completion.

The following abbreviations may have been used throughout this report: barrels (bbl); billion cubic feet (bcf); cost and freight (CFR); cost, insurance and freight (CIF); dry metric tonne unit (dmtu); free on board (FOB); grams per tonne (g/t); kilograms per tonne (kg/t); kilometre (km); metre (m); million barrels of oil equivalent (MMboe); million cubic feet per day (MMcf/d); million tonnes (Mt); million tonnes per annum (Mtpa); ounces (oz); pounds (lb); thousand barrels of oil equivalent (Mboe); thousand ounces (koz); thousand standard cubic feet (Mscf); thousand tonnes (kt); thousand tonnes per annum (ktpa); thousand tonnes per day (ktpd); tonnes (t); and wet metric tonnes (wmt).

In this release, the terms 'BHP', 'Group', 'BHP Group', 'we', 'us', 'our' and ourselves' are used to refer to BHP Billiton Limited, BHP Billiton Plc and, except where the context otherwise requires, their respective subsidiaries as defined in note 28 'Subsidiaries' in section 5.1 of BHP's 30 June 2017 Annual Report on Form 20-F and in note 13 'Related undertaking of the Group' in section 5.2 of BHP's 30 June 2017 Annual Report on Form 20-F. Notwithstanding that this release may include production and other data from non-operated assets, non-operated assets are not included in the BHP Group.

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Production summary

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(1) LPG and ethane are reported as natural gas liquids (NGL). Product-specific conversions are made and NGL is reported in barrels of oil equivalent (boe). Total boe conversions are based on 6 bcf of natural gas equals 1 MMboe.

(2) Metal production is reported on the basis of payable metal.

(3) Shown on a 100% basis. BHP interest in saleable production is 57.5%.

(4) Includes Cerro Colorado and Spence.

(5) Iron ore production is reported on a wet tonnes basis.

(6) Shown on a 100% basis. BHP interest in saleable production is 85%.

(7) Metallurgical coal production is reported on the basis of saleable product. Production figures include some thermal coal.

(8) Shown on a 100% basis. BHP interest in saleable production is 80%.

(9) Shown on a 100% basis. BHP interest in saleable production is 75%.

Throughout this report figures in italics indicate that this figure has been adjusted since it was previously reported.

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Production and sales report