BHP Group Regulatory News (BHP)

BHP OPERATIONAL REVIEWFOR THE HALF YEAR ENDED 31 DECEMBER 2017

· Full year production and unit cost guidance(1) maintained for Petroleum, Copper, Iron Ore and Energy Coal. At Western Australia Iron Ore (WAIO), a record annualised production rate of 284 Mt (100 per cent basis) was achieved for the December 2017 quarter.

· Production guidance for Metallurgical Coal reduced to between 41 and 43 Mt as a result of challenging roof conditions at Broadmeadow, which are expected to continue through the March 2018 quarter, and geotechnical issues triggered by wet weather impacts at Blackwater. Unit cost guidance is also expected to be negatively impacted and is currently under review.

· We continue to release latent capacity across our portfolio, with the Los Colorados Extension project successfully ramped up during the December 2017 quarter.

· In Onshore US, our operated rig count remained at nine during the December 2017 quarter but is expected to fall as we tailor plans to maximise value in the exit process. We continue to progress a number of alternatives to divest our Onshore US assets for value.

· All major projects under development are tracking to plan.

· Underlying EBIT(2) in the December 2017 half year is expected to include impairment charges, predominately related to conveyors at Escondida, in a range of US$250 million to US$350 million.

BHP Chief Executive Officer, Andrew Mackenzie, said: "A strong operating performance in the first half allowed us to capture the benefit of higher prices. The successful Los Colorados Extension project ramp-up contributed to a 17 per cent increase in copper output and production records were achieved at a number of Western Australia Iron Ore and Queensland Coal mines. We have revised down our metallurgical coal production forecast for the full year as a result of geotechnical issues at both Broadmeadow and Blackwater. The momentum we've built across the wider portfolio during the second quarter will flow through to an expected stronger second half operating performance. Together with incremental production from latent capacity projects in iron ore and copper, we expect volume growth of six per cent for the full year."

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Production for the December 2017 half year and guidance for the 2018 financial year are summarised in the table below.

(i) Other copper comprises Pampa Norte, Olympic Dam and Antamina.

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

(iii) Subject to regulatory approvals to increase capacity above 270 Mt.

During the December 2017 half year, the BHP Board approved an investment of US$2.5 billion for the development of the Spence Growth Option.

BHP has four major projects under development in Petroleum, Copper and Potash, with a combined budget of US$7.5 billion over the life of the projects. All projects remain on time and on budget.

BHP expects Underlying EBIT in the December 2017 half year to include impairment charges (predominately related to conveyors at Escondida that are no longer planned to be utilised due to the successful completion of the Los Colorados Extension project) in a range of US$250 million to US$350 million.

The Group's adjusted effective tax rate(4) for the December 2017 half year is currently being finalised and is expected to be below the full year guidance range of 32 to 37 per cent.

As previously highlighted, during the December 2017 half year we made final corporate income tax cash payments in Australia of approximately US$1.3 billion relating to the prior year. We also successfully concluded a US$2.9 billion multi-currency bond repurchase plan, with total costs in relation to the repurchase program of approximately US$100 million to be reported in net finance costs in the December 2017 half year financial results.

On 16 November 2017, Samarco and its shareholders, Vale S.A. and BHP Billiton Brasil, entered into an agreement with the Federal Prosecutors' Office in Brazil and the Minas Gerais State Prosecutors Office (Amendment Agreement). The Amendment Agreement, subject to ratification by the 12th Federal Court of Minas Gerais, amends the Preliminary Agreement(5) entered into on 18 January 2017 in relation to the Samarco dam failure (Preliminary Agreement). The Amendment Agreement provides for the State Prosecutors to become a party to the Preliminary Agreement and provides for additional community consultation.

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Samarco, Vale S.A., BHP Billiton Brasil and the Federal Prosecutors also jointly requested, and the 12th Federal Court has approved, an additional 150 days, ending on 20 April 2018, for the parties to continue negotiations for the settlement of the Public Civil Claims.

On 22 December 2017, BHP announced a total of US$181 million in further financial support for the Renova Foundation and Samarco until 30 June 2018. This comprises US$133 million to fund the Renova Foundation which will be offset against the Group's provision for the Samarco dam failure, US$6 million of fees payable to experts appointed in connection with remediation and compensation programs and a short-term facility of up to US$42 million to be made available to Samarco.

As at the date of this Operational Review, we are not in a position to provide an update, for the purpose of the December 2017 half year financial results, on the ongoing potential financial impacts on BHP Billiton Brasil of the Samarco dam failure. Any financial impacts will continue to be classified as an exceptional item.

On 22 December 2017, the US President signed a new US tax law (H.R. 1). BHP is currently working through the financial impacts of the tax reform, which will include a non-cash revaluation of the Group's US net deferred tax assets. The financial impact is expected to give rise to an exceptional item in the December 2017 half year financial results. Longer term, we expect US attributable profits to be positively impacted by the lower US corporate income tax rate.

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

(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) Export sales only. Includes thermal coal sales from metallurgical coal mines.

At 31 December 2017, the Group had 348 kt of outstanding copper sales that were revalued at a weighted average price of US$3.28 per pound. The final price of these sales will be determined over the remainder of the 2018 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(2) by US$246 million in the December 2017 half year.

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Petroleum - Total petroleum production for the December 2017 half year decreased by seven per cent to 99 MMboe. Guidance for the 2018 financial year remains unchanged at between 180 and 190 MMboe, comprising Conventional volumes between 119 and 123 MMboe and Onshore US volumes between 61 and 67 MMboe.

Completion of the agreement with Chevron and ExxonMobil to withdraw from our 4.95 per cent interest in the Genesis deepwater asset in the Gulf of Mexico occurred in December 2017, with an effective date of 1 January 2017.

Petroleum capital expenditure of approximately US$1.9 billion is now planned in the 2018 financial year, a reduction from our previous guidance of US$2.0 billion. Onshore US capital expenditure is expected to be lower at US$1.1 billion, reflecting development activity tailored to support value in the exit process and meet Hold by Production obligations. Conventional capital expenditure of US$0.8 billion remains unchanged, focused on high-return infill drilling opportunities in the Gulf of Mexico, a life extension project at North West Shelf and investment in the Mad Dog Phase 2 project.

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Onshore US drilling and development expenditure for the December 2017 half year was US$336 million (US$511 million on an activity basis). Our operated rig count remained at nine during the December 2017 quarter.

· We have adjusted our Onshore US capital plans to optimise value for our planned exit.

· In the Permian, sub-surface trials have confirmed first year production improvements associated with larger completions. We reduced our rig count from three to two (in December 2017 quarter) as we focused on meeting Hold by Production obligations and progressing sub-surface trials.

· In the Eagle Ford, we increased our rig count from two to three in the December 2017 quarter to test the Austin Chalk horizon and trial larger completions in Hawkville. We anticipate a return to two rigs during the March 2018 quarter.

· In the Haynesville, we recently incorporated larger completions and have been operating new wells with larger chokes, both of which have improved results. We will continue to implement these changes in future wells, but expect to lower our rig count during the second half of the 2018 financial year as rig contracts expire and we optimise future investments ahead of our planned exit.

· In the Fayetteville, our plans remain unchanged at this time. We continue to assess the potential of the Moorefield horizon based on data from the new non-operated wells.

(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.

We continue to progress a number of alternatives to exit our Onshore US assets for value. We are preparing all appropriate documentation ahead of data rooms being opened to potential trade sale buyers by the end of the March 2018 quarter. In parallel, we continue to explore a potential exit via demerger or Initial Public Offering.

Exploration and appraisal wells drilled during the December 2017 quarter are summarised below.

In the US Gulf of Mexico, the Scimitar well was spud on 1 October 2017, with results expected in the March 2018 quarter. BHP holds a 65 per cent working interest and is the operator of the Scimitar prospect, with partner Repsol (20 per cent working interest) and Statoil (15 per cent working interest).

In Mexico, an Exploration and Appraisal plan for the Trion contractual area licence number CNH-A1-Trion/2016 (formerly referred to as blocks AE-0092 and AE-0093) was submitted to the Comisión Nacional de Hidrocarburos of Mexico by BHP and Pemex on 29 August 2017, in line with regulatory requirements. We have received positive feedback and planning continues for the exploration and appraisal wells which are expected to be drilled in the 2019 financial year.

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In Trinidad and Tobago, we continued appraisal work to assess the potential commercialisation of the gas discovery at LeClerc. Preparations continued for Phase 2 deepwater exploration which is expected to commence in the second half of the 2018 financial year.

Petroleum exploration expenditure for the December 2017 half year was US$378 million, of which US$137 million was expensed. A US$715 million exploration program is planned for the 2018 financial year. This program comprises the Wildling-2 side track and Scimitar exploration well in the US Gulf of Mexico and two wells in Trinidad and Tobago, with the third well now expected to be drilled at the beginning of the 2019 financial year.

Copper

Copper - Total copper production for the December 2017 half year increased by 17 per cent to 833 kt. Guidance for the 2018 financial year remains unchanged at between 1,655 and 1,790 kt.

Escondida copper production for the December 2017 half year increased by 29 per cent to 583 kt, supported by the start-up of the Los Colorados Extension (LCE) project on 10 September 2017. LCE successfully ramped up during the December 2017 quarter, enabling utilisation of the three concentrators. Production guidance for the 2018 financial year remains unchanged at between 1,130 and 1,230 kt. Escondida and Union N°2 of Supervisors and Staff signed a new Collective Agreement, valid from 1 October 2017, which has a duration of 36 months. The existing agreement with Union N°1 will expire on 1 August 2018, with planning underway for early negotiations.

Pampa Norte copper production for the December 2017 half year increased by nine per cent to 126 kt, supported by record material mined at Cerro Colorado and rapid ramp-up at the Spence tank house post unplanned maintenance during the September 2017 quarter. Pampa Norte production guidance for the 2018 financial year remains unchanged and is expected to be higher than the prior year.

Olympic Dam copper production for the December 2017 half year decreased by 31 per cent to 54 kt as a result of the planned major smelter maintenance campaign recently completed. Smelting operations have now resumed with the first anode cast from the flash furnace on 23 December 2017. Operations will continue to ramp-up to full capacity in the March 2018 quarter, with production guidance unchanged at 150 kt for the 2018 financial year. We expect production to increase to approximately 215 kt in the 2019 financial year, underpinned by improved operating performance and higher ore grades from the Southern Mine Area.

Antamina copper production for the December 2017 half year increased by five per cent to 70 kt and zinc production increased 54 per cent to 58 kt due to higher head grades and mining progressing through a zinc-rich ore zone consistent with the mine plan. Guidance for the 2018 financial year remains unchanged, with copper production of approximately 125 kt and zinc production of approximately 100 kt.

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Iron Ore

(i) Represents Western Australia Iron Ore (WAIO). Excludes production from Samarco.

Iron ore - Total iron ore production for the December 2017 half year was in line with the same period last year at 117 Mt, or 136 Mt on a 100 per cent basis. Guidance for the 2018 financial year remains unchanged at between 239 and 243 Mt, or between 275 and 280 Mt on a 100 per cent basis, with volumes weighted to the second half of the financial year as expected.

At WAIO, record production at Jimblebar and Mining Area C was offset by the impact of lower opening stockpile levels following the fire at the Mt Whaleback screening plant in June 2017, and planned maintenance in the previous quarter. Volumes increased by 11 per cent from the September 2017 quarter with a record annualised rate of 284 Mt (100 per cent basis) achieved for the December 2017 quarter. The higher volumes reflect increased plant availability and improved rail performance. Port debottlenecking activities were completed in the December 2017 quarter and will support higher volumes in the second half of the financial year.

BHP continues to work with the relevant authorities in relation to the necessary approvals to increase system capacity to 290 Mtpa (100 per cent basis).

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

Coal

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Metallurgical coal - Metallurgical coal production for the December 2017 half year decreased by four per cent to 20 Mt. Guidance for the 2018 financial year has been reduced to between 41 and 43 Mt and reflects lower volumes now expected at Broadmeadow and Blackwater. As a result of the reduced Broadmeadow and Blackwater volumes and compensatory increased production from higher cost pits, unit cost guidance is also expected to be negatively impacted and is currently under review.

At Queensland Coal, production for the December 2017 half year was lower due to the impacts of ongoing challenging roof conditions at Broadmeadow and geotechnical issues brought on by wet weather at Blackwater. This was partially offset by record production at South Walker Creek, Saraji, Caval Ridge and Daunia, underpinned by improved truck and shovel performance, utilisation of latent dragline capacity at Caval Ridge and increased wash-plant feed rates.

The Caval Ridge Southern Circuit project is progressing according to plan, with production expected to ramp-up early in the 2019 financial year.

Energy coal - Energy coal production for the December 2017 half year increased by four per cent to 14 Mt. Guidance for the 2018 financial year remains unchanged at 29 to 30 Mt.

New South Wales Energy Coal production increased by 10 per cent as it benefitted from improved stripping performance, higher truck utilisation and additional bypass coal. This was partially offset by a six per cent decline in Cerrejón production, which was impacted by wet weather conditions during the September 2017 quarter.

Other

Nickel - Nickel West production for the December 2017 half year increased by 11 per cent to 45 kt of nickel primarily due to improved performance at the Kalgoorlie smelter. Nickel production guidance for the 2018 financial year remains unchanged and is expected to be broadly in line with the 2017 financial year.

Minerals exploration

Minerals exploration expenditure for the December 2017 half year was US$86 million, of which US$55 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 December 2017 half year compared with the December 2016 half 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.

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The following footnotes apply to this Operational Review:

(1) 2018 financial year unit cost guidance is based on exchange rates of AUD/USD 0.75 and USD/CLP 663.

(2) 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.

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

(4) Adjusted effective tax rate comprises Total taxation (expense)/benefit excluding exceptional items and exchange rate movements included in taxation (expense)/benefit divided by Profit/(loss) before taxation and exceptional items.

(5) The Preliminary Agreement outlines the process and timeline for negotiation of a settlement of the BRL 155 billion (approximately US$47 billion) and BRL 20 billion (approximately US$6 billion) Public Civil Claims relating to the dam failure.

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).

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Production summary

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Production summary

(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

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