BHP Group Regulatory News (BHP)

BHP OPERATIONAL REVIEWFOR THE HALF YEAR ENDED 31 DECEMBER 2018

- Production guidance for the 2019 financial year remains unchanged for petroleum, iron ore, metallurgical coal and energy coal. Total copper production guidance increased to between 1,645 and 1,740 kt and reflects the retention of Cerro Colorado.

- Group copper equivalent production(1) was broadly unchanged in the December 2018 half year, with volumes for the full year also expected to be in line with last year.

- Full year unit costs for all major assets are expected to be in line with guidance(2), predominantly reflecting stronger anticipated volumes in the second half of the year. However, unit costs were tracking above full year guidance at the December 2018 half year as a result of planned maintenance and production outages during the period.

- All major projects under development are tracking to plan.

- In Petroleum, the first appraisal well at Trion in Mexico (Trion-2DEL) encountered oil, in line with expectations. A downdip sidetrack is currently being drilled to further appraise the field.

- The Onshore US sale process was completed on 31 October 2018, with the net proceeds of US$10.4 billion to be returned to shareholders. On 17 December 2018, a US$5.2 billion off-market buy-back of BHP Group Limited shares was successfully completed. The balance of the net proceeds will be paid on 30 January 2019 as a special dividend of US$1.02 per share.

- The financial results for the December 2018 half year are expected to reflect certain items as summarised in the table on page two.

- Productivity for the December 2018 half year has been impacted by unplanned production outages at Olympic Dam, Spence and Western Australia Iron Ore, with a total negative impact of approximately US$600 million.

BHP Chief Executive Officer, Andrew Mackenzie, said: "Production in the first half was broadly in line with the prior period despite planned maintenance and outages. In Petroleum, our first appraisal well at Trion in Mexico encountered oil and we added to our exploration options with successful bids for two licences offshore Eastern Canada. We completed the sale of our US shale assets and returned US$5.2 billion to shareholders through a share buy-back program, with a further US$5.2 billion to be returned as a special dividend on 30 January 2019."

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Summary

Production for the December 2018 half year and guidance for the 2019 financial year are summarised below.

(i) Other copper comprises Pampa Norte (including Cerro Colorado production for the full 2019 financial year to reflect its retention, previous guidance only included 35 kt of production for the first half of the 2019 financial year), Olympic Dam and Antamina.

(ii) Increase in BHP's share of volumes reflects the expiry of the Wheelarra Joint Venture sublease in March 2018, with control of the sublease area reverted to the Jimblebar Joint Venture, which is accounted for on a consolidated basis with minority interest adjustments.

BHP expects its financial results for the first half of the 2019 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 19 February 2019. Accordingly, the information is subject to update.

(i) Numbers are not tax effected, unless otherwise noted.

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

(iii) Financial impact is the subject of ongoing work and is not yet finalised.

Productivity for the December 2018 half year has been impacted by lower than expected volumes at Olympic Dam (unplanned acid plant outage in August 2018, volume impact of 45 kt), Spence (fire at the electro-winning plant in September 2018, volume impact of 25 kt) and WAIO (train derailment in November 2018, volume impact of 4 Mt), with a total negative impact of approximately US$600 million. Productivity guidance for the full year is currently under review and revised guidance will be provided in December 2018 half year financial results.

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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.

(v) Comparative financial information has been restated for the new accounting standard, IFRS15 Revenue from Contracts with Customers, which became effective from 1 July 2018.

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 31 December 2018, the Group had 339 kt of outstanding copper sales that were revalued at a weighted average price of US$2.70 per pound. The final price of these sales will be determined over the remainder of the 2019 financial year. In addition, 364 kt of copper sales from the 2018 financial year were subject to a finalisation adjustment in the current period. The provisional pricing and finalisation adjustments will decrease Underlying EBITDA(4) by US$272 million in the 2019 financial year and is included in the average realised copper price in the above table.

During the December 2018 quarter, the North West Shelf Greater Western Flank-B project achieved first production ahead of schedule and under budget. The North West Shelf Greater Western Flank-B project will not be reported in future Operational Reviews.

At the end of December 2018, 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.

The Onshore US sales process was completed on 31 October 2018, with the net proceeds of US$10.4 billion to be returned to shareholders through an off-market buy-back and a special dividend shareholder return program. On 17 December 2018, the US$5.2 billion off-market buy-back of BHP Group Limited shares was successfully completed and enabled the buy-back of approximately 265.8 million shares (5.0 per cent of the total issued capital of BHP Group Limited and BHP Group Plc) at A$27.64 per share. In addition, the Board of BHP determined to pay a special dividend to shareholders of US$1.02 per share, representing the residual US$5.2 billion of net proceeds, based on the reduced number of shares on issue (approximately 5,058 million) following completion of the off-market buy-back.

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On 19 November 2018, BHP settled its transfer pricing dispute relating to its marketing operations in Singapore with the Australian Taxation Office. The settlement fully resolved all prior years, being 2003 to 2018, with no admission of tax avoidance by BHP. As part of the settlement, BHP paid a total of approximately A$529 million in additional taxes for the prior years (BHP paid A$328 million of this amount when the amended assessments were received in prior years, with the balance of A$201 million paid in the December 2018 quarter). In addition, the settlement provides certainty in relation to the future taxation treatment as, due to a change in ownership of the main marketing entity, all profits made in Singapore in relation to the Australian assets owned by BHP Group Limited will be fully subject to Australian tax under the Controlled Foreign Company tax rules from the 2020 financial year.

BHP has agreed to fund a total of US$515 million in further financial support for the Renova Foundation and Samarco. This comprises US$438 million to fund the Renova Foundation until 31 December 2019 which will be offset against the Group's provision for the Samarco dam failure, and a short-term facility of up to US$77 million to be made available to Samarco until 30 June 2019.

As at the date of this Operational Review, we are not in a position to provide an update, for the purpose of the December 2018 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 treated as an exceptional item.

Petroleum

Petroleum - Total Conventional petroleum production was broadly flat at 63 MMboe. Guidance for the 2019 financial year remains unchanged at between 113 and 118 MMboe, with volumes expected to be towards the upper end of the guidance range.

Crude oil, condensate and natural gas liquids production declined by five per cent to 29 MMboe due to natural field decline across the portfolio and a 70 day planned dry dock maintenance program at Pyrenees completed during the September 2018 quarter. This decline was partially offset by higher uptimes at our Gulf of Mexico assets.

Natural gas production was broadly flat at 206 bcf, reflecting increased tax barrels at Trinidad and Tobago in accordance with the terms of our Production Sharing Contract. This was partially offset by planned maintenance at Trinidad and Tobago in the December 2018 quarter and natural field decline across the portfolio.

On 30 November 2018, BHP completed the sale of its interests in the Bruce and Keith oil and gas fields in the United Kingdom to Serica Energy UK Ltd, with an effective date of 1 January 2018.

During the December 2018 quarter, the Bass Strait West Barracouta project was approved. The A$200 million (BHP share) investment is expected to produce first gas in the 2021 calendar year to help offset Bass Strait production decline, and to deliver competitive returns.

On 8 January 2019, BP (the operator) announced the sanction of the Atlantis Phase 3 project. Approval from BHP's Board will be sought during the March 2019 quarter. Study work continues on the Ruby project in Trinidad and Tobago.

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

In the US Gulf of Mexico, a sidetrack of the Samurai-2 exploration well commenced on 25 August 2018 to further appraise the discovery, and was plugged and abandoned on 2 November 2018 after delineating the Samurai discovery. Appraisal and development planning is in progress. In the Western US Gulf of Mexico, the Ocean Bottom Node(5) seismic acquisition is expected to be completed in the March 2019 quarter. This is the world's first deepwater exploration ocean bottom node seismic acquisition.

In Trinidad and Tobago, the Concepcion-1 well was spud on 30 September 2018 to further test the Magellan play, with no commercial hydrocarbons encountered. The well was plugged and abandoned on 25 October 2018. This completed Phase 2 of our deepwater exploration drilling campaign in Trinidad and Tobago.

In Mexico, we spud the Trion-2DEL appraisal well on 15 November 2018 and encountered oil in line with expectations. This was the first well drilled by an international operator in the Mexican deepwater. A downdip sidetrack of the Trion-2DEL well commenced on 4 January 2019 to further appraise the field, including the oil water contact.

BHP was successful in its bids to acquire a 100 per cent interest in, and operatorship of, two exploration licences for blocks 8 and 12 in the Orphan Basin, offshore Eastern Canada. BHP's aggregate bid amount of US$625 million reflects the costs of the drilling and seismic work likely to be performed during the exploration phase, although there is no minimum work program under the licence agreements. BHP's minimum commitment under the licence agreements, if no work is performed, is approximately US$119 million for block 8 and US$38 million for block 12.

Petroleum exploration expenditure for the December 2018 half year was US$316 million, of which US$166 million was expensed. A US$750 million exploration and appraisal program is being executed for the 2019 financial year.

Onshore US - Discontinued operations

The Onshore US sales process was completed on 31 October 2018, with the rights to the economic profits transferring to the purchasers from 1 July 2018. Onshore US production for the July 2018 to October 2018 period was 26 MMboe, with drilling and development expenditure of US$0.4 billion. Our operated rig count remained unchanged at five, with two rigs at Eagle Ford, two rigs at Permian and one at Haynesville. We continue to provide certain transitional services to BP for up to nine months following completion, however no further production will be reported by BHP.

Copper

Copper - Total copper production decreased by one per cent to 825 kt. Guidance for the 2019 financial year has been increased to between 1,645 and 1,740 kt and reflects the retention of Cerro Colorado.

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Escondida copper production was broadly unchanged at 580 kt as higher concentrator throughput and improved recoveries offset the impact of expected lower copper grades. Production guidance remains unchanged at between 1,120 and 1,180 kt for the 2019 financial year.

Pampa Norte copper production decreased by 17 per cent to 105 kt and reflects planned maintenance and a production outage at Spence following a fire at the electro-winning plant in September 2018. Record ore milled was achieved in the half year at both Spence and Cerro Colorado. Spence returned to full capacity during the December 2018 quarter, with production guidance of between 160 and 175 kt unchanged for the 2019 financial year. In the December 2018 quarter, BHP and EMR Capital agreed to terminate their agreement for the sale and purchase of Cerro Colorado after it became clear that the financing conditions of the transaction would not be satisfied by the end of the 2018 calendar year. Production at Cerro Colorado for the 2019 financial year is expected to be between 60 and 70 kt.

Olympic Dam copper production increased by 20 per cent to 65 kt as a result of the major smelter maintenance campaign in the prior period, which was partially offset by an unplanned acid plant outage in August 2018. Surface operations resumed at the end of October 2018 following completion of acid plant remediation works. Underground operations continue to progress into the Southern Mine Area, with record development kilometres achieved and the mine's third decline becoming fully operational in the quarter. Production guidance for the 2019 financial year remains unchanged at between 170 and 180 kt.

Antamina copper production increased by eight per cent to 75 kt due to higher head grades. Production guidance for the 2019 financial year remains unchanged at approximately 135 kt for copper and approximately 85 kt for zinc.

Iron Ore

Iron ore - Total iron ore production increased by two per cent to 119 Mt (135 Mt on a 100 per cent basis). Guidance for the 2019 financial year remains unchanged at between 241 and 250 Mt, or between 273 and 283 Mt on a 100 per cent basis.

At WAIO, increased volumes reflected record production at Jimblebar and the impact from the Mt Whaleback fire in the prior period. This was partially offset by the impact of planned maintenance in the September 2018 quarter and a train derailment on 5 November 2018 which resulted in the suspension of rail operations for five days and a production impact of approximately 4 Mt. During the rail outage, mine stockpile levels were built and are expected to be partially drawn down in the March 2019 quarter.

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

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Coal

Metallurgical coal - Metallurgical coal production increased by two per cent to 21 Mt. Guidance for the 2019 financial year remains unchanged at between 43 and 46 Mt, with volumes weighted to the second half of the year as expected.

At Queensland Coal, increased production was supported by record production at South Walker Creek and higher wash-plant throughput at Poitrel following the purchase of the Red Mountain processing facility. This increase was partially offset by the scheduled longwall move at Broadmeadow which was successfully completed during the quarter.

The Caval Ridge Southern Circuit project was completed according to plan with the conveying of first coal in October 2018.  

Energy coal - Energy coal production decreased by five per cent to 13 Mt. Guidance for the 2019 financial year remains unchanged at approximately 28 to 29 Mt.

New South Wales Energy Coal production decreased by four per cent as a result of a higher average strip ratio. Cerrejón production decreased by seven per cent due to mine sequence changes.

Other

Nickel - Nickel West production decreased by 15 per cent to 40 kt as operations were suspended following a fire at the Kalgoorlie smelter in September 2018. The smelter returned to operation on 1 October 2018, with full repairs now expected to be completed in the March 2019 quarter. Planned maintenance at the Kwinana refinery was brought forward to align with the smelter outage and, as a result, production guidance for the 2019 financial year remains unchanged and is expected to be broadly in line with the 2018 financial year.

Minerals exploration

Minerals exploration expenditure for the December 2018 half year was US$81 million, of which US$56 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.

Consistent with our exploration focus on copper, in September 2018, BHP acquired an initial 6.1 per cent interest in SolGold Plc (SolGold), the majority owner and operator of the Cascabel porphyry copper-gold project in Ecuador. On 15 October 2018, BHP entered into an agreement to acquire an additional 100 million shares in SolGold, for an investment of US$59 million, with our total interest now approximately 11.2 per cent.

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In November 2018, BHP confirmed identification of a potential new iron oxide, copper, gold (IOCG) mineralised system, located 65 kilometres to the south east of BHP's operations at Olympic Dam in South Australia. BHP is evaluating and interpreting the results reported and planning a further drilling program, to commence in early in the 2019 calendar year.

Variance analysis relates to the relative performance of BHP and/or its operations during the December 2018 half year compared with the December 2017 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. Numbers presented may not add up precisely to the totals provided due to rounding. Copper equivalent production based on 2018 financial year average realised prices.

The following footnotes apply to this Operational Review:

(1) Excludes production from Onshore US.

(2) 2019 financial year unit cost guidance: Conventional Petroleum

(3) IFRS15 Revenue from Contracts with Customers became effective for the Group from 1 July 2018.

(4) 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.

(5) WGOM OBN 2018 Seismic Permit is OCS Permit T18-010.

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 Group Limited, BHP Group Plc and, except where the context otherwise requires, their respective subsidiaries as defined in note 27 'Subsidiaries' in section 5.1 of BHP's 30 June 2018 Annual Report on Form 20-F, unless stated otherwise. Notwithstanding that this release may include production, financial and other information from non-operated assets, non-operated assets are not included in the BHP Group and, as a result, statements regarding our operations, assets and values apply only to our operated assets unless stated otherwise.

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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) Production restated to include other nickel by-products.

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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Production and sales report