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BHP's Mackenzie targets 70% value uplift in low-price market, 'incremental' growth seen

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BHP's Mackenzie targets 70% value uplift in low-price market, 'incremental' growth seen

The top executive at BHPBilliton Group moved to ease investors' concerns over sliding metalprices and a recent US$44 billion damages claimby outlining a plan to potentially increase the value of the company by 70% viacost-cutting; boosting efficiencies; and betting on a handful of oil, copper andpotash growth assets.

Speaking at an investor conference in Florida on May 10, CEOAndrew Mackenzie indicated he would not wait for a bounce in metal prices to expandthe company; he also dampened speculation that BHP Billiton would seek to take advantageof record-low mining valuations and a swell of distressed asset sales by buyingnew mines.

Instead, he said growth would likely focus on incrementally ratchetingup output at the company's existing projects, or one or two of its own greenfieldoptions in copper and oil.

"Today, I present a roadmap based solely on our broad suiteof existing opportunities which, even without a significant recovery in commodityprices, has the potential to grow the base value of BHP Billiton by more than 70%,"Mackenzie told the audience.

While he said he thought output from existing operations couldincrease by about 10% in the coming years, the biggest potential for windfall valuegrowth came from promising projects with a combined net present value of US$25 billion,including three major conventional oil projects, the Jansen potash project, and the company's two copperexpansions — Spenceand Olympic Dam.

Selecting which of these to progress will be taken in the nextfew years, he said.

BHP Billiton shareshave crashed from 2010-2011 peak

Mackenzie presented his plan to grow despite low pricesafter three years of pain for BHP Billiton stockholders.

The shares have been walloped in recent years, down by nearly70% from the peak of the commodities boom in December 2010.

Worse, the company at the start of 2016 abandoned its long-heldpolicy of paying equal or higher dividends every year. With low metals prices hittingearnings, BHP Billiton slashed this year's payout by 74%.

Credit rating agencies, meanwhile, downgraded the company's debt a notch to reflect a weakerbalance sheet.

Concerns over slowing Chinese growth have put pressure on ironore mines, while renewed focus on pollution and carbon emissions has sparked a worldwidebacklash against thermal coal. Both minerals are among BHP Billiton's mainstay assets.

Soothing investors'fears

But Mackenzie's new pitch in Florida was aimed at allayingthese concerns, and reminding investors that, despite the tough times, BHP Billitonstill has a solid portfolio of assets.

These assets can either be made more efficient to survive inthe current market, or quickly leveraged and squeezed to extract additional value,Mackenzie said.

He pointed out that BHP Billiton's cash flow at April spot pricesshould be over US$5 billion in the next financial year, adding that the companywould be able to prosper even at the current low market ebb.

He said incremental expansion of existing operations could add10% to production volumes without any significant capital investments. At WesternAustralian Iron Ore, where unit cash costs will fall to US$14 per tonne in the currentfinancial year, overall output is on track to hit 290 million tonnes by the endof the decade without any additional CapEx. Similarly, at the partly-owned copper mine in Chile,completion of a third processing plant should allow the mine to produce an additional150,000 tonnes of copper per annum over the next decade.

Another incremental project is Olympic Dam, where productionis expected to rise to 230,000 tonnes of copper per annum by 2021, with potentialto increase to 280,000 tonnes per year.

Overall, Mackenzie said he expected production costs at Escondidato fall to US$1 per pound this year.

At Queensland Coal, the executive said he expected cash coststo fall to US$55 per tonne, while production could increase by 4 million tonnesper annum by leveraging use of the CavalRidge wash plant.

In petroleum, Mackenzie said the company's cash cost for conventionaloil would fall to less than US$10 per barrel in the next year, while he was "enthusiastic"about new conventional oil development plans, such as Mad Dog 2, an offshore projectin the Gulf of Mexico.

Board decisions on MadDog oil, Spence copper investments by end of 2017

Despite the focus on incremental growth, cost-cutting andboosting efficiencies at existing operations, Mackenzie said the company is stillpushing ahead with its greenfield investments.

The biggest of these are those in copper and offshore oil.

The CEO said BHP Billiton will make investment decisions on twoof them in the coming 18 months — the offshore conventional oil Mad Dog 2 project,and the Spence Growth Option copper project.

"[Our] studies on Spence continue with the potential forthis project to add 200,000 tonnes of copper by 2020. This will be well-timed forthe improving market fundamentals," he said.

In oil, he said the board will make a decision on whether toinvest in the Mad Dog expansion with partner British Petroleum Plc within the next12 months.

"Continued optimization has reduced our share of expectedcapital costs to between US$2.5 billion and US$3 billion … [this] significant improvementin development costs makes Mad Dog Phase 2 even more resilient to lower oil prices."

Shale expansionwas "poorly timed," but BHP set for price recovery

On onshore shale, Mackenzie said he was still positiveabout the value of the assets, but admitted that the company's entry into the sectorat the peak of oil prices was unfortunate.

"Although the acquisition was poorly timed, we believe ourshale assets positively differentiate us from our peers," he said.

BHP Billiton bought Chesapeake Energy Corp.'s Arkansas shalegas assets in 2011 for US$4.75 billion in cash, but wrote the investment down byUS$2.8 billion four years later, when oil prices crashed.

But Mackenzie said he was very positive still about the U.S.shale sector's "huge" resource potential, its efficiency, short paybacktimes, and its flexibility to shut down production during times of low oil prices.

"We have reduced capital spending to about US$700 millionnext financial year, our rig count to four, and we continue to exercise flexibilityin the pace of drilling and fracking to maximize value as prices recover,"he said.