Wrap Text
BHP Annual Financial Report 2017
BHP Billiton Plc
Registration number 3196209
Registered in England and Wales
Share code: BIL
ISIN: GB0000566504
Issued by: BHP Billiton Plc
Date: 20 September 2017
To: London Stock Exchange
JSE Limited
For Release: Immediately
Contact: Helen Ratsey +44 (0) 20 7802 7540
BHP Billiton Plc – Annual Financial Report 2017
UK Listing Authority Submissions
The following documents have today been submitted to the National Storage Mechanism
and will shortly be available for inspection at: www.morningstar.co.uk/uk/NSM
• Annual Report 2017
http://www.bhp.com/-/media/documents/investors/annual-
reports/2017/bhpannualreport2017.pdf
• Sustainability Report 2017
http://www.bhp.com/-/media/documents/investors/annual-
reports/2017/bhpsustainabilityreport2017.pdf
• BHP Billiton Plc Notice of Meeting 2017
http://www.bhp.com/-/media/documents/investors/annual-
reports/2017/bhpnoticeofmeetingplc2017.pdf
• BHP Billiton Plc Supplementary Notice of Meeting 2017
http://www.bhp.com/-/media/documents/investors/annual-
reports/2017/bhpnoticeofmeetingplc2017supplementarynotice.pdf
• Revised Proxy Form (UK Principal Register)
• Revised Proxy Form (South Africa Branch Register)
The documents (with the exception of the Revised Proxy Forms) may also be
accessed via BHP’s website - bhp.com - or using the web links above.
Additional Information
The following information is extracted from the Annual Report 2017 (page references
are to pages in the Annual Report) and should be read in conjunction with BHP’s
Final Results announcement issued on 22 August 2017. Both documents can be
found at bhp.com and together, constitute the material required by DTR 6.3.5 to be
communicated to the media in unedited full text through a Regulatory Information
Service. This material is not a substitute for reading the Annual Report 2017 in full.
1. Principal risks and uncertainties
1.1 Risk management
Identifying and managing risk and opportunity are central to achieving our corporate
purpose of creating long-term shareholder value.
We embed risk management in our critical business activities, functions, processes
and systems through the following mechanisms:
• Risk assessments – we regularly assess known, new and emerging risks.
• Risk controls – we put controls in place over material risks, and periodically
assess the effectiveness of those controls.
• Risk materiality and tolerability evaluation – we assess the materiality of a risk
based on the degree of financial and non-financial impacts, including health,
safety, environmental, community, reputational and legal impacts. We assess the
tolerability of a risk based on a combination of residual risk and control
effectiveness.
We apply established processes when entering or commencing new activities in high-
risk countries. These include risk assessments and supporting risk management plans
to ensure potential reputational, legal, business conduct and corruption-related
exposures are managed and legislative compliance is maintained.
For information on our principal risks, refer to section 1.8.3. For information on our risk
management governance, refer to sections 2.13.1 and 2.14.
1.2 Principal risks
Robust risk assessment and viability statement
The Board has carried out a robust assessment of BHP’s principal risks, including
those that would threaten the business model, future performance, solvency or
liquidity.
The Directors have assessed the prospects of BHP over the next three years, taking
account our current position and principal risks.
The Directors believe a three-year viability assessment period is appropriate for the
following reasons. BHP has a two-year budget, a five-year outlook and a 20-year
strategic planning horizon. We have publicly stated our view that the outlook for the
sector remains challenging and volatile in the short to medium term. This exchange
rate and price volatility results in variability in plans and budgets. A three-year period
strikes an appropriate balance between long and short-term influences on
performance.
The viability assessment took into account, among other things, BHP’s commodity
price protocols, including low-case prices; the latest funding and liquidity update; the
long-dated maturity profile of BHP’s debt and the maximum debt maturing in any one
year; the Group-level risk profile and the mitigating actions available should particular
risks materialise; the Board strategy discussions, which provide a strategic review of
BHP’s markets and plans under divergent scenarios and consider available strategic
options; the flexibility in BHP’s capital and exploration expenditure programs under the
enhanced Capital Allocation Framework; and the reserve life of BHP’s minerals assets
and the reserves-to-production life of our oil and gas assets.
The Directors’ assessment also took account of additional stress-testing of the balance
sheet against two hypothetical significant risk events: a well blow out in the Gulf of
Mexico and a low-price environment. The Directors were also mindful of the scenario
analysis incorporated in BHP’s corporate planning process. These scenarios help
identify the key uncertainties facing the global economy and natural resources sector.
Taking account of these matters, and BHP’s current position and principal risks, the
Directors have a reasonable expectation that BHP will be able to continue in operation
and meet its liabilities over the next three years.
Risk factors
External risks
Fluctuations in commodity prices (including sustained price shifts) and
impacts of ongoing global economic volatility may negatively affect our
results, including cash flows and asset values
The prices we obtain for our oil, gas and minerals are determined by, or linked to,
prices in world markets, which have historically been subject to significant volatility.
Our usual policy is to sell our products at the prevailing market prices. The diversity
provided by our relatively broad portfolio of commodities does not necessarily
insulate BHP from the effects of price changes. Fluctuations in commodity prices
can occur due to price shifts reflecting underlying global economic and geopolitical
factors, industry demand, increased supply due to the development of new
productive resources or increased production from existing resources, technological
change, product substitution and national tariffs. We are particularly exposed to
price movements in minerals, oil and gas. For example, a US$1 per tonne decline
in the average iron ore price and US$1 per barrel decline in the average oil price
would have an estimated impact on FY2017 Profit after taxation from Continuing
and Discontinued operations of US$142 million and US$48 million, respectively.
For more information in relation to commodity price impacts, refer to section 1.6.3.
Volatility in global economic growth, particularly in developing economies, has the
potential to adversely affect future demand and prices for commodities. The impact
of sustained price shifts and short-term price volatility, including the effects of
unwinding the sustained monetary stimulus in the United States, and uncertainty
surrounding the details of the United Kingdom’s exit from the European Union,
creates the risk that our financial and operating results, including cash flows and
asset values, will be materially and adversely affected by short- or long-term
volatility in the prevailing prices of our products.
Our financial results may be negatively affected by exchange rate fluctuations
The geographic diversity of the countries in which our assets are located means
that our assets, earnings and cash flows are influenced by a variety of currencies.
Fluctuations in the exchange rates of those currencies may have a significant impact
on our financial results. The US dollar is the currency in which the majority of our
sales are denominated and the currency in which we present our financial
performance. Operating costs are influenced by the currencies of those countries
where our assets and facilities are located and also by those currencies in which
the costs of imported equipment and services are determined.
Reduction in Chinese demand may negatively impact our results
The Chinese market has been driving global materials demand and pricing over the
past decade. Sales into China generated US$18.9 billion (FY2016: US$13.2 billion)
or 49.3 per cent (FY2016: 42.6 per cent) of our revenue in FY2017. FY2017 sales
into China by commodity included 61 per cent Iron Ore, 22 per cent Copper, 16 per
cent Coal and 1 per cent Nickel (reported in Group and Unallocated). A continued
slowing in China’s economic growth and demand could result in lower prices for our
products and materially and adversely impact our results, including cash flows.
Actions by governments, regulation, political, community or social events,
judicial or community activism or unrest in the countries where our assets
are located could have a negative impact on our business
There are varying degrees of political, judicial and commercial stability and activism
in the locations in which we have operated and non-operated assets around the
globe. At the same time, our exposure to emerging markets may involve additional
risks that could have an adverse effect on the profitability of an operation. Risks in
the locations in which we have operated and non-operated assets could include
terrorism, civil unrest, judicial activism, community challenge or opposition,
regulatory investigation, nationalisation, protectionism, renegotiation or nullification
of existing contracts, leases, permits or other agreements, imposts, controls or
prohibitions on the production or use of certain products, restrictions on repatriation
of earnings or capital and changes in laws and policy, as well as other unforeseeable
risks. Risks relating to bribery and corruption, including possible delays or disruption
resulting from a refusal to make so-called facilitation payments, may be prevalent in
some of the countries where our assets are located. If any of our major assets are
affected by one or more of these risks, it could have a material adverse effect on
our assets in those countries, as well as BHP’s overall operating results, financial
condition and prospects.
Our operated and non-operated assets are based on material long-term
investments that are dependent on long-term fiscal stability and could be adversely
affected by changes in fiscal legislation, changes in interpretation of fiscal
legislation, periodic challenges and disagreements with tax authorities and legal
proceedings relating to fiscal matters. The natural resources industry continues to
be regarded as a source of tax revenue and can also be adversely affected by
broader fiscal measures applying to businesses generally. BHP is currently involved
in a number of uncertain tax and royalty matters. For more information, refer to note
5 ‘Income tax expense’ in section 5.
Our business could be adversely affected by new or evolving government
regulations and international standards, such as controls on imports, exports, prices
and greenhouse gas emissions. The nature of the industries in which we conduct
business means many of our activities are highly regulated by laws relating to
health, safety, environment and community impacts. Increasing requirements
relating to regulatory, environmental, social or community engagement or approvals
can potentially result in significant delays or interruptions and may adversely affect
the economics of new mining and oil and gas projects, the expansion of existing
assets and operations and the performance of our assets. As regulatory standards
and expectations are constantly developing, we may be exposed to increased
regulatory review, compliance costs to meet new operating and reporting standards
and unforeseen closure and site rehabilitation expenses.
Infrastructure, such as rail, ports, power and water, is critical to our business
operations. We have assets or potential development projects in countries where
government-provided infrastructure or regulatory regimes for access to
infrastructure, including our own privately operated infrastructure, may be
inadequate, uncertain or subject to legislative change. The impact of climate change
may increase competition for, and the regulation of, limited resources, such as
power and water. These factors could materially and adversely affect the expansion
of our business and ability of our assets to operate efficiently.
We own assets or interests in countries where land tenure can be uncertain and
disputes may arise in relation to ownership and use, including in respect of
Indigenous rights. For example, in Australia, the Native Title Act 1993 provides for
the establishment and recognition of native title under certain circumstances.
New or evolving regulations and international standards are complex, difficult to
predict and outside our control. Potential compliance costs, litigation expenses,
regulatory delays, rehabilitation expenses and operational impacts and costs arising
from government action, regulatory change and evolving standards could materially
and adversely affect BHP’s future results, prospects and our financial condition.
Business risks
Failure to discover or acquire new resources, maintain reserves or develop
new assets could negatively affect our future results and financial condition
The demand for our products and production from our assets results in existing
reserves being depleted over time. As our revenues and profits are derived from our
oil, gas and minerals assets, our future results and financial condition are directly
related to the success of our exploration and acquisition efforts, and our ability to
generate reserves to meet our future production requirements at a competitive cost.
Exploration activity occurs adjacent to established assets and in new regions, in
developed and less-developed countries. These activities may increase land tenure,
infrastructure and related political risks. A failure in our ability to discover or acquire
new resources, maintain reserves or develop new assets or operations in sufficient
quantities to maintain or grow the current level of our reserves could negatively
affect our results, financial condition and prospects. Deterioration in commodities
pricing may make some existing reserves uneconomic. Our actual exploration
drilling activities and future drilling budget will depend on our inventory size and
quality, drilling results, commodity prices, drilling and production costs, availability
of drilling services and equipment, lease expirations, land access, transportation
pipelines, railroads and other infrastructure constraints, regulatory approvals and
other factors.
There are numerous uncertainties inherent in estimating mineral and oil and gas
reserves. Geological assumptions about our mineralisation that are valid at the time
of estimation may change significantly when new information becomes available.
Estimates of reserves that will be recovered, or the cost at which we anticipate
reserves will be recovered, are based on uncertain assumptions. The uncertain
global financial outlook may affect economic assumptions related to reserve
recovery and may require reserve restatements. Reserve restatements could
negatively affect our results and prospects.
Potential changes to our portfolio of assets through acquisitions and
divestments may have a material adverse effect on our future results and
financial condition
We regularly review the composition of our asset portfolio and from time-to-time
may add assets to, or divest assets from, the portfolio. There are a number of risks
associated with acquisitions or divestments. These include:
• adverse market reaction to such changes or the timing or terms on which
changes are made;
• the imposition of adverse regulatory conditions and obligations;
• commercial objectives not being achieved as expected;
• unforeseen liabilities arising from changes to the portfolio;
• sales revenues and operational performance not meeting our expectations;
• anticipated synergies or cost savings being delayed or not being achieved;
• inability to retain key staff and transaction-related costs being more than
anticipated.
These factors could materially and adversely affect our reputation, future results and
financial condition.
Increased costs and schedule delays may adversely affect our development
projects
Although we devote significant time and resources to our project planning, approval
and review processes, many of our development projects are highly complex and
rely on factors that are outside our control, which may cause us to underestimate
the cost or time required to complete a project. For instance, incidents or
unexpected conditions encountered during development projects may cause
setbacks or cost overruns, required licences, permits or authorisations to build a
project may be unobtainable at anticipated costs, or may be obtained only after
significant delay and market conditions may change, thereby making a project less
profitable than initially projected.
In addition, we may fail to develop and manage projects as effectively as we
anticipate and unforeseen challenges may emerge.
Any of these may result in increased capital costs and schedule delays at our
development projects and materially and adversely affect anticipated financial
returns.
Financial risks
If our liquidity and cash flow deteriorate significantly it could adversely affect
our ability to fund our major capital programs
We seek to maintain a strong balance sheet. However, fluctuations in commodity
prices and ongoing global economic volatility could materially and adversely affect
our future cash flows and ability to access capital from financial markets at
acceptable pricing. If our key financial ratios and credit ratings are not maintained,
our liquidity and cash reserves, interest rate costs on borrowed debt, future access
to financial capital markets and the ability to fund current and future major capital
projects could be adversely affected.
We may not fully recover our investments in mining, oil and gas assets, which
may require financial write-downs
One or more of our assets may be adversely affected by changed market or industry
structures, commodity prices, technical operating difficulties, inability to recover our
mineral, oil or gas reserves and increased operating cost levels. These may cause
us to fail to recover all or a portion of our investment in mining, oil and gas assets
and may require financial write-downs, including goodwill, adversely affecting our
financial results.
The commercial counterparties we transact with may not meet their
obligations, which may negatively affect our results
We contract with many commercial and financial counterparties, including end-
customers, suppliers and financial institutions in the context of global financial
markets that remain volatile. We maintain a ‘one book’ approach with commercial
counterparties to make sure all credit exposures are quantified and assessed
consistently. However, our existing counterparty credit controls may not prevent a
material loss due to credit exposure to a major customer segment or financial
counterparty. In addition, customers, suppliers, contractors or joint venture partners
may fail to perform against existing contracts and obligations. Non-supply of key
inputs, such as tyres, mining and mobile equipment, diesel and other key
consumables, may unfavourably impact costs and production at our assets. These
factors could negatively affect our financial condition and results of assets.
Operational risks
Unexpected natural and operational catastrophes may adversely impact our
assets
We have onshore and offshore extractive, processing and logistical operations in
many geographic locations. Our key port facilities are located at Coloso and
Antofagasta in Chile and Port Hedland and Hay Point in Australia. We have four
underground mines, including one underground coal mine. Our operational
processes may be subject to operational accidents, such as port and shipping
incidents, underground mine and processing plant fire and explosion, open-cut pit
wall or tailings/waste storage facility failures, loss of power supply, railroad incidents,
loss of well control, environmental pollution, mechanical critical equipment failures
and cyber security attacks on BHP’s infrastructure. Our minerals and oil and gas
assets may also be subject to unexpected natural catastrophes such as
earthquakes, floods, hurricanes and tsunamis. Our Western Australia Iron Ore,
Queensland Coal and Gulf of Mexico oil and gas assets are located in areas subject
to cyclones or hurricanes. Our Chilean copper and Peruvian base metals assets are
located in a known earthquake and tsunami zone. Based on our risk management
and the limited value of external insurance in the natural resource sector, our risk
financing (insurance) approach is to minimise or not to purchase external insurance
for certain risks, including property damage and business interruption, sabotage and
terrorism, marine cargo, construction, primary public liability and employee benefits.
Existing business continuity plans may not provide protection for all the costs that
arise from such events, including clean-up costs, litigation and other claims. The
impact of these events could lead to disruptions in production, increased costs and
loss of facilities. Where external insurance is purchased, third party claims arising
from these events may exceed the limit of liability of the insurance policies we have
in place. Additionally, any uninsured or underinsured losses could have a material
adverse effect on our financial position or results of assets.
Breaches in, or failures of, our information technology may adversely impact
our business activities
We maintain and increasingly rely on information technology (IT) systems,
consisting of digital infrastructure, applications and networks to support our
business activities. These systems may be subject to security breaches (e.g. cyber-
crime or activists) or other incidents (e.g. from negligence) that can result in
misappropriation of funds, increased health and safety risks to people, disruption to
our assets, environmental damage, poor product quality, loss of intellectual property,
disclosure of commercially or personally sensitive information, legal or regulatory
breaches and liability, other costs and reputational damage.
Evolving convergence of IT and operational technology (OT) networks across
industries, including ours, present additional cyber-related risk as traditionally IT
networks have focused on availability of service to the enterprise.
Our potential liability from litigation and other actions resulting from the
Samarco dam failure is subject to significant uncertainty and cannot be
reliably estimated at this time, but could have a material adverse impact on
our business
On 5 November 2015, the Samarco Mineração S.A. (Samarco) iron ore operations
experienced a tailings dam failure that resulted in a release of mine tailings, flooding
the communities of Bento Rodrigues, Gesteira and Paracatu and impacting other
communities downstream and the environment of the Rio Doce basin. Samarco is
a joint venture owned equally by BHP Billiton Brasil Limitada (BHP Billiton Brasil)
and Vale S.A. (Vale). For information on the Samarco dam failure, refer to section
1.7.
The Samarco dam failure and subsequent suspension of Samarco’s mining and
processing operations continue to impact our financial results and will be disclosed
as an exceptional item for the year ended 30 June 2017, as described in 1.7 and in
note 3 ‘Significant events – Samarco dam failure’ in section 5.
Mining and processing operations remain suspended following the dam failure.
Samarco is currently progressing plans to resume operations; however, significant
uncertainties surrounding the nature and timing of any resumption of operations
remain, including as a result of Samarco’s significant debt obligations. For financial
information relating to Samarco, refer to note 29 ‘Investments accounted for using
the equity method’ in section 5.
BHP Billiton Brasil is among the defendants named in a number of legal proceedings
initiated by individuals, non-governmental organisations (NGOs), corporations and
governmental entities in Brazilian federal and state courts following the Samarco
dam failure. The other defendants include Samarco, Vale and Fundação Renova.
The lawsuits seek various remedies, including rehabilitation costs, compensation to
injured individuals and families of the deceased, recovery of personal and property
losses, moral damages and injunctive relief.
Among the claims brought against BHP Billiton Brasil is a public civil claim
commenced by the Federal Government of Brazil, the states of Espírito Santo and
Minas Gerais, and certain other public authorities (Brazilian Authorities) on 30
November 2015, seeking the establishment of a fund of up to R$20 billion
(approximately US$6.1 billion) in aggregate for clean-up costs and damages and a
R$155 billion (approximately US$47 billion) claim brought by the Federal Public
Prosecution Service on 3 May 2016 for reparation, compensation and moral
damages in relation to the Samarco dam failure. Given the status of these
proceedings, it is not possible at this time to provide a range of possible outcomes
or a reliable estimate of potential future exposures for BHP Billiton Brasil. For further
details on some of the legal proceedings relating to the Samarco dam failure, refer
to section 6.
On 2 March 2016, BHP Billiton Brasil, together with Vale and Samarco, entered into
a Framework Agreement (Framework Agreement) with the Brazilian Authorities to
establish a foundation (Fundação Renova) that will develop and execute
environmental and socio-economic programs to remediate and provide
compensation for damage caused by the Samarco dam failure. The Framework
Agreement was ratified by the Conciliation Chamber of the Federal Court of Appeal
in Brasilia on 5 May 2016, suspending the R$20 billion public civil claim. However,
on 30 June 2016, the Superior Court of Justice issued a preliminary order (Interim
Order) suspending the 5 May 2016 ratification of the Framework Agreement and
reinstating the R$20 billion public civil claim. BHP Billiton Brasil, Vale and Samarco
and the Federal Government have appealed the Interim Order before the Superior
Court of Justice.
In light of the significant uncertainties surrounding the nature and timing of ongoing
future operations at Samarco and based on currently available information, at 30
June 2017, BHP recognised a provision of US$1.1 billion, before tax and after
discounting (30 June 2016, US$1.2 billion), in respect of BHP Billiton Brasil’s
obligations under the Framework Agreement.
The measurement of the provision requires the use of estimates and assumptions
and may be affected by, among other factors, potential changes in scope of work
and funding amounts required under the Framework Agreement, including further
technical analysis required under the Preliminary Agreement (referred to below), the
outcome of the ongoing negotiations with Federal Prosecutors, costs incurred in
respect of programs delivered, resolution of uncertainty in respect of operational
restart, updates to discount and foreign exchange rates, resolution of existing and
potential legal claims and the status of the Framework Agreement. As a result, future
actual expenditures may differ from the amounts currently provided and changes to
key assumptions and estimates could result in a material impact on the amount of
the provision in future reporting periods.
On 18 January 2017, BHP Billiton Brasil, together with Vale and Samarco, entered
into a Preliminary Agreement with the Federal Prosecutors’ Office in Brazil, which
outlines the process and timeline for further negotiations towards a settlement
regarding the R$20 billion public civil claim and the R$155 billion public civil claim.
While a final decision by the Court on the issue of ratification of the Framework
Agreement is pending, the Preliminary Agreement suspends a R$1.2 billion
(approximately US$365 million) injunction order under the R$20 billion public civil
claim. The Preliminary Agreement also requests suspension of the public civil claim,
with a decision from the Court pending. The R$1.2 billion injunction order may be
reinstated if a final settlement arrangement is not agreed by 30 October 2017. Given
the status of these proceedings, it is not possible at this time to provide a range of
possible outcomes or a reliable estimate of potential future exposures for BHP
Billiton Brasil.
With regard to the Preliminary Agreement, the 12th Federal Court of Belo Horizonte
suspended the R$155 billion claim, including a R$7.7 billion (approximately US$2.3
billion) injunction request. However, proceedings may be resumed if a final
settlement agreement is not agreed by 30 October 2017. Given the status of these
proceedings, it is not possible at this time to provide a range of possible outcomes
or a reliable estimate of potential future exposures for BHP Billiton Brasil.
In addition, government inquiries and investigations relating to the Samarco dam
failure have been commenced by numerous agencies of the Brazilian Government.
Other lawsuits and investigations are at the early stages of proceedings, including
a shareholder action in the United States against BHP and a Samarco bondholder
action in the United States against Samarco, Vale, BHP Billiton Brasil and BHP. For
more information on the shareholder and bondholder actions and other lawsuits
relating to the Samarco dam failure, refer to section 6.5. Additional lawsuits and
government investigations relating to the Samarco dam failure may be brought
against BHP Billiton Brasil and possibly other BHP entities in Brazil or other
jurisdictions.
While additional retention structures have been completed, the potential remains for
further release or downstream movement of tailings material, which may result in
additional claims, fines and proceedings (or impact existing proceedings) and may
also have additional consequences on the environment and the feasibility, timing
and scope of any restart of Samarco operations.
Our potential costs and liabilities in relation to the Samarco dam failure are subject
to a high degree of uncertainty and cannot be reliably estimated at this time. The
total amounts that we may be required to pay will be dependent on many factors,
including the timing and nature of a potential restart of operations at Samarco, the
number of claims that become payable, the quantum of any fines levied, the
outcome of litigation and the amount and timing of payments under any judgements
or settlements. Nevertheless, such potential costs and liabilities could have a
material adverse effect on our business, competitive position, cash flows, prospects,
liquidity and shareholder returns.
Cost pressures and reduced productivity could negatively impact our
operating margins and expansion plans
Cost pressures may continue to occur across the resources industry. As the prices
for our products are determined by the global commodity markets, we do not
generally have the ability to offset these cost pressures through corresponding price
increases, which can adversely affect our operating margins. Although our efforts to
reduce costs and a number of key cost inputs are commodity price-linked, the
inability to reduce costs and a timing lag could materially and adversely impact our
operating margins for an extended period.
Some of our assets, such as those producing copper, are energy or water intensive.
As a result, BHP’s costs and earnings could be materially and adversely affected by
rising costs or supply interruptions. These could include the unavailability of energy,
fuel or water due to a variety of reasons, including fluctuations in climate, inadequate
infrastructure capacity, interruptions in supply due to equipment failure or other
causes and the inability to extend supply contracts on economic terms.
Many of our Australian employees have conditions of employment, including wages,
governed by the operation of the Australian Fair Work Act 2009. Conditions of
employment are often contained within collective agreements that are required to
be renegotiated on expiry (typically every three to four years). In some instances,
under the operation of the Fair Work Act, it can be expected that unions will pursue
increases to conditions of employment, including wages, and/or claims for greater
union involvement in business decision-making.
In circumstances where a collective agreement is being renegotiated, industrial
action is permitted under the Fair Work Act. Industrial action and any subsequent
settlement to mitigate associated commercial damage can adversely affect
productivity and customer perceptions as a reliable supplier, and contribute to
increases in costs.
The industrial relations environment in Chile remains challenging and it is possible
that we will see further disruptions. Recent changes to labour legislation in Chile
have resulted in the right to have a single negotiating body across different
operations owned by a single company. This change may lead to a higher risk of
operational stoppages that can contribute to an increase in costs and a reduction in
productivity.
More broadly, cost and productivity pressures on BHP and our contractors and sub-
contractors may increase the risk of industrial action and employment litigation.
These factors could lead to increased operating costs at existing assets,
interruptions or delays and could negatively impact our operating margins and
expansion plans.
Non-operated assets have their own management and operating standards,
joint venture partners or other companies managing those non-operated
assets may take action contrary to our standards or fail to adopt standards
equivalent to BHP’s standards, and commercial counterparties may not
comply with our standards
We have interests in assets which are operated and managed by joint venture
partners or by other companies. Those joint venture partners or other companies
have their own management and operating standards, controls and procedures,
including health, safety, environment and community (HSEC) standards and may
take action contrary to BHP’s management and operating standards, controls and
procedures. Failure by those joint venture partners or other companies to adopt
equivalent standards, controls and procedures at these non-operated assets could
lead to higher costs and reduced production, litigation and regulatory action, delays
or interruptions and adversely impact our results, prospects and reputation.
Commercial counterparties, such as our suppliers, contractors and customers, may
not comply with our HSEC standards or other standards we apply, causing adverse
reputational, legal and financial impacts.
Sustainability risks
Safety, health, environmental and community impacts, incidents or accidents
may adversely affect our people, assets and reputation or licence to operate
Safety
Potential safety events that may have a material adverse impact on our people,
assets, reputation or licence to operate include fire, explosion or rock fall incidents
in underground mining operations, personnel conveyance equipment failures in
underground operations, aircraft incidents, road incidents involving buses and light
vehicles, incidents between light vehicles and mobile mining equipment, ground
control failures, uncontrolled tailings containment breaches, well blowouts,
explosions or gas leaks and accidents involving inadequate isolation, working from
heights or lifting operations.
Health
Health risks faced include fatigue, musculoskeletal illnesses and occupational
exposure to substances or agents, including noise, silica, coal mine dust, diesel
exhaust particulate, nickel and sulphuric acid mist and mental illness. Longer-term
health impacts may arise due to unanticipated workplace exposures or historical
exposures of our workforce or communities to hazardous substances. These effects
may create future financial compensation obligations, adversely impact our people,
reputation, regulatory approvals or licence to operate and affect the way we conduct
our assets.
Given the global location of our assets, we could be affected by a public health
emergency such as influenza or other infectious disease outbreaks in any of the
regions in which our assets are located.
Environment
Our assets by their nature have the potential to adversely impact air quality,
biodiversity, water resources and related ecosystem services. Changes in scientific
understanding of these impacts, regulatory requirements or stakeholder
expectations may prevent, delay or reverse project approvals and result in
increased costs for mitigation, offsets or compensatory actions.
Environmental incidents have the potential to lead to material adverse impacts on
our people, communities, assets, reputation or licence to operate. These include
uncontrolled tailings containment breaches, subsidence from mining activities,
escape of polluting substances and uncontrolled releases of hydrocarbons.
We provide for operational closure and site rehabilitation. Our operating and closed
facilities are required to have closure plans. Changes in regulatory or community
expectations may result in the relevant plans not being adequate. This may increase
financial provisioning and costs at the affected assets.
Climate change
The physical and non-physical impacts of climate change may affect our assets,
productivity and the markets in which we sell our products. This includes acute and
chronic changes in weather patterns, policy and regulatory change, technological
development and market and economic responses. Fossil fuel-related emissions
are a significant source of greenhouse gases contributing to climate change. We
produce fossil fuels such as coal, oil and gas for sale to customers. We use fossil
fuels in our mining and processing operations either directly or through the purchase
of fossil fuel based electricity.
A number of national governments have already introduced, or are contemplating
the introduction of, regulatory responses to greenhouse gas emissions, including
from the extraction and combustion of fossil fuels to address the impacts of climate
change. This includes countries where we have assets such as Australia, the United
States and Chile, as well as customer markets such as China, India and Europe. In
addition, the international community completed a new global climate agreement at
the 21st Conference of the Parties (COP21) in Paris in December 2015. The
absence of regulatory certainty, global policy inconsistencies and the challenges
presented by managing our portfolio across a variety of regulatory frameworks have
the potential to adversely affect our assets and supply chain. From a medium- to
long-term perspective, we are likely to see some adverse changes in the cost
position of our greenhouse gas-intensive assets as a result of regulatory impacts in
the countries where we do business. These proposed regulatory mechanisms may
adversely affect our assets directly or indirectly through our suppliers and
customers. Assessments of the potential impact of future climate change regulation
are uncertain given the wide scope of potential regulatory change in the many
countries in which we do business. Examples of this include China, which is
launching the world’s largest emissions trading system in 2017 and Australia, where
the federal government repealed a carbon tax in 2014 and introduced new
legislation to take its place.
There is a potential gap between the current valuation of fossil fuel reserves on the
balance sheets of companies and in global equities markets and the reduced value
that could result if a significant proportion of reserves were rendered incapable of
extraction in an economically viable fashion due to technology, regulatory or market
responses to climate change. In such a scenario, stranded reserve assets held on
our balance sheet may need to be impaired or written off and our inability to make
productive use of such assets may also negatively impact our financial condition
and results.
The growth of alternative energy supply options, such as renewables and nuclear,
could also present a change to the energy mix that may reduce the value of fossil
fuel assets.
The physical effects of climate change on our assets may include changes in rainfall
patterns, water shortages, rising sea levels, increased storm intensities and higher
temperatures. These effects could materially and adversely affect the financial
performance of our assets.
Community
Our assets and activities may directly impact communities and also risk the potential
for adverse impacts on human rights or breaches of other international laws or
conventions.
Local communities may become dissatisfied with our operations or oppose our new
development projects, including through legal action leading to, potential schedule
delay, increased costs and reduced production. Community-related risks may
include community protests or civil unrest, adverse human rights impacts,
community health and safety, complaints and grievances, and civil society activism.
In extreme cases the risks may affect viability, adversely impacting our reputation
and licence to operate.
Hydraulic fracturing
Our Onshore US assets involve hydraulic fracturing, which includes using water,
sand and a small amount of chemicals to fracture hydrocarbon-bearing subsurface
rock formations, to allow flow of hydrocarbons into the wellbore. We depend on the
use of hydraulic fracturing techniques in our Onshore US drilling and completion
programs.
In the United States, the hydraulic fracturing process is typically regulated by
relevant US state regulatory bodies. Arkansas, Louisiana and Texas (the states in
which we currently operate) have adopted various laws and regulations, or issued
regulatory guidance, concerning hydraulic fracturing. Some states are considering
changes to regulations in relation to permitting, public disclosure, and/or well
construction requirements on hydraulic fracturing and related operations, including
the possibility of outright bans on the process. For more information, refer to section
7.10.
While we have not experienced a material delay or substantially higher operating
costs in our Onshore US assets as a result of current regulatory requirements, we
cannot predict whether additional federal, state or local laws or regulations will be
enacted and what such actions would require or prohibit. Additional legislation or
regulation could subject our assets to delays and increased costs, or prohibit certain
activities, which could adversely affect the financial performance of our Onshore US
assets.
Governance and compliance
A failure of our governance or compliance processes may lead to regulatory
penalties and loss of reputation. We conduct our business in a global environment
that encompasses multiple jurisdictions and complex regulatory frameworks. Our
governance and compliance processes (which include the review of internal
controls over financial reporting and specific internal controls in relation to trade and
financial sanctions and offers of anything of value to government officials and
representatives of state-owned enterprises) may not operate to identify financial
misstatements or prevent potential breaches of law, or of accounting or governance
practice. Our BHP Code of Business Conduct, together with our mandatory policies,
such as the anti-corruption, trade and financial sanctions and competition policies,
may not prevent instances of fraudulent behaviour and dishonesty nor guarantee
compliance with legal or regulatory requirements. This may lead to regulatory fines,
disgorgement of profits, litigation, allegations or investigations by regulatory
authorities, loss of operating licences and/or reputational damage.
1.3 Management of principal risks
The scope of our assets and the number of industries in which we conduct our
business and engage mean that a range of factors may impact our results. Material
risks that could negatively affect our results and performance are described in section
1.8.4 of the Annual Report 2017. Our approach to managing these risks is outlined
below.
Principal risk area Risk management approach
External risks The diversification of our portfolio of commodities,
Risks arise from fluctuations in geographies and currencies is a key strategy for
commodity prices and reducing the effects of volatility. Section 1.8.1
demand in major markets describes external factors and trends affecting our
(such as China or Europe) or results and note 21 ‘Financial risk management’ in
changes in currency exchange section 5 outlines BHP’s financial risk
rates, and actions by management strategy, including market,
governments, including new commodity and currency risk. The Financial Risk
regulations and standards, Management Committee oversees these risks as
and political events that described in sections 2.14 and 2.15. We also
impact long-term fiscal engage with governments and other key
stability stakeholders to make sure the potential adverse
impacts of proposed fiscal, tax, resource
investment, infrastructure access, regulatory
changes and evolving international standards are
understood and, where possible, mitigated.
Business risks Our Geoscience and Resource Engineering
Risks include the inherent Centres of Excellence manage governance and
uncertainty of identifying and technical leadership for Mineral Resource
proving reserves, adding and development and Ore Reserves reporting as
divesting assets and described in section 6.3.2. Our governance over
managing our capital reporting of Petroleum reserves is described in
development projects section 6.3.1.
We have established investment approval
processes that apply to all major capital projects
and asset divestment and acquisitions. The
Investment Committee oversees these as
described in sections 2.14 and 2.15. Our Project
Management Centre of Excellence aims to make
sure projects are safe, predictable and
competitive.
Financial risks We seek to maintain a strong balance sheet,
Continued volatility in global supported by our Portfolio Risk Management
financial markets may strategy. As part of this strategy, the diversification
adversely impact future cash of our portfolio reduces overall cash flow volatility.
flows, our ability to adequately Commodity prices and currency exchange rates
access and source capital are not generally hedged, and wherever possible,
from financial markets and our we take the prevailing market price. A hedging
credit rating. Volatility may program for our shale gas assets is an exception
impact planned expenditures, and reflects the inherent differences in shale gas
as well as the ability to recover assets in our portfolio. A shale gas operation has a
investments in mining, oil and short-term investment cycle and a price responsive
gas projects. In addition, the supply base, while hedging prices and input costs
commercial counterparties can be used to fix investment returns and manage
(customers, suppliers, volatilities. We use Cash Flow at Risk analysis to
contractors and financial monitor volatilities and key financial ratios. Credit
institutions) we transact with limits and review processes are required to be
may, due to adverse market established for all customers and financial
conditions, fail to meet their counterparties. The Financial Risk Management
contractual obligations Committee oversees these, as described in
sections 2.14 and 2.15. Note 21 ‘Financial risk
management’ in section 5 outlines our financial risk
management strategy.
Operational risks By applying our risk management processes, we
Unexpected natural and seek to identify catastrophic operational risks and
operational catastrophes may implement the critical controls and performance
adversely affect our assets. requirements to maintain control effectiveness.
Breaches in IT security Business continuity plans must be established to
processes may adversely mitigate consequences. Consistent with our
affect the conduct of our portfolio risk management approach, we continue
business activities. Our to be largely self-insured for losses arising from
potential liabilities from property damage, business interruption and
litigation and other actions construction.
resulting from the Samarco IT security controls (to protect IT infrastructure,
dam failure are subject to business applications and communication
significant uncertainty and networks and respond to security incidents) are in
cannot be reliably estimated at place and subject to regular monitoring and
this time. Operating cost assessment. To maintain adequate levels of
pressures and reduced protection, we also continue to monitor the
productivity could negatively development of threats in the external environment
affect operating margins and and assess potential responses to those threats.
expansion plans. Non- The Board has continued to focus its attention on
operated assets may not responding to the tragedy at Samarco. As that
comply with our standards response has now moved from the immediate,
emergency stage to a more strategic, structured
way of working, we have transitioned the work
previously carried out by the Samarco Sub-
committee of the Board to the Risk and Audit
Committee, the Sustainability Committee, as
appropriate, as well as the Board.
For further information on BHP’s response to the
Samarco dam failure, refer to section 1.7.
BHP has identified a number of actions that we will
take in the management of tailings dams and non-
operated joint venture arrangements. For details of
those actions, refer to section 1.7.
We aim to maintain adequate operating margins
through our strategy to own and operate large,
long-life, low-cost, expandable, upstream assets.
Our concentrated effort to reduce operating costs
and drive productivity improvements has realised
tangible results, with a reduction in controllable
costs.
The capability to sustain productivity
improvements is being further enhanced through
continued refinements to our Operating Model.
The Operating Model is designed to deliver a
simple and scalable organisation, providing a
competitive advantage through defining work,
organisation and performance measurements.
Defined global business processes, including
1SAP, provide a standardised way of working
across BHP. Common processes generate useful
data and improve operating discipline. Global
sourcing arrangements have been established to
ensure continuity of supply and competitive costs
for key supply inputs. We seek to influence the
application of our standards to non-operated
assets.
From an industrial relations perspective, detailed
planning is undertaken to support the renegotiation
of employment agreements, and is supported by
training and access to expertise in negotiation and
agreement making.
Sustainability risks Our approach to sustainability risks is reflected in
HSEC incidents or accidents Our Charter and described in section 1.10. Our
may adversely affect people or Requirements standards set out Group-wide
neighbouring communities, HSEC-related performance requirements
assets, reputation and our designed to support effective management control
licence to operate. The of these risks.
potential physical impacts and Our approach to corporate planning, investment
related responses to climate decision-making and portfolio management
change may impact the value provides a focus on the identification, assessment
of BHP, our assets and and management of climate change risks. We
markets have been applying an internal price on carbon in
our investment decisions for more than a decade.
Through a comprehensive and strategic approach
to corporate planning, we work with a broad range
of scenarios to assess our portfolio, including
consideration of a broad range of potential policy
responses to and impacts from climate change.
We also track signals across the external
environment to provide timely insights into the
potential impacts on our portfolio. For more
information on the management of climate change,
refer to section 1.10.6.
Our approach to engagement with community
stakeholders is outlined in our minimum
organisational requirements for Community. We
undertake stakeholder identification and analysis,
social impact and opportunity assessments,
community perception surveys and human rights
impact assessments to identify, mitigate or
manage key potential social and human rights
risks.
Our Requirements for Risk Management standard
provides the framework for risk management
relating to climate change and material health,
safety, environment and community risks. We
conduct internal audits to test compliance with Our
Requirements standards and develop action plans
to address any gaps. Key findings are reported to
senior management and reports are considered by
relevant Board committees.
Our Requirements standards and action plans are
developed to address any gaps. Key findings are
reported to senior management and reports are
considered by relevant Board committees.
Our Code of Business Conduct sets out
requirements related to working with integrity,
including dealings with government officials and
third parties as described in section 2.16.
Processes and controls are in place for the internal
control over financial reporting, including under
Sarbanes-Oxley. We have established anti-
corruption, competition and trade sanctions
performance requirements, which are overseen by
the Ethics and Compliance function. The
Disclosure Committee oversees our compliance
with securities dealing obligations and continuous
and periodic disclosure obligations, as described in
sections 2.14, 2.15 and 2.17.
2. Related party transactions
There have been no related party transactions that have taken place during the year
ended 30 June 2017 that have materially affected the financial position or the
performance of the BHP Group during that period. Details of the related party
transactions that have taken place during the year ended 30 June 2017 are set out
in notes 22 ‘Key management personnel’ and 31 ‘Related party transactions’ to the
Financial Statements on pages 194 and 202 of the Annual Report 2017.
3. Directors’ Responsibility Statement
The following statement which was prepared for the purposes of the Annual Report
2017 is repeated here for the purposes of complying with DTR 6.3.5. It relates to and
is extracted from the Annual Report 2017 and is not connected to the extracted and
summarised information presented in this announcement.
“In accordance with a resolution of the Directors of BHP Billiton Limited and BHP
Billiton Plc, the Directors declare that:
(a) in the Directors’ opinion and to the best of their knowledge the Financial
Statements and notes, set out in sections 5.1 and 5.2, are in accordance with
the UK Companies Act 2006 and the Australian Corporations Act 2001,
including:
(i) complying with the applicable Accounting Standards;
(ii) giving a true and fair view of the assets, liabilities, financial position
and profit or loss of each of BHP Billiton Limited, BHP Billiton Plc, the
Group and the undertakings included in the consolidation taken as a
whole as at 30 June 2017 and of their performance for the year ended
30 June 2017;
(b) the Financial Statements also complies with International Financial Reporting
Standards, as disclosed in section 5.1;
(c) to the best of the Directors’ knowledge, the management report (comprising
the Strategic Report and Directors’ Report) includes a fair review of the
development and performance of the business and the financial position of
the Group and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and uncertainties that
the Group faces;
[Paragraphs related to Australian regulatory requirements have been omitted.]
Signed in accordance with a resolution of the Board of Directors.
Ken MacKenzie, Chairman
Andrew Mackenzie, Chief Executive Officer.
Dated this 7th day of September 2017.”
Sponsor: UBS South Africa (Pty) Limited
BHP Billiton Plc Registration number 3196209
LEI 549300C116EOWV835768
Registered in England and Wales
Registered Office: Nova South, 160 Victoria Street, London SW1E 1LB United Kingdom
A member of the BHP Group which is headquartered in Australia
Date: 20/09/2017 07:05:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
Sharenet Sites 
