29th Nov 2006 07:00
BHP Billiton PLC29 November 2006 BHP Billiton Limited Annual General Meeting Speeches by Don Argus, Chairman, BHP Billiton and Chip Goodyear, Chief Executive Officer, BHP Billiton 29 November 2006 Don Argus, Chairman, BHP Billiton Good morning ladies and gentlemen and welcome to the 2006 Annual General Meetingof BHP Billiton Limited. My name is Don Argus, and I will Chair today's meeting. As a Queenslander I want to say what a pleasure it is to have this meeting herein Brisbane. Thank you for taking the time to join us here this morning. Queensland has always been significant in the history of BHP and it's an evenmore significant part of the future of BHP Billiton. Our metallurgical coal business with Mitsubishi exports more than 25 per cent ofAustralia's annual coal exports to steel producers in Japan, Europe, India,China and Brazil. Our Yabulu Refinery is one of the major nickel and cobalt processing plants inthe world and our Cannington underground mine in north west Queensland is theworld's largest producer of silver. We directly employ more than 5,400 Queenslanders and our Queensland businessesgenerate around 1.5 billion dollars in royalties and taxes each year. Importantly, many of those employees are part of the 61,600 Queenslanders whoare BHP Billiton shareholders. So you can see we are very pleased to be here and proud to play a role in theongoing economic development of Queensland. Now the reason for being here today is to consider the business of the meeting. I propose to take the Notice as read. If you need a copy of the Notice, pleaseask one of the attendants. Minutes of our last meeting are available forinspection in the registration area outside. Now, let me introduce your Directors. On my left is Chip Goodyear, our Chief Executive Officer and an ExecutiveDirector. The other Directors are seated in the auditorium. I'll ask them tostand as I introduce them. We have: Gail de Planque, David Jenkins, Jac Nasser, Chris Lynch, David Brink, JohnBuchanan, Carlos Cordeiro, Paul Anderson, Marius Kloppers, David Crawford andJohn Schubert. You can read full details of their backgrounds and qualifications in the AnnualReport. Next to Chip on my left is Alex Vanselow, our Chief Financial Officer, and on myright is our Group Company Secretary, Karen Wood. On your behalf I would like to welcome Chris, Jac and Marius to their firstannual general meeting of BHP Billiton Limited as directors, and Paul to hisfirst meeting since rejoining our Board. Mike Salamon's last meeting as an executive Director of BHP Billiton was at thePlc annual general meeting held in London on 26 October. He retired on that date and left BHP Billiton after more than 20 years with theGroup and its predecessor companies. Mike has been a true leader and has playeda key role in creating the organisation we are today. On your behalf I thankMike for his tireless efforts and commitment to the Group. Also here this morning are Peter Nash, Michael Andrew and Tony Romeo,representatives from the Group's external auditors, KPMG. Let me now run through today's agenda. Again we have a considerable amount ofbusiness to cover with 32 items. Given this, I propose to manage the agenda for this year's meeting in a way thatwill provide a sharper focus on the issues that shareholders have said are ofinterest to them. A very pertinent issue this week has been the release of the report fromCommissioner Cole's inquiry into the United Nations Oil-for-Food program. During the course of the Cole Inquiry, BHP Billiton was included in the terms ofreference because of events surrounding the Company's payment for a shipment ofwheat to Iraq in 1996. As disappointed as we were about being involved in the inquiry, we made acommitment to conduct a full review of what occurred and to publicly disclosethe findings of our review. This morning we made our report on those findings public and Chip has just givena media conference to answer questions relating to ours and the Commissioner'sfindings. I am pleased to report that Commissioner Cole has found: • There was no basis for any adverse finding against BHP or BHP Billiton • The company did not act inconsistently with UN sanctions or Australian law; • Payment for the wheat shipment did not amount to a bribe but was a gift; and • The Department of Foreign Affairs and Trade and the UN gave their approval for the shipment. Our internal review reached the same conclusions on key factual and legalfindings as Commissioner Cole. Our review did find areas for improvement in some of our internal processes andthere are recommendations that Chip will implement. We are proud of our record of governance and of our commitment to adopt thehighest ethical standards wherever we do business. We also recognise that thereare always things we can do better and we have used both the Commission and theInternal Review to identify those things. Our report on the findings of our Internal Review can be found on our websitefor those of you who are interested in further detail. Two of the key areas that shareholders have told us they want covered today arecapital management and dividend policy. And, of course, I will discuss the outlook for the Company. Chip will then talk to you about our operational performance. And following Chip's address I will move to the formal items of business andthen open the meeting for questions from the floor. Of course, you will have theopportunity to ask questions on the specific items of business as the meetingconsiders each of these. At the end of the meeting, the Directors and the management team would like youto join us outside for some light refreshments. For reasons of consistency, as we go through today's proceedings both Chip and Iwill talk in US dollars, as this is the currency we report in. This year BHP Billiton recorded a profit of 10.2 billion dollars. In the 2002financial year, that's the year following the merger, our profit was 1.9 billiondollars. Today our market capitalisation is around 113 billion dollars. In 2002 it was 30 billion dollars. In the five years since the merger we have invested nearly 15 billion dollars ingrowth projects and acquisitions to help create the world's largest diversifiedresources company. In fact we now account for about 16 per cent of the total value of the world'spublicly traded minerals industry. But size of itself is not important. What is important is how we generatesustainable returns for our 440,000 shareholders and for the millions of peoplearound the world who have entrusted their savings to those institutions whoinvest in BHP Billiton on their behalf. The foundation of our strategy is to have the best people at every level in BHPBilliton. As we have seen in our history and with other companies, great assetsdon't manage themselves. Great assets need talented people to deliver value. In talking about our people, I believe it is appropriate to pay tribute to Chipand his management team, and all the employees and contractors across the Groupwho have delivered the results we are discussing today. They have really made an outstanding effort. Let me now turn to our approach to capital management and dividend policy. Effective management of our capital is a key imperative for us and involvesdecisions about how we use our cash flow. Decisions must be made about whetherto invest in new projects, reinvest in existing operations, pay off debt, orreturn free cash to shareholders through dividends or share buy-backs. BHP Billiton's strength is built on a portfolio of low cost, long life, highquality assets that generate significant value over extended periods of time. We must continually invest in new and existing projects, sometimes many years oreven decades ahead of when those investments will generate returns. As I mentioned earlier, we have invested nearly 15 billion dollars in theseoperations over the past five years. We adopt a disciplined approach to all our decisions to invest capital. This is especially important in a market where demand for resources is strong.We have to make sure the fundamental economics are sound no matter where we arein the cycle, and we have to ensure those projects are operated as efficientlyas possible over their life. It is only after we are satisfied that the level of capital investment issufficient to drive sustainable long-term returns to shareholders, that weconsider returning funds. These returns are led by dividends. Our progressive dividend policy aims tosteadily increase the dividend at each half yearly payment. This is something wehave done since the merger in 2001. In the last three years, we have increased the dividend by more than 148 percent. In addition to dividends we regularly look at other ways in which to returnfunds to shareholders. In May this year we completed a 2 billion dollar buy-back of both BHP BillitonLtd and BHP Billiton Plc shares. At our recent full year results announcement inAugust we committed to an additional 3 billion dollars in share buy-backs over18 months. At the end of this latest buy back program we will have returned over 15 billiondollars to shareholders since June 2001. The other questions shareholders have asked me to address today fall into twobroad categories. The first deals with energy supply and BHP Billiton's role in providing energysolutions. The second deals with executive remuneration. I will cover this when we ask youto consider the remuneration report later in the meeting. Let me return to energy supply and start with some comments about uranium. When we acquired WMC Resources just over a year ago, we added the Olympic Damcopper, uranium and gold operation in South Australia to our portfolio. Olympic Dam is the largest known uranium resource in the world. We are workingthrough our planning process so that we can expand that mine and increaseproduction. As a major producer of uranium, we have to meet the strictest environmental,health and safety standards. We believe we also have a responsibility toparticipate in the global discussion about the use of uranium as an energysource. All forms of energy, from fossil fuels to solar, oil and nuclear, haveadvantages and disadvantages. What governments and their citizens have to do, isfind the trade-offs they are prepared to make when they decide on the energysources they will use. For instance, countries such as France and Germany have long used uranium as amajor source of their energy needs. Other countries are only now beginning tolook at nuclear power as a logical answer to their rapidly increasing energyneeds, and to help mitigate the impact of fossil-fuel energy on climate change. In fact, nuclear power now supplies 15 per cent of the world's electricity incountries such as the United States, France, Japan and the United Kingdom. Over the last few months there has been some discussion about whether Australiashould allow its uranium to go to China and India. The Australian Government has a policy to allow the export of uranium to Chinaunder strong safeguard provisions that will ensure Australian uranium will beused exclusively for peaceful purposes. India on the other hand is yet to satisfy the conditions of Australia's uraniumexport policy. Until those conditions are met, Australian uranium will not beexported to India. I want to show you some data that may help explain why India and China areconsidering nuclear power and why other countries are evaluating nucleargenerated electricity. BHP Billiton is well placed to supply the uranium these countries require tomeet their energy needs. The slide you see here compares the average global costs of generatingelectricity from various sources. Oil is by far the most expensive source of electricity. It is160 per cent moreexpensive than coal-fired power generation. The average cost of non-hydro renewables such as wind and solar is about 130 percent higher than coal. On average, nuclear generated electricity today costs about 60 per cent more toproduce than electricity from coal. However, it is worth noting that in somecountries such as the United States, the cost of electricity generation fromcoal and nuclear are similar. While there are regional differences in the relative cost of power generation,you can see that coal-fired electricity generation is the least expensive. Coal is also an attractive fuel from the perspective of energy security - it isabundant and many countries have their own domestic supplies. In the future we expect the cost differential between nuclear and coal powerplants to narrow, as new technologies and market conditions alter their relativecompetitive position. We produce four of these energy sources - coal, gas, uranium and oil - and wesee all of them playing an important role in meeting the world's current andfuture energy needs. If you look at the expected growth in energy consumption from 2001 to 2050, youcan see that compared with Australia and the United States, the energyconsumption of India and China is expected to increase dramatically. That's hardly surprising given the pace at which those economies are developing.China builds new power plants every year at a rate equal to Australia's totalelectricity generation capacity. But it means that access to a whole portfolio of energy sources, includingnuclear, will become even more vital for the developing countries. In fact two weeks ago, the International Energy Agency in its 2006 "World EnergyOutlook" said - "Nuclear power remains a potentially attractive option forenhancing the security of electricity supply and mitigating carbon-dioxideemissions". That of course is the real challenge for the world today. And that is why we advocate that no responsible company or government can ignorethe full range of energy options. Of course, programs to encourage energy efficiency are equally important. Buteven with strong energy efficiency initiatives there will continue to be asignificant and growing requirement for additional sources of energy into thefuture. I do not think that anyone will argue that access to affordable energy anddevelopment of minerals and metals is critical to taking people out of povertyand driving social and economic change. One of our challenges as a member of the global society is to help meet theworld's minerals and energy needs, while mitigating the potential impact ofgreenhouse gas emissions on climate. Since 1996 we have worked hard to cut emissions from our sites. Today ourapproach to this challenge involves: • Reducing the greenhouse intensity of emissions from our sites • Constantly striving for energy efficiency at all our locations - and • Contributing to research and development that will help reduce our emissions and those of our customers both now and in the future. I hope that helps set the scene for how we see the demand for energy sourcesdeveloping over the coming decades. Clearly there is a huge prize for those countries that get their energy mixright over the next 50 years. Finally, I would like to give you some idea of how we see the year ahead. While rates of growth around the world are likely to slow from the very stronglevels we've seen, we still view the global economic outlook as positive. Growth in north east Asia will continue to be a major driver of the globaleconomy. Japan's expansion is well-established and China's economic growth isexpected to remain strong, even if the attempts to cool recent accelerations aresuccessful. Clearly, the U.S. economy is slowing from the rapid growth experienced earlierin the year but we expect any slowdown to be offset, to an extent, by increaseddemand in Japan and Europe. These factors, together with low inventory levels, means that the demand outlookfor commodities is encouraging. But the outlook is not without risk. Escalating geopolitical tensions, supply disruptions and high energy prices areadding increased uncertainty in markets. We expect that natural and man-made events will continue to disrupt the supplyside of the commodity chain. As well, regulatory approvals and rising capitalcosts are delaying project developments. The likely outcome of these circumstances is an extended period of high cyclicalprices for the commodities that BHP Billiton produces. So our economic performance looks bright. I'm also pleased to report that BHP Billiton is a much more sustainable companythanks to the efforts of Chip and his team. Part of that work is to ensure thecommunities in which we operate share in our success. Over the last five years our commitment to spending at least 1 per cent of pretax profits on community programs, has seen us invest over a quarter of abillion dollars in communities around the world. In a minute or so I want to show you a short video, looking at some of thecommunity programs we've helped support at the Mozal aluminium operations inMozambique. At the conclusion of the video I will ask Chip to talk to you about theoperational performance of the group during the year and the opportunities wehave to continue to build on the success of this Company. Chip Goodyear, Chief Executive Officer, BHP Billiton Thank you Don. As you have heard this morning, it has been another excellent year for BHPBilliton. I'd like to take you through some of the highlights as well as outlinehow the Group is placed to ensure we continue to perform for our shareholders. Let me begin with safety. Our primary safety indicator, the Total RecordableInjury Frequency Rate, was flat for the year. The first half of the year saw a deterioration in this indicator due to a numberof issues including the integration of the WMC assets into BHP Billiton. But inthe second half of the year we saw our safety numbers improve, which of courseis consistent with our aspiration to Zero Harm. We did see some particularly good things in our safety indicators, including animprovement in our identification of significant incidents and our sharing ofknowledge about those incidents throughout the organisation. We also had a 28per cent improvement in the duration rate, which measures the severity ofinjuries. Moving onto our financial and operational results. Earnings Before Interest and Tax was up 54 per cent on the previous year to morethan $15 billion. This is the third year of record performance. While the prices of the products we produce were certainly an important factorin achieving this result, prices are irrelevant without production. Over the last five years, we have completed 30 new projects, with four of thosebeing completed and commissioned in the last financial year. These projects spana broad range of commodities and have contributed significantly to ourproduction volumes. For the 2006 financial year, we set record production for five major commoditiesand two minor commodities. Over the past five years, we have delivered an average volume growth in ourmajor products of 38 per cent. And that is despite having sold a number ofproducing assets that no longer fit our portfolio. So the bottom line is that we have positioned ourselves with significantlyhigher product volumes which have allowed us to maximise the opportunitypresented by the current price environment. This slide shows our 2006 earnings from each of our seven customer sectorgroups. Five of these achieved record earnings. Petroleum underlying EBIT increased by 24 per cent to $3 billion. Higher productprices contributed significantly to this result, along with the volume from newoperations such as ROD in Algeria, Mad Dog in the Gulf of Mexico, Angostura inTrinidad and Tobago and Minerva in Australia. The Board approved three new petroleum projects during the year - two inAustralia and one in the Gulf of Mexico. Production from Atlantis and from our other discoveries in the Gulf of Mexicowill increase our production of oil and gas over the next five years. In the Aluminium CSG, underlying EBIT increased by 24 per cent to $1.2 billion.Higher prices were achieved for both aluminium and alumina. The benefits of ourtechnical expertise are evident at the Mozal and Hillside aluminium smelters insouthern Africa, where production records were set again. Base Metals underlying EBIT rose 149 per cent to $5.4 billion. We had recordcopper production during the year, with the highest ever production from bothEscondida in Chile and Antamina in Peru. The integration of Olympic Dam in SouthAustralia made a significant contribution to volumes and all this was achievedat a time of record copper prices. Two copper projects in Chile were completed during the year and another, Spence,which you can see here, is on schedule to start producing in December this year.At full capacity, Spence will be one of the 20 largest copper mines in the worldtoday. Carbon Steel Materials - that is iron ore, coking coal and manganese - recordeda 61 per cent increase in underlying EBIT to $4.5 billion. This was largelydriven by higher product prices and record iron ore sales. With seven CarbonSteel Materials projects in our pipeline, volume growth will continue to bedelivered in all three commodities. The underlying EBIT for Diamonds and Specialty Products decreased by $215million to $345 million, mainly due to lower value material being produced atour EKATI diamond mine in Canada. While the lower diamond grades will continueto impact earnings from EKATI, in the medium term increasing production from thenew Koala pit will help restore profitability. The underlying EBIT for Energy Coal decreased by 44 per cent to $327 million.Prices and volumes of thermal coal were largely flat during the period but weexperienced the same cost pressures here as being faced across the industry. Wedid however achieve annual production records at both Cerrejon Coal in Colombiaand our New Mexico operations. In the Stainless Steel CSG, underlying EBIT of $901 million was up 27 per centover 2005. The Nickel West business in Western Australia that we acquiredthrough the purchase of WMC, made a significant contribution to our earnings. As well, Cerro Matoso in Colombia had annual record production. The Yabuluexpansion in Queensland, Australia is on track for delivery next year, howeverthe budget and schedule for the Ravensthorpe nickel project in Western Australiais under review. We are looking forward to increasing our overall production of nickel whenRavensthorpe comes on line but the reality is that cost pressures in theindustry and low contract labour productivity have had an impact on ourprogress. This is our current pipeline of projects that are either in the feasibilitystage or under construction. There are 23 projects represented here with acapital cost of approximately $14 billion. Seven of these projects were approvedfor execution in FY06. As I said earlier, we have already brought on line 30projects in the past five years. So why are we reinvesting so much money in expanding our production capacity? What's happening is that after years of under-investment, the world hasrediscovered resources and the critical role they play in our daily lives. Todaythere are billions of people in developing economies of the world who neednatural resources to support their economic and social development. For a variety of reasons, the industry is finding it difficult to respond to theincreased demand for commodities. And that gives BHP Billiton, with our size and scale and footprint, acompetitive advantage. We have excellent opportunities for growth through those projects I've shown youand we have the capabilities to bring them on line in a way that adds value toour business. Of course, it's important to look beyond this decade and we are doing this bycontinuing our expenditure on exploration and technology and looking at newopportunities around the world. So either alone, or as part of our JuniorAlliance program, we have more than 200 projects in early stage assessments in35 countries around the world. We don't try to predict where commodity prices will be either tomorrow or in thenext decade. But we do believe that solid product demand and a supply side thatstruggles to keep up will characterise our industry in the short to medium term. We will continue to maintain our focus on large, low cost, long reserve lifeassets while preparing for a future where billions of people entering the globaleconomy from the developing world need the essential products that we produce toprogress social and economic development. Of course to do this, we need to be looking to acquire and develop projects inemerging parts of the globe. To find the next generation of opportunitiesrequires us to go beyond Australia, North America, South Africa and LatinAmerica. And we have an excellent track record of success in places likeMozambique, Pakistan, Algeria and Colombia. We must continue to explore for anddevelop resources in Africa and Asia as well as pursue technological challenges. Our commitment to sustainable development is essential for the success of BHPBilliton. Before I hand back to Don I'd like to thank all of our employees and contractorsfor their continuing efforts and contribution to what has been another excitingyear. We have a global workforce that has shown itself more than able to adaptto the rapidly developing environment and find new and better ways of meetingthe challenges. Don Argus, Chairman, BHP Billiton Thanks Chip. The Chairman then conducted the formal items of business. A key plank of our remuneration policy - published in the Annual Report - is thecommitment to link executive pay to the creation of value for shareholders. To achieve this, remuneration is broken into fixed and at risk components. The fixed component is made up of base salary, retirement and other benefits.The at-risk component is made up of short and long term incentives. Pay at BHP Billiton is set at industry average levels. BHP Billiton is not thehighest or the lowest payer in our industry. To give you a feel for where we sit, we have taken 17 companies in ourcomparator group and plotted the pay rates for their Chief Executives. You cansee that BHP Billiton sits at around the mid range. The largest component of executive pay is the at risk piece which is only earnedwhen performance measures that are linked to the creation of shareholder value -are met. This can be illustrated by looking at the Chief Executive's pay for 2006. The slide on the screen shows you the fixed and at risk components. You will see the value of the at-risk piece was about 60 per cent of the total. To show how Chip's pay is aligned to shareholder value, let me show you what hashappened since 2003. Chip's total pay has increased by 48.1 per cent since 2003. For the same periodthe total shareholder return (that is the total of the share price and thedividends paid) has increased by 305 per cent. I am sure you will agree, that the link between pay and performance is clear. I will talk more about the executives' performance measures in a few moments. Before asking you to consider the Remuneration Report I would like to raise oneother matter and that is the supplemental bonus which the Board agreed to payfor the 2006 year. The circumstances leading to this decision were unusual. As I said in my openingremarks, the 2006 year was the most successful in BHP Billiton's history. Profit attributable to shareholders increased by over 63 per cent, revenue byover 20 per cent and earnings per share by over 65 per cent. This resulted in the Company being able to increase its dividends by over 28 percent. The performance measures for our executives are disclosed in the RemunerationReport. We also disclose their achievement against those measures. When we assessed the performance of executives for the 2006 year, it was clearthat the bonus levels were substantially below those paid in 2005. In these circumstances the Board had to make an assessment as to whether anyadjustment should be made. In making that assessment the Board weighed the risks associated with retentionof key people at a time when the global resources industry was at an all timehigh. The Board elected to pay a supplemental bonus and in doing so: • capped the total amount of money that could be paid; • assessed the amount payable to each executive against his or her individual performance; • satisfied itself that the margins earned by the Company had not been reduced (in fact margins increased from 40 per cent in 2005 to 44 per cent in 2006); and • made it clear that this bonus was a "one off". Your Board believes that this was the right approach to take. Some shareholders have quite rightly asked whether this shows a flaw in the waywe set performance measures. While the Board does not believe we should make wholesale changes to thosemeasures as a result of this one year, we will review them and if we decide thatchange is necessary we will consult with shareholders before any final decisionis taken. I spoke earlier of the need to ensure that there is a link between executive payand the creation of shareholder value and you saw how the Chief Executive's payincreased at the same time as the total shareholder return increased. Our Long-Term Incentive Plan operates over five years and has been designed toensure that when shareholders see value created, so do the executives. We are asking you today to award 600,000 performance shares in that Plan toChip. For him to receive a single share of the 600,000 BHP Billiton's totalshareholder return must exceed the median of our comparator group. Simply achieving the same shareholder return as any other company is not enough. For him to receive all of the 600,000 shares BHP Billiton's total shareholderreturn must exceed the comparator group by 5.5 per cent each year for the fiveyears of the plan. This equates to exceeding our comparator group by a cumulative 30 per cent overthe five years - a result I am sure you would agree, is exceptional forshareholders and executives alike. While this share award is potentially lucrative, it includes very stringentperformance conditions. These include: • A five-year performance period • No award unless our TSR exceeds industry averages - and • Full vesting of the award requires top performance compared to our industry peers. The combination of these conditions results in the expected value of theperformance shares being only 31 per cent of the face value of the shares. Don Argus, Chairman, BHP Billiton In closing the meeting, let me say again that the results for the 2006 financialyear are an indication of the strength of the BHP Billiton Group. BHP Billiton is in excellent financial shape. We have very strong cash flows andmargins, outstanding leadership, a committed workforce and an impressivepipeline of growth projects. Your Board and management are focused on ensuring that shareholders, ouremployees and the community at large continue to share in our success. Thank you. BHP Billiton Limited ABN 49 004 028 077 BHP Billiton Plc Registration number 3196209Registered in Australia Registered in England and WalesRegistered Office: Level 27, 180 Lonsdale Street Melbourne Registered Office: Neathouse Place London SW1V 1BH UnitedVictoria 3000 KingdomTelephone +61 1300 554 757 Facsimile +61 3 9609 3015 Telephone +44 20 7802 4000 Facsimile +44 20 7802 4111 The BHP Billiton Group is headquartered in Australia This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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