BHP Billiton's (BHPBF) CEO Andrew Mackenzie on Q4 2014 Results - Earnings Call Transcript

Aug.19.14 | About: BHP Billiton (BHPBF)

BHP Billiton Plc (OTC:BHPBF) Q4 2014 Earnings Conference Call August 19, 2014 4:00 AM ET

Executives

Andrew Mackenzie - CEO

Graham Kerr - CFO

Analysts

Nick Stanovic - Brewin Dolphin

Jason Fairclough - Bank of America Merrill Lynch

Menno Sanderse - Morgan Stanley

Craig Campbell - Northcape Capital

Andrew Hines - Commonwealth Bank

Anna Mulholland - Deutsche Bank

Paul Young - Deutsche Bank

Sylvain Brunet - Exane BNP Paribas

Fraser Jamieson - JP Morgan

Glyn Lawcock - UBS

Peter Harris - JCP

Tim Huff - RBC

Myles Allsop - UBS

James Gurry - Credit Suisse

Hunter Hillcoat - Investec

David Butler - Barclays

Adrian Wood - Macquarie

Andrew Mackenzie

Well, welcome to our results briefing on what is a very important day for our company. I'm in London with our CFO, Graham Kerr. And other members of our Group Management Committee are here or they have joined by telephone.

First, let me point you to the disclaimer and remind you of its importance to today's presentation. I'm going to provide you with an overview of the last year, and share with you exceptional results of our productivity agenda. And Graham is then going to take you through our financial results in some considerable detail. And I'll then focus on our next exciting step in our journey towards a simple portfolio and our strategy to deliver the next level of performance for our shareholders.

In the 2014 financial year, we continue to deliver on our commitments. We exceeded production guidance for a number of our core commodities and surpassed our annual productivity target with another $2.9 billion of sustainable gains embedded, and there is more to come.

Our selective investment through which we'll ultimately deliver higher investment returns coupled with our financial discipline generated a substantial increase in free cash flow. And this comfortably covers our progressive base dividend and has further strengthened our balance sheet. We'll return excess cash flow to our shareholders in a consistent and predictable manner.

And finally, we've announced plans to simplify our portfolio in a single step. All of this should provide you with the confidence that we'll continue to do what we say we'll do.

Sustainability, our first charter value dictates that health and safety always come first, so that everyone goes home safely every day. This year, we've delivered our best ever safety performance. Our total recordable injury frequency of 4.2 for every million hours worked is a new record low. But most importantly, none of our colleagues lost their lives at work.

And as you know, sustainability extends beyond safety alone. In June the past year, we achieved or remain on track to achieve many of our key public targets. The potential exposure of our employees to contaminants, reduced by 21% compared to our 2012 baseline.

Our greenhouse gas emissions remain below our 2006 baseline in absolute terms even with the considerable and significant growth in our business. And in line with our commitment set at 1% of pretax profit, we invested $240 million in community programs.

The 2014 financial year was characterized by weaker prices for the majority of our key commodities. However, the exceptional success of our productivity agenda and volume growth from our largely low risk Brownfield Investment Program enabled us to increase profitability, underlying EBITDA by 7% to $32.4 billion, underlying attributable profit by 10% to $13.4 billion, net operating cash flow by 26% to $25.4 billion, capital and exploration expenditure excluding finance leases decreased by 32% to $15.2 billion.

Free cash flow, one of my overwriting priorities has grown by $8.1 billion. Without disciplined approach to investment we maintained return on capital of 15%. Our progressive base dividend increased by 4% to 121 U.S. cents per share. Our solid A balance sheet continue to strengthen with net debt at the end of the period of $25.8 billion.

Annual production records were achieved at 12 of our operations across four commodities. And as a result, group production increased in a corporate equivalent basis by 9%. Our 14th consecutive year of record production at Western Australian iron ore delivered volumes significantly ahead of our initial full year guidance. The early completion on accelerated ramp up of the Jimblebar Mine expansion and the success of volume-lead productivity initiatives contributed to this result.

Queensland Coal achieved record production in sales, metallurgical coal production exceeded guidance and increased by 20%.

Copper production met guidance of 1.7 million tons as higher mill throughput and concentrated utilization at Escondida offset a decline in all grades.

At Olympic Dam, with the initial trials of heap-leaching now complete, we plan to commence construction of our largest scale demonstration plant in the second half of the 2015 calendar year. These studies will help to unlock the full value of this unique orebody.

Petroleum liquids increased by 18% underpinned by growth Onshore U.S's 73% and an 87% increase in production of Atlantis. Our onshore U.S. business was profitable in the second half as we focused on the highest value acreage. And with a 6% reduction in unit costs, underlying EBITDA increased by more than 60% to $1.4 billion. And in our Black Hawk acreage, we now plan to bring one up to 120 new wells in the 2015 financial year.

We're also making further gains in the Permian, where our plans to develop a 100,000 barrels of oil equivalent per day operation are firmly on track. And with strong growth in liquids production and further improvements in productivity anticipated, we remain confident that in the 2015 financial year this business will be strongly EBIT positive.

The capabilities of our core businesses will carry our momentum forward. Production guidance for this financial year is now iron ore of 225 million tons, copper of 1.8 million tons, petroleum of 255 million barrels of oil equivalent and metallurgical coal of 47 million tons. For the two financial years, 2014 and 2015, we have delivered a production growth of 16%. This outlook is the clearest indication of our systematic approach to productivity and how it continues to lift performance in a sustainable way. How do we do this?

Well, we're working on many fronts. For instance, in our minerals business we identify and attack the usual bottlenecks, wash plants in coal, concentrators in copper, train load out as in iron ore, but the element common to all of our mines is trucks, and with all our operations now using a single platform across the entire fleet, we can interrogate these systems and use the power of Big Data.

In the 2013 financial year, we identified a high degree of variability in the average utilization of our fleet. Armed with this depth of data, we set benchmarks to improve performance. The results, we increased utilization by 10% in the 2014 financial year as well as reducing variability and increasing predictability. This 10% improvement has given us the equivalent of 75 additional trucks at no extra cost. And iron ore and coal has allowed us to relocate our fleet, displace contractor equipment and increase both capital productivity and margins.

Our relentless focus on productivity is most evident at our largest asset, Western Australian iron ore. After a decade of capital investment, the next phase in the journey is to maximize return on this investment. And in the 2014 financial year, we increased production by 20%, and in the second half, delivered a unit cost reduction of 12%. As we lift our performance and move the bottleneck in iron ore to the port, we have the potential to grow this business from 225 million tons per annum to 290, that's 290 million tons per annum at a capital intensity of less than $50 per annual ton.

As volumes grow and we attack the cost base, we expect even lower unit costs. While Western Australian iron ore provides a case study, it is about one example of a great work of our teams across our whole organization. We've already embedded more $6.6 billion of sustainable productivity-led gains, and there is more to come from our simplification agenda.

I'm now going to pass over to Graham, Graham Kerr, and then I'll return to tell you more about our proposed demerger.

So with this in mind, I'm very pleased to announce that today we've confirmed -- sorry, last week, that Graham is the CEO elect of our new company. Congratulations, Graham. Well done.

Graham Kerr

Thank you, Andrew. I'm very excited about the prospect of becoming the CEO for the new company. But today, I'm equally excited to present our strong 2014 results, my last as CFO.

Before I turn to this year's financial performance, I want to remind you what we've achieved over the last two years. We started with project reset, a thorough review of operating costs resulting in far reaching savings across all the business. It evolved into our productivity agenda.

We also optimized a right allocation and timing of our capital expenditure by striking the right balance in maximizing investment returns from high quality projects.

In the 2014 financial year there is rigorous processes and financial discipline underpinned solid financial results. There are four areas I'll cover today. Individual items affecting profit, an EBIT waterfall analysis covering each of their five businesses, the sustainable productivity guidance we've embedded and have strong growth in free cash flow.

A number of individual items affected our underlying financial performance this year. This slide summarizes the EBITDA impacted impairments, closure costs, redundancy charges and other items starting $1.5 billion of which $1.3 billion were recognized in the second half before accounting for the movement of monetary items on the balance sheet. I'll cover these in more detail as I go through each of that businesses to assist you in working through our accounts.

Turning to taxation; as you can see tax and royalty-related charges were partially offset by re-measurement of deferred tax assets recognized under the mineral resources rent tax; this rise underlying profit by $170 million. We paid $6.5 billion of income and royalty-related taxation and $2.8 billion for other production royalties.

Our adjusted effective tax rate was 32.5%, and is expected to remain between 30% and 34% in the 2015 financial year.

Now, turning to the earnings waterfall; we divided our EBIT waterfall into uncontrollable factors on the left and controllable factors on the right. We have also split the volume variants between growth volumes associated with our capital projects and productivity volumes delivered without additional investment.

Underlying EBIT remain stable at $22.9 billion as they are focused on the controllables, safety, volume and costs mitigated abroad by swiftness in commodity markets and delivered and $2.4 billion increase in underlying EBIT, but first, to the fact that it's added solely by our control.

We continue to benefit from our diversity, a 16% increase in the average realized price for natural gas partially offset level bulk commodity and metal prices. In total, however, lower commodity prices reduced underlying EBIT about $3.4 billion, a favorable move in the exchange rates as the Australian dollar wakened, contributed an extra $1.8 billion although inflationary pressure particularly Australia, Chile and South Africa which is underlying EBIT for $800 million.

Now, moving on to the factors we control, a 9% rise in copper equivalent production increased underlying EBIT by $2.9 billion. As Andrew mentioned iron ore and Middle East for coal production exceeded expectations supported by productivity initiatives and the completion of growth projects.

We reduced controllable cash cost by $1.9 billion by optimizing equipment utilization contract directivity and again reducing expiration and business development expenditure. This lower rate of expiration and business development expenditure of around $1 billion per annum is sustainable given the level of understanding that we now have about large, long life oil bodies. An increase in non-cash charges reduced underlying EBIT $2.1 and included a number of the items I mentioned earlier.

Now, to each business in turn, petroleum and products contributed $5.3 billion to underlying EBIT. The positive EBIT contribution from volume growth which included a better than expected 18% increase in liquids volumes was offset by an increase in non-cash costs. This included $140 million in impairment charges for a number of small Gulf of Mexico assets and mine site rehabilitation provisions for closed mines in North America totaling $300 million.

An adjustment to the brass divestment price reduced underlying EBIT by further $143 million and as reflected in other items. We invested $4.2 billion at onshore U.S. this year and capital productivity continues to improve. For example, Blackhawk drilling cost declined by 16% and spud to sales timing reduced by 21%.

Now, copper. The contribution of our copper business declined to $5.1 billion as weakened metal prices reduced underlying EBIT by $900 million. By focusing on the factors we control, we managed to offset the impact of great decline by raising productivity. For example, at Escondida the insourcing and optimization of contract or activities led to a $190 million cost saving and contributed to 6% reduction in unit cost at our operated copper assets.

Our Iron Ore business contributed $21.1 billion to underlying EBIT despite the net effect of lower prices inflation and exchange rates which reduced underlying EBIT by $600 million. Growth volumes mainly from Jimboomba added $900 million to underlying EBIT. Productivity volumes delivered a similar benefit as we released lightened capacity in our supply chain. The additional volume and hardened focus on all aspects of our cost base led to 12% reduction in unit costs to below $26 per ton in the second half of the 2014 financial year.

Our coal business continues to move sharply down the cost curve. Given the significant impact of lower prices our $1.2 billion reduction in controllable cash costs was fundamental to maintaining a positive underlying EBIT contribution. Queensland Coal cash costs are now more than 40% below their peak. Included in non-cash charges was $292 million impairment at South Africa Energy Coal. All other items include a profit on sale of the optimum coal purchase agreement.

Our aluminum, manganese and nickel business increased its contribution to underlying EBIT, a 300 million improvement in controllable cash costs or supported by productivity related volume gains. Worsley, Alumar, Hillside and Mozal all delivered annual production records. This year our result was particularly impressive as the closure of the perseverance underground mine and smelting activities at Bayside reduced underlying EBIT by 341 million. With these productivity gains embedded this business is well placed a benefit from any sustained recovery in prices.

What does this mean? We've generated more than $6.6 billion, a sustainable productivity led gains in two years including $2.9 billion of volume and cost efficiencies this year. This exceeded our target by more than 60% or $1.1 billion. As mentioned the key contributor to our cost efficiencies was coal while all in all underpin their stronger volumes.

Our commitment to increased productivity is a continual process. It will drive growth and free cash flow and shareholder returns made in the absence of higher prices. In fact our free cash flow increased by $8.1 billion in the 2014 financial year. Strong operating performance, a 32% reduction in capital and expressed in expenditure, the $15.2 billion and a significant reduction in working capital in the second half of the financial year were the main contributors.

We successfully completed six major projects during the period and expect capital expenditure decline again in the 2015 financial year.

Solid A balance sheet is strong and getting stronger. Net debt declined by $1.7 billion to $25.8 billion including financing leases of which $757 million were brought to account in the second half.

We continue to optimize our debt facilities and now have a very well balanced debt maturity profile. We issued $5 billion of bonds in multiple markets. This included $2.5 billion, 5% senior notes due in 2043. This is long-term money at very attractive rates. Conversely, we redeemed $1.4 billion of high yield Petrohawk bonds, and after period end, redeemed the remaining Petrohawk bonds for $1.8 billion. So our balance sheet is in good shape, and we are confident in the outlook for the group. As a result we've increased our base dividend by 4% to $0.121 per share for a payout ratio of 48%. Importantly, this base dividend is comfortably covered by free cash flow.

Looking ahead, we will ensure we have a capacity required to invest selectively. Payout base dividend and return excess cash to shareholders consistently, predictably and in the most efficient and value accretive way irrespective of commodity prices. In conclusion, our performance continues to improve. We're generating strong results underpinned by solid operating performance. We have a strong balance sheet and it is getting stronger. We will remain financial disciplined, continue to maximize value and return excess capital to shareholders.

Back to you, Andrew.

Andrew Mackenzie

Thanks, Graham. I'd now like to outline the next major step towards and simpler and even more formidable portfolio. Again, let me point you to the disclaimer and remind you of its importance again to the second part of today's presentation.

We've decided to reshape our company and stay true to our strategy. We plan to simplify BHP Billiton's portfolio with a demerger and unlock value for shareholder who is in focused even more on our largest businesses, reduced costs and improve productivity more quickly.

We will create a new global metals and mining company which I would refer to as "NewCo." And this will largely complete our simplification process in a single step. This will maximize value of all assets for all our shareholders. So please note that our presentation, my presentation will be in three sections. The red section outlines the rationale and structure of the proposed demerger. The Terra copper section defines BHP builds in its core portfolio and it's potential. And the blue section introduces new core.

BHP Billiton's strategy has remained unchanged for many years. We own and operate large, long life, low cost, expandable upstream assets diversified by commodity, geography and market. Over the last decade the disciplined implementation of this strategy has delivered exceptional results.

We maintain a strong balance sheet throughout the cycle and return to $64 billion to shareholders. BHP Billiton has significantly outperformed both the sector and the broader markets. A $100 invested in our shares ten years ago is worth almost $500 today.

Through this period of consistent out performance, our portfolio has evolved. For iron ore, copper, coal and petroleum, the growth in Chinese demand could only be met by the addition of much higher cost supply, so prices rose significantly. But the resource and development of our major basins allowed us to respond, and we directed the majority of our capital towards projects in our highest returning businesses which offered the most attractive growth.

We expanded our low cost operations to the benefit of our shareholders and to the global economy. And as you can see our four pillars now contributed the vast majority of our underlying EBITDA and they generate the strongest margins and offer the most compelling investment options. These exceptional businesses demand our full focus, attract all of our capital and drive performance for shareholders.

Given the shift and the shape of our portfolio we've been simplifying our business now for over a decade. In the last two years alone, we've completed divestments of over $6.5 billion at attractive valuations.

Our demerger is the logical next step for other high quality assets elsewhere in the portfolio that don't have the scale of those in our major basins. The assets selected for demerger are our manganese business with mines at GEMCO and Hotazel and smelt as TEMCO metalloys.

Our aluminum business including Worsley and Alumar refineries and the Hillside and Mozal smelters, the Cannington silver mine, the Cerro Matoso nickel operation, Illawarra Coal and South African Energy Coal. Creating a new global and metals and mining company with a dedicated board on management team with this on the spot strategy will help all these assets, realize their true potential and unlock shareholder value.

Shareholders will have the opportunity to benefit from the potential value created by two high quality companies that can each optimize performance and improve productivity more quickly. All BHP Billiton shareholders will receive a prorated distribution of NewCo and retain their current holding in BHP Billiton. All shareholders will be treated equally. NewCo will apply for an ASX primary listing and a GAC inwards secondary listing.

While a dual-listing structure works for BHP Billiton we have decided not to pursue a DLC for NewCo as a complexity, cost and regulatory burden outweigh the benefits for a business of the skill. Australia where many of the new companies' assets are has been chosen as its listing location and home for its headquarters. The decision to apply for a GAC secondary listing reflects the importance of South Africa to NewCo.

Given the time to implement, associated costs and risks without party approvals, the board believes this demerger proposal would deliver more value than other options including trading shares. This proposal will remain subject to final board approval and will be put to shareholder vote after receipt of per party approvals on satisfactory terms.

Based on our current timetables, we anticipate listing NewCo in the middle of the 2015 calendar year. Now let me talk the core BHP Billiton and our vision for our minerals and energy portfolio of on rival scale, quality and diversity.

For many years we successfully reshaped our business. We moved from mining silver, lead and zinc at Broken Hill and ten on Billiton towards producing and demerging steel to petroleum, the Pilbara, the Bowen Basin and copper in the Andes. We also entered and exited many other commodities along the way. This map shows our portfolio in June 2005. The size of each bubble represents the underlying EBITDA contribution from each asset. Then we held an interest in 50 assets spread across 14 countries and six continents. After a decade of investment and high grading our portfolio we are hold and interested for our Q1 assets.

You can see the strong growth in our major basins. This proposal and trade sales will further sharpen our focus. We see our future based on 19 core minerals and petroleum assets, a 50% reduction from today. Of these 19 assets only 12 will be operated by BHP Billiton. For our minerals business this includes Western Australia in iron ore at top three iron ore producer. Queensland Coal, the largest metallurgical coal exporter; Olympic Dam, one of the best copper and uranium deposits in the world and New South Wales energy coal, all in Australia plus Escondida, the largest producing copper mine and Pampa Norte also in Chile, and finally the Jansen project based on our potash resource in Saskatchewan, Canada.

Across petroleum, this includes our liquids with shared resources in the United States, Shenzi in the deepwater Gulf of Mexico, Pyrenees in Macedon and Western Australia and the Angostura development in Trinidad and Tobago, a region where we see great exploration potential. In addition our core portfolio also includes interests in the known operated world class joint ventures at Antamina Copper, Cerrejon Energy Coal and Samarco iron ore plus our petroleum interests in Atlantis and Mad Dog, two of the largest fields in the Gulf of Mexico and the long life Bass Strait and the North West Shelf operations offshore Australia.

Given our vision for simplification there is more we can do. We continue to review Nickel West including the potential sales of all our parts of the business and New Mexico coal where we have completed the Navajo transaction. And we are also looking at smaller petroleum assets having recently sold Liverpool Bay.

It's one thing to have the best assets, but a company also needs to have the right management team and we have both. The changes we made 18 months ago to delay our structure has brought me and the GMC closer to operations. With the changes announced today, we retain a first-class management team. This is important, given our ever increasing focus on health and safety, operating costs and productivity.

On core portfolio we will be in path to align to our strategy and remain diversified by commodity, geography and market. With our broad exposure to steel making energy, copper and potentially fertilizers, we uniquely position to respond to changes in commodity demand. From our concentrated largely OECD footprint we will continue to sell to the four corners of the world and have the freedom to choose when and where to selectively expand our operations and maximize value.

Compared to our historic performance, the core portfolio would have generated even stronger results over the last decade with no increase in volatility. We have many of the best oil bodies in the world. They underpin our competitive advantage, an advantage that cannot be replicated by others. We hold more than 100 years of inventory across multiple commodities in our major minerals basins. No other company has this unique position. We will continue to invest our skills and capital selectively and sparingly, so as to maximize value and shareholder returns.

As Graham covered, capital expenditure declined by 32% to %15.2 billion in the 2014 financial year and is expected to be below our $15 billion investments early next year had about 14.8 billion. In the medium terms, our plans include roughly $2.5 billion for maintenance CapEx, 1 billion for exploration, 4 billion for inshore U.S. and around 1.5 billion to maintain steady production in our existing conventional petroleum business. Finally, we have our major minerals projects in execution and beyond that all investment options will compete for capital.

After we complete the proposed demerger we will reduce our investment ceiling to $14 billion. As we continue to lower our spend, internal competition for capital will rise as will the quality of our major projects. And as I said at the half e, our favorite projects are now expected to generate an average rate of return in excess of 20%. As we improved capital productivity we can choose either to maintain our rates of investment, create more value or to invest less than $14 billion and return even more cash to shareholders. But under all scenarios we will maintain strict financial discipline to get the balance right.

By the end of the 2017 financial year, we are targeting at least $3.5 billion of additional annualized productivity gains beyond those reported today. These go straight to the bottom line with more to come, and the demerger will be a catalyst that helps this improved productivity further faster and with more certainty. With fewer assets and an ever greater upstream focus, we will continue to simplify our management structure and reduce duplication and functional cost at an even quicker pace. We will continually improve our operating performance more like an advanced manufacturing company than our traditional resources business. The price is huge. In line with that commitment solid A credit rating, we have a strong balance sheet as Graham said is getting stronger.

This enables us to invest consistently throughout the cycle, and we will seek to increase steadily or at least maintain our dividend per share after the demerger. So this implies an even higher payout ratio and the 48% quoted by Graham.

We will be even more focused on the controllables, safety, volume, cost and the rates and where we invest. But the pace at which our balance sheet strengthens of course does depend on external factors like commodity prices and foreign exchange rates. We will not be overly conservative and we will return excess cash to shareholders in the most efficient way and by making sure that we start from a position of strength, we will be well placed to implement an enduring and improved program for capital management that can be carried out over years in a consistent unpredictable manner.

BHP Billiton has been a very successful company, but it can be even stronger. This plan will further differentiate us so that we increasingly compete with the very best companies in the world.

NewCo will be a global metals and mining company with high quality assets, many of which are amongst the most competitive in their respective industries. Even at these prices -- today's prices together with these assets which spread across the southern hemisphere form a portfolio that generates over $1.4 billion of net operating cash flow. It will be a company of global significance. And NewCo's portfolio will have a diversified exposure to manganese, precious metals based metallurgical coal and energy coal, which is commonly traded below mid cycle levels and have some of the highest trades of demand growth.

NewCo will operate 11 assets primarily in Australia and Southern Africa. A sculpture process is organizational structure and systems will suit the scale of its operations. It will be lead and flat, but the regional operating model designed to strengthen relationships with governments and communities where it operates especially in Southern Africa. NewCo will have an experienced team whereby Graham Kerr, our CEO and headed by David Crawford as Chairperson who will retire from the BHP Billiton board in November 2014.

Given the location of its assets the head office will be at its geographical center in Perth, Australia; and there will be a regional head office in Johannesburg to lead its African operations and the global shared services center there.

As we take a closer look at the portfolio, remember that these are BHP Billiton assets built to BHP Billiton standards in sync with our strategy of large long life and low cost. They are some of the leading assets in their industries.

Let me now explain the chart on the right. It shows the position of NewCo on the commodities cost curve against other companies in that industry as well as its production rank. NewCo is positioned in the first or second quarter industry cost curves and ranks amongst the largest global producers. These are all high quality assets. Over the last decade, however, their markets have evolved differently. So they are not -- they have not received the same level of capital as our pillars. Individually, NewCo's assets are large and well capitalized, have been operational for decades. Collectively, they form a robust portfolio that will continue to benefit from the legacy of BHP Billiton's common systems processes and highly trained people.

NewCo will hit the ground running. It will be set up for success and adjust its approach to optimize its portfolio. It is designed to maintain safe operations, increased productivity and improved performance.

Let's discuss the assets in turn. Illawarra Coal holds and operates three underground coal mines. It's situated close to major core infrastructure with easy access to global markets. It's an operation that produces high quality, high coking coal with a capacity of 9 million tons per annum. Energy Coal South Africa is the third largest exporter of thermal coal in the region, and it had export sales of 13.3 million tons in the 2014 financial year, and has significant potentials of growth.

Individual aluminum capacity of 5.2 million tons per annum is supplied from the modern Leslie and Eluma refineries. After the completion of recent expansions in both places these assets are fully capitalized, aluminum smelters at Hillside and Mozal have a combined capacity of 1.3 million tons per annum.

Cannington is the world's largest silver mine with a production of 25.2 million ounces. In the 2014 financial year it generated a return of over 150%, truly unique asset. Cerro Matoso is one the world's leading ferronickel assets with an annual production of more than 40,000 tons of contained nickel.

Over the last ten years on average Cerro Matoso generated an underlying EBITDA margin of 49%. Finally, NewCo will be the world's largest and one of the lowest cost producers of manganese ore. It will also be the top global producer of manganese alloy.

Over the last ten years the portfolio has generated around half of it's EBITDA in Australia and close to a third in Southern Africa. As NewCo implements its strategy and seeks to reduce costs there are significant earnings outside. For example, a 5% reduction in operating cost will equate to approximately 20% of last year's underlying EBITDA. So what consensus estimate is suggesting recovery in most of its major market, the outlook for NewCo is compelling.

A strong balance sheet will complement NewCo's operational leverage and on formation the company is expected to have minimal net debt before finance leases and with targeted credit rating of investment grade.

While BHP Billiton will continue its progressive dividend policy, NewCo will be able to consider a dividend policy that reflects its cash generating capacity. The major plants for major investments as margins expand shareholders would be rewarded.

Over time though, as NewCo develops a proven track record is a strong operator and a disciplined manager of capital, it will have the choice of a broader set of options. Attractive low risk driving through the investments such as Cannington and the Rietspruit energy coal mine in South Africa become even more attractive. These projects extend asset life and have the potential to create significant value for NewCo. But they have not and would not be a priority for BHP Billiton.

In conclusion, while our current structure has worked well, we are now at a point where the status score no longer positions us to best maximize value to fulfill our commitments to grow free cash flow and to be more productive. Change is required. We believe a demerger will maximize value for shareholders, better align the BHP Billiton portfolio with our proven strategy and accelerate simplification.

Fewer assets and a greater upstream focus will enable BHP Billiton to improve productivity even more quickly. NewCo will have a competitive position across a broad range of commodities. They will have the best at both growth with significant operating leverage and minimal net debt. They will continue to benefit from the legacy of BHP Billiton systems and processes is a draw on the pool of talented BHP Billiton people who will join NewCo.

From day one, it will have a dedicated management team and a new direction that will position it to increase the value of its asset base and accelerate productivity gains. BHP Billiton will seek to increase steadily or at least maintain its dividend which means a higher effective payout ratio. And on top of this NewCo will be able to consider a dividend policy that grows with its cash flow. Overall we believe returns to shareholders will rise. BHP Billiton will continue to return excess cash in the most efficient and value accretive way possible and NewCo will be structured to do likewise.

I believe that this is the value maximizing strategy for our shareholders. These two distinctive companies will meet their customers demand for the critical resources that underpin global economic growth, play a positive role in their communities, create new opportunity for their people, and contribute to sustainable economic growth with ones that we intent forge a simpler, more productive BHP Billiton and a new global metals and mining company.

Thank you. So I'm now pleased to take your questions. Of course, both of us. Go ahead.

Question-and-Answer Session

Nick Stanovic - Brewin Dolphin

Hi. Nick Stanovic from Brewin Dolphin; just wondering you mentioned in the past 25 billion target to maintain a singular credit rating. How does the divestment in NewCo change that target?

Second question is, have commodity prices -- recent movements in commodity changed your view of what's sustaining or general cash generation the business can generate in the future from the remaining company? Thank you.

Andrew Mackenzie

Well, we aren't -- as you have heard, we're not quite at that target yet. But BHP Billiton will continue to target a solid A credit rating. And clearly we'll discuss as we go forward the shape of the new company and how commodity prices look going forward as we make decisions around capital management. These are under active consideration at our board level and as both Graham and I've said, we continue to strengthen our balance sheet and lay the basis for something that may be considered as we go forward that we think would be both consistent and enduring over a period of years. So we want to wait until we're ready and we look at all the indications in effect to make sure when we're ready.

Hi, Jason.

Jason Fairclough - Bank of America Merrill Lynch

Yes. Jason Fairclough, Bank of America Merrill Lynch. I have this question for you, Andrew or for Graham as the CEO of NewCo. Could you talk a little bit about the strategy of NewCo? Is it just the BHP strategy, but applied to different markets, or is there going to be some nuances to this? Do you dress it up to get Glencore to buy it?

Andrew Mackenzie

I don't really want to answer that question today. I mean we have only just created the beginnings of a new team that will look after NewCo. They have to form and they then have to work out their strategy and come to the market in due course, but not for today.

Jason Fairclough - Bank of America Merrill Lynch

So the strategy is not defined yet?

Andrew Mackenzie

I mean many of the elements of the strategy about unlocking free cash flow through running high quality assets better, using the BHP Billiton approval which I think are the basis of it, but how do they step up from that basis to do other things I think requires better definition before we attempt to fully answer your question.

Jason Fairclough - Bank of America Merrill Lynch

Okay.

Menno Sanderse - Morgan Stanley

Good morning. It's Menno Sanderse from Morgan Stanley. Two questions, Andrew. First one on U.S. Onshore, which will be a very big swing factor for NewCo in terms of earnings, how happy were you at the performance in last financial year? The company just missed its targets, but you expressed some confidence for next year.

And secondly you showed the slide with the CapEx, 10 billion has been determined already and there is a 4 billion gap that's still to be filled in. When is the company ready to get its more insight and how you go to spend 4 billion?

Andrew Mackenzie

Okay. Look, I'm very satisfied with the performance of the petroleum business and particularly the onshore business in the second half of the year. We delivered an EBITDA of $1.4 billion which if you annualize that and you look at its current capital spend and what I have suggested means that we are well on track to being cash flow positive as well as in FY '16 as well as EBIT positive in FY '15. So a lot more to do, but the gains that was spoken about in productivity and in well performance and invite well yield that continue to impress on the upside. So that's the first question.

I think filling in the detail of some of the -- how we will spend the capital up to in the long-term, the $14 billion ceiling, which I'd remind you is a ceiling, we may not spend all of it. I think it will come over the months to follow. I think you're probably aware that we do have an investor tour to iron ore at the beginning of November and I will have certainly more to see then as well Jimmy Wilson. And we'll add into that as the year matures, some of our ideas on small and large scale projects that might come to fruition in the coming periods.

We should take a question from Melbourne on the phone. Hello, Melbourne.

Craig Campbell - Northcape Capital

Hi, Craig Campbell, Northcape Capital; with regards to assets going into SpinCo just now it's flicking through the accounts that the depreciation on a number of assets seems to have increased a bit more than I would have expected in a particular South African Coal. Is there something in there that's causing depreciation to rise amongst those SpinCo assets for the new listing, maybe to bring down the valuation perhaps, make it a better return on equity or is there something to do with the asset quality that's caused that depreciation to go up?

Andrew Mackenzie

Look, I'm going to ask Graham to answer the detail on that question, Craig. But it's certainly not preparing for the transaction. This is normal course of business accounting that causes this year. And maybe Graham would like to say a bit more about …

Graham Kerr

Thank you, Andrew. Craig, the big one in Energy Coal in South Africa with BECSA was there was $292 million impairment at South Africa Energy Coal. That was included in non-cash charges.

Andrew Mackenzie

Okay, maybe take one -- okay, one more question from Melbourne and then we will com back to you and then maybe take questions from the phones elsewhere possibly London, so one more from Melbourne.

Andrew Hines - Commonwealth Bank

Andrew, its Andrew Hines from Commonwealth Bank.

Andrew Mackenzie

Hi, Andrew.

Andrew Hines - Commonwealth Bank

A question about the assets that haven't been included in SpinCo, I'd mention that assets like New South Wales Energy Coal and the Cerrejon Colombian coal assets must have been considered to be included and they haven't been. And then of course Nickel West, which remains in comments, remains under review. Can you talk a little bit about why those energy coal assets weren't included in SpinCo and why they remain in the main BHP but they are not really significant assets of BHP. And then give a little bit more color around the Nickel West process, what's happening there?

Andrew Mackenzie

Let me do Nickel West first, Andrew. Nickel West is not really a good fit with either the high quality assets that we want to have in NewCo or absolutely the high quality that we're trying to create within BHP Billiton. It's a mature asset and it has other natural and as I think other than those two companies, so the still force is continuous. I'm not able to comment any more on that at the moment.

The decision to include very high quality, some of the best energy coal mines in the world and the BHP Billiton portfolio reflects our broader strategic thrust which is suggesting that as the world and particularly China into more of a consumption phase, we're likely to invest more in energy relative to the past than we have in steel making.

We don't yet quite know how energy futures will play out and the role that coal will play. But that's why we have retained the very best coal assets in our portfolio as part of our longer term thinking about how we can use the skills of BHP Billiton people to maximize returns on share for shareholders.

So, I'll take one more question from our floor, and then we'll go back to the phones; maybe the lady in the front row.

Anna Mulholland - Deutsche Bank

Thanks. Anna Mulholland from Deutsche Bank; I have three quick questions on NewCo, please. The first is, Andrew, you mentioned that your core assets, the assets remaining in BHP have attracted most of the capital over the years. How much maintenance CapEx do you think you need to put in to the NewCo assets? You have given as a life of mine for most of the core assets; do you have that for NewCo as well?

And then thirdly, maybe just to understand why Illawarra is not staying in BHP but going into NewCo? Thanks.

Andrew Mackenzie

Okay. Look, and answers to your first question, I said these are assets that were built and run and operated towards BHP Billiton standards, so there isn't any element of catch-up capital. The capital investment there will depend on NewCo developing a track record of investing capital with discipline, and it may well then be that they'll have opportunities to invest in growth and growth options that will emerge.

I think let's wait until we hear more about the details of NewCo before we actually talk here about the life of mines of the assets in NewCo. The inclusion of Illawarra is just a scale thing. I mean basically these are -- although they're competitive assets, they're strong assets in their industry as I've said, they're generally smaller scale than the assets that we're retaining in BHP Billiton and that's why Illawarra is included in NewCo.

So I will take your question from the phones now.

Operator

The next question is from Paul Young of Deutsche Bank.

Andrew Mackenzie

Hi, Paul.

Paul Young - Deutsche Bank

Thanks. Hi, Andrew. First question is on your U.S. 2.3 billion controllable cash plus target; a majority of opportunities will be on iron ore and copper, can you provide us with a rough divisional split that will talk about the opportunities and the split of that 2.3?

And then also can you talk about the petroleum growth pipeline in particular, discuss the rate into the recent 10 million probably downgrade in U.S. onshore volumes, compared to the scenario you presented in Houston in December. If we look at Devon Energy's second quarter results, say, your JV partner's results, now the Black Hawk is performing better than expected. So it indicates to me that the whole field in Haynesville will perform its underperforming, so can you just talk about that, please?

Andrew Mackenzie

Okay, yes. Paul, I think in order to breakdown where the future productivity gains will come from, I think we should talk to you about that in the more detailed presentations we'll do around the business in the coming months. And the first one as I've said will be with iron ore, and [Jimmy] (ph) in early November in Pilbara. I mean clearly iron ore is a big contribution to make. But really all our businesses are working hard on productivity, and all of them have a number of potential options up there. So even who comes first and thickest and fast, I think it depends on a number of things, but more updates in future.

I think you half answered your own question on petroleum. We did have during the course of this year some challenges with the wells at Hawk Field, they had been wrongly tubed and they had quite high H2S. We need to take them off line to put to more effective methodology in the wells and to make them safe, very much in line with our principle. We think about things for the long-term and the integrity of our assets.

At Haynesville, it is a business where we're learning more and more through the fracking process as to how we can contact a greater amount of the potential reserves. Again, like Hawk Field, I think we're winning this. And I think increasingly you'll see that we as a company are outperforming the industry in terms of reserves per well and the nature of our decline curves as we take our time to really master this very new technology and to do it in a very safe way.

So, let's -- I do more one more question from here and then (indiscernible) over there, yes. Sorry, I'll come back to middle now.

Sylvain Brunet - Exane BNP Paribas

Good morning. I'm Sylvain Brunet from Exane BNP Paribas. Two quick questions; first on potash, on which you could maybe update us on the process there, how closer are you to approval if there is anything to report on the shareholder structure?

And second question, when you were in Houston last time on the Onshore shale businesses, I remember you were exploring some asset swaps, has there been any progress there to fit any interest in the industry there? Thank you.

Andrew Mackenzie

Okay. Not much to report on potash. We're taking this very slowly. We went to get it right in terms of the technology for developing the shaft, which is the most difficult part of it, and we're also watching the market and we continue to re-work the capital. So, no decision is eminent on that for some time. It's something that we consider to -- we continue to look at as a team and as a board, but I wouldn't expect any announcements beyond the commitments that we've already made to complete the shaft over the next couple of years.

On trading, actually trading happens all the time, and the petroleum acreage. We believe, of course many others do, that we're understanding better and better where the sweet spots are where people have different views or perhaps they want to get into trades that are available, and in a small way we continue to do that to upgrade the quality of our portfolio, particularly in the Permian.

So let's -- yes, we'll take one more here.

Fraser Jamieson - JP Morgan

Thanks. I'm Fraser Jamieson from JP Morgan.

Andrew Mackenzie

Hi, Fraser.

Fraser Jamieson - JP Morgan

A quick one on the debt that you intent or otherwise pretend to NewCo, could you maybe just clarify your comments, yourself talked about targeting and investment grade rating also about carrying minimal net debt, those -- that business could probably carry a degree of net debt while still retaining an investment grade rating. Maybe just make some comments around that, maybe how you think about it in terms of multiples relative to free cash flow or relative for BHP as an overall group is currently positioned?

Andrew Mackenzie

There is a half way to answer to your question is more -- at least a way until we have a more detailed plan and strategy for NewCo and that I'll imagine in the coming months. But minimal net data, basically there is a range of financing leases that we have included on some associated liabilities with the assets that will be transferred. But beyond that we'll wait until Graham and his team have formed up and can talk to you about that in more detail.

Fraser Jamieson - JP Morgan

Okay, thanks.

Andrew Mackenzie

Okay. So let's -- one more question from the phone.

Operator

The next question is from Glyn Lawcock of UBS.

Andrew Mackenzie

Hi, Glyn.

Glyn Lawcock - UBS

Hi, Andrew. Look, two questions; firstly, you talked about some impediments to the demerger and you need a lot of relief from the regulatory authorities. I'd have thought taxes is a big one, is there an issue or risk that so many assets might be Cannington good earnings low book value, if you can't get the tax relief you might not be able to go ahead with this or you're confident you can get the relief you need? That's the first question.

And then secondly, you said earlier on the call, the DLC brings complexity and cost burdens, I understand it's not right in NewCo, but what about BHP Billiton? You don't access equity markets, you can't deploy franking credits fully, can you rule out that the DLC might be collapsed in the future, if you said, or is that something that's further down the track? Thanks.

Andrew Mackenzie

So, Graham will answer the first part of your question. I'll handle the DLC. Yes, you heard me right. I mean it clearly has a sound complexity. But for the company of the scale of BHP Billiton, and our ability to access strong capital markets in London as well as in Australia, then it's a valuable way of structuring the capital of our business, and something that we continue to enjoy. And we think there is value for BHP Billiton in that.

So, no change there, but maybe Graham wants to say a little bit more about the tax issue in Cannington.

Graham Kerr

Yes, Glyn, just might be barrier on some of the points that Andrew made rather than getting into the specifics. We talked about the U.K. would basically list big mix calendar year. We talked about providing an update some time in November from the board about what we do in terms of next steps. Obviously now that we've announced this publicly today, there are a number of regulatory hurdles that we got to look at as a number of JV agreements and another number of steps to go through. Obviously, their things hasn't still really get done, but we have a high degree of confidence; otherwise we wouldn't be announcing it today.

Andrew Mackenzie

Another question from the phone.

Operator

The next question is Peter Harris of JCP Investments.

Andrew Mackenzie

Hi, Peter.

Peter Harris - JCP

Hi, Andrew. Thank you for the presentation, and a really fantastic effort on health and safety. Congratulations to Graham and Brendan in their new roles. You didn't touch franking credits in the presentation. Do you think demerger will impact on BHP's ability to liberate the $13 billion of franking credits you have in the balance sheet more quickly? People are attributing about $13 billion to the value of NewCo and you still got that to the balance sheet in franking credits. So, will the demerger impact on your ability to get those out to shareholders more quickly?

And just following off from that, are you worried about the Murray enquiry and treasury rumblings about potentials and the ability to frank or do an invitation franking credits and people that may need to liberate those credits more quickly?

Andrew Mackenzie

I'm not going to comment on the second part. I mean that's such an unpredictable area. And we'll obviously monitor that as you. But let me be clear. This team measure has no impact one way or the other on whatever capital management program we plan to do. And we've made no decision, if and when we start other than it will be consistent and predictive over a period of years and so we start in a way that we're not going to have to interrupt. So we need to be ready around the mechanism, and therefore the rule that franking credits will play. But there is no impact on those plans in my view on our capital management plans.

Peter Harris - JCP

Thank you.

Operator

The next question is from Lyndon Fagan of JP Morgan.

Lyndon Fagan - JP Morgan

Hi, Andrew. Just a couple of questions; so the first one was why did you decide to I guess give payoff, say, shareholders a proportionate stake in NewCo rather than perhaps share this compensation given that some of the mandates of those investors wanting to allow them to hold the listening and perhaps that might put some pressure on share price of the new listing immediately?

And then the second question was just on iron ore, so you've talked about 290 million tons as a new capacity target. I'm just wondering if you can perhaps shed some light on which mines that might come from and potential timing on new project announcements just to get a better feel for that. Thanks.

Andrew Mackenzie

Okay. Let me deal with the second one first. It will mainly come from the expansion of the Jimblebar mine, and then investments in effectively de-bottlenecking and increasing the efficiency of the port, backing off some of the investments we're making at the moment. And we'll provide a lot more details around that when we do the investor tour to the Pilbara in November.

I think on the choice of listing of NewCo, the choice was to demerge and once we had actually created what we thought NewCo or decided NewCo would look like, we then have to make a decision on what was the most appropriate place to list. As you heard earlier, we rejected the idea that we'd have a dual-listing, so we did have to make a choice because the 50% of the assets are based in Australia and because obviously of the complexity of approvals and corporations and so on, it made a lot more sense to primarily list in Australia that was the highest value creating process for all shareholders to do it in the cheapest and most effective way possible.

And then the second re-listing in South Africa is in many ways a recognition that a strong relationship between this company and South African government in process is going to be critical to its success. So we didn't walk backwards from where we wanted to list. We walk forward from what the demerger company look like and what was the most value accreting way of doing that listing for all shareholders, and that's why we ended up at the ASX.

Question is here from London. There is two or three waiting; let's just take one in the front door, yes, and then we'll move here, and then we'll go back to the phones.

Unidentified Analyst

Thank you. Just a follow-up on that; in terms of the spin out in NewCo, is there any possibility that we could see a book billing process, and can you rule out the possibility of BHP taking any stake in NewCo in terms of any shares that may come out of the U.K. market at the time of the initial listing?

Andrew Mackenzie

I mean Graham might want to add to this. But there is a lot of things that we now need to talk to regulators about to get really clarity around the mechanism. And so I'd rather not try and speculate at this stage about some of those issues until -- now in the open, we can have a lot of those discussions, but Graham I don't know if you want to add to that.

Graham Kerr

The only thing I'd comment when we think about the payoff to shareholders that we haven't quite touched on is one of the fundamental aspects of the demerger, and the DLC is actually trading shareholders equally, so the equivalents concept. So when we looked at the demerger, Andrew is exactly right, the first one was well, what are the suite of assets you wanted to merge, what we do think creates the most value, lots of logical listing location, then we have to think about all the other issues. Now that, again, we've actually made the announcement today, we can start with regulators around what are all the issues and the things that we need to consider, and we'll come back to the market when the board looks at it later in this year.

Unidentified Analyst

But both of those are potentially on the table at this stage.

Graham Kerr

That's okay.

Unidentified Analyst

Okay.

Andrew Mackenzie

Give us a little bit of time. There is a lot of discussions that we now need to have with regulators to really get into detail on the mechanism, and that's why we're not explaining that today, because we're not ready.

Tim Huff - RBC

Hi. Tim Huff from RBC; just a quick question on cash flows, on working cap gains, you've mentioned and talked a lot about how you're going to be saving on the cost front going forward on the core set of assets. I was just wondering from a net debt reduction standpoint or sustainable basis, have you taken a close look on not only how you can swing your working capital from the first half to the second half in the fiscal year, but you can sustainably reduce your working cap going forward, and does that play a larger or small part in sustainable net debt reduction for BHP core assets going forward?

Andrew Mackenzie

Well, working capital management in order to reduce net debt is about core to everything we do, which is my primary aim isn't maximizing free cash flow. I don't know if Graham, our CFO, he want to add any more color to that.

Graham Kerr

There is a natural cycle around seasons about how working capital balance looks at the calendar year versus our financial year in terms of the timing of shipments and sales. But we certainly do a lot of benchmarking work around our average debtor days, our average trade creditor days, etcetera, and we think we're pulling very well on that. We have a continued focus on that, but there is a natural underlying seasonality in some aspects as well.

Andrew Mackenzie

Take another question from the phones.

Operator

The next question is from Myles Allsop of UBS.

Andrew Mackenzie

Hi, Myles.

Myles Allsop - UBS

Hi, there. A couple of quick questions, first of all on M&A, in the past you've been reasonably clear that it's very much not on the agenda, obviously as your balance sheet strengthened, you're in a position to maybe think about it again. Can you give us a quick update what your thinking is in terms of acquisitions?

And then secondly, with the buyback obviously, it's a bit of disappointment today that you haven't -- you don't believe you're in a position to launch it. Could you just clarify whether the timing of buyback will be driven by the timing of the spin out, are you preparing to do it before the spin out just complete mid next year? And also, whether it's driven by divestments such as Nickel West or if you got a billion dollars in for Nickel West, would that trigger the start of the buyback?

Andrew Mackenzie

Okay. I think your question on the Nickel West proceeds is probably been answered by the room, I don't have a lot more to do to that. Just on M&A, Myles, nothing has changed and much else would have been in my answer to capital management by the demerger process other than of course our ability I think to generate free cash flow quicker in BHP Billiton. We're and BHP Billiton will remain a strongly internal focus company. You've seen through our presentation that we have hundred year resources and the potential to develop them on average at returns in excess of 20%. I find it very hard to imagine any deal that would actually be as compelling as that.

So, as far you considered you should assume that the M&A is off the agenda for a considerable period. I think on your question on the buyback, I mean again our capital management has broadened a bit. This isn't something that will be dictated or be affected by the demerger process which is part of our simplification agenda.

As you pointed out, we're not quite ready in terms of our forward look and current the shape of our balance sheet. But our balance sheet is getting stronger and why we want to make sure that when we start that we're ready is we want to do something over and above, and I'll come to that in a moment, what we're doing to remind you of that, which is something that we can do consistently and predictably over a period of years and it isn't just some sort of one-off. But I do remind you as that there is capital management in this announcement, part one is that we're not going to re-base the dividend that we pay BHP Billiton when we demerged NewCo. And we're setting NewCo up in a form that we think it will be able to generate dividends through relative to what we think will be strong cash generating capacity.

If and what we've announced today, in turns out that we've been a bit conservative of course that will bring the possibility of doing something on a consistent and predictable (technical difficulty) sure that we're ready. In fact we control, so obviously our productivity, our management of capital, everything we're doing that we discussed on this thing about maximizing free cash flow, but there are other factors we don't (technical difficulty).

Another question (technical difficulty).

Operator

(technical difficulty) with Citibank.

Unidentified Analyst

(Technical difficulty) 6.6 billion, and whether there is any sort of (technical difficulty) and also again, in terms of what is the strategy within your company, is that (technical difficulty) going forward?

Andrew Mackenzie

(Technical difficulty) to them, but I don't want us to say too much (technical difficulty) as the CFO of Billiton. And with that said, maybe Graham you can answer the question.

Graham Kerr

Okay, Thanks, Andrew. A couple of points I'd make out when we look at the financials this year, the aluminum, manganese and nickel business, I've talked about a $300 million reduction in controllable cash cost and if you remember that half year result, we also talked about the strong improvement in that business. So, well, they're not of the same size and scale necessarily of our BMA business or iron ore business in the Pilbara certainly have been leading the way on productivity improvements.

Andrew is right, obviously just been announced today and obviously made a bit of time to look at the strategy, but I think if you look at it in an simple way, there is opportunity for the assets in NewCo to continue to improve in terms of we spoke about the org structure and Andrew showed where we had a regional model, so running it in different operating model and so it's about adjusting the systems and processes to fit the size of the scale and the top of the assets that exist Newco.

So I do feel there is more opportunity on the productivity side in the new company, but also on BHP Billiton as Andrew mapped out today.

Andrew Mackenzie

Is there a question at the back here? I can't quite see you, but …

James Gurry - Credit Suisse

Yes. Sorry. It's James Gurry from Credit Suisse. You can't see me very well, but I just got two quick questions. Your CapEx guidance for the next year is 14.8 and 14, excluding SpinCo. I think that 14 also coincide with the upper limit of what you want to spend in the future in terms of CapEx. Do you think this is the right time in the cycle to be spending the maximum amount of capital on investment projects within the industry? Or do you think it is time to actually have a lowest spend going forward?

And just a quick factual question for Graham; on the franking credit balance, how much of the current balance is actually attributable to the profits generated by the SpinCo assets in Australia?

Andrew Mackenzie

Okay. I mean on the capital size, the 14.8 includes NewCo, while it's with us, and the 14 excludes NewCo, which is of course we think we'll find ourselves in from at least the whole of financial year '16. I think it's important to remind you that we have no commitment to spend up to that. That's the sealing. It's not a target. And as we continue to work capital productivity, we assess the projects coming forward. It's perfectly possibly that we may spend less than that for the reasons that you outlined.

Graham Kerr

Regarding the franking credits, I mean obviously they're related to the Australia assets that we have in the portfolio today. And I don't have the exact split in front of me, but the vast majority would relate to our biggest center in Australia, which is iron ore. That will be little bit associated with Cannington, Illawarra and Worsley, but predominantly they're all related around the big core pillars of BHP Billiton.

Andrew Mackenzie

There is a couple more in the room; one next to the lady with the microphone and I think there is one at the back if we can get a microphone to them as well. Okay.

Hunter Hillcoat – Investec

Hello. It's Hunter Hillcoat from Investec. You mentioned that the balance sheet is not quite ready in terms of capital returns to shareholders. Is there any sort of target you have in mind in terms of out thinking of when you're going to be ready so that you can make those returns?

Andrew Mackenzie

Look, I'd rather not get as quite as specific as that. I mean there is a number of factors that we have to consider, obviously the forward looking price, the view of the rating agencies, the view of the rating agencies in some respects of the new BHP Billiton. But you're right. We aren't quite ready relative to the way we said we might be and you know the reasons for that. It's not because we haven't tried, we've delivered a billion dollars more in terms of cash from our productivity savings and we cut capital by a billion dollars more. But that is against that we've had a number of reductions in price, which tells you that you can't be too certain about the predictions because we're (technical difficulty) as well as the things that we control.

I think -- is there a question on the phone? No. So, take another question here, just at the middle of the back.

David Butler - Barclays

David Butler from Barclays. Under the DLC structure, is there any regulatory limit to the asset value attached to the limited side versus the asset value attached to the PLC side? Can all the assets be housed under BHP Limited? And yet there still exist a DLC structure?

Andrew Mackenzie

It's more complicated than just a regulatory side. I guess Graham it's very much a financial question, I don't know if you want to -- I'll help you, but the reality is that it's not a regulatory issue. It's obviously availability of funds to pay dividends out of both companies, but Graham I don't …

Graham Kerr

I think it's slightly more practically inside. If you look at assets fleet today, if you made the decision to move even before it got into the regulatory issues, if you saw from one side of the company to the other in terms of the DLC, there is going to be imposed and evolved around potentially capital guidance tax, perhaps the triggers have brilliantly broaden some of those assets and then you have regulatory approval. So, there's certainly so many obstacles in the way that why you wouldn't look to do that.

David Butler - Barclays

But there can't be much left under the PLC side?

Graham Kerr

I mean if you look at the assets today, I'll start say a part of BHP Billiton, there are a number that come from the old Billiton side around the DLC side, including Antamina, Spence, Cerrejon, New South Wales Energy Coal that allows large Tier 1 quality assets.

David Butler - Barclays

Okay, thanks.

Andrew Mackenzie

Okay. I think we're done here in the room. What about the phones?

Operator

The next question is from Adrian Wood of Macquarie Bank.

Andrew Mackenzie

Hi, Adrian.

Adrian Wood - Macquarie

Yes. Hi, Andrew. Just two questions; first of all, just on the Permian, last your we were looping at just under 12,000 barrels a day, and as of year end I believe you had only four rigs in the play. I don't know that you're still talking about 100,000 barrel medium-term target; first of all, can you put any timeline around that? Is that going to be focused on the Delaware basin or the Middleton basin, I just notice that Devon has 23 rigs in the play at the moment and Apache has 37, they're producing much near than 100,000 barrel a day you're targeting? When are we going to start to see the capital flow into the Permian?

And then, just following on some of the questions on franking credits, I just noticed back in 2002 when you demerged BlueScope, you gave them no franking credits, given that who is going to be Australian lifting and those franking credits perhaps will lift more in Australian hand, I just wonder if there is the ability to [cut out] (ph) some of those franking credits? Back in 2002, you had less than a billion dollars of franking credit, today you've obviously got considerably more than that and perhaps therefore could distribute some to the new entity?

Andrew Mackenzie

Well, its two very detailed questions I'd say. I mean your questions around the Permian, to be honest; I mean they're slightly sensitive that we would answer them because they reflect our view of acreage is still very much actively traded. I'd rather not be drawn on those things. I mean we're taking time on the Permian to really assess the potential and make our move. But you're right, when you look at others are achieving, we do see the capability there if we get it right to, and more than replicate liquids performance we're getting in the Black Hawk. The detail of how we do this I think has to remain partly our secret until such time as we feel more able to share it with you.

On the franking credits piece and that question (technical difficulty) the BlueScope transaction was complicated because it was provided for in the way in which the merged was done and it was to some extent it was pretty sold as part of the whole merger process and equalizing things between BHP and Billiton shareholders. We have none of those requirements at this time. And so, we have to treat always shareholders equally. And as I've said elsewhere, now that we're free to talk to the regulators the exact mechanism by which we do this. It has to be another part of discussions as we go forward rather than speculation today. Graham wants to say one thing.

Graham Kerr

The only thing I'd add Adrian is obviously now that is clearly in Australia, franking credits is a challenging issue and there is a lot of anti-avoidance issues around how you can stream franking credits. So I think Andrew's point is right now that we've actually announced the deal we need to go through all the regulatory different assessments and hurdles and talk to people, but just to sort of set expectation streaming or moving franking credits is not an easy thing to do.

Adrian Wood - Macquarie

Okay. Thanks, Graham.

Andrew Mackenzie

I think that's all the questions. Very good. Well, thank you for listening. And I look forward to in our road show in the next three weeks, both Graham and myself and so are my colleagues talking to many of you again in more slightly intimate sessions, but hopefully this is a taste for things that will come in more detail in the next three weeks.

So, thank you very much, and the session is closed.

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