Corporate financial report for BHP Group Ltd
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EXECUTIVE SUMMARY
This
is a corporate financial report presented for BHP Group Ltd. The report starts
with industry and business analysis, reviewing the company’s position in its
industry and overall performance relative to its competitors. This is followed
by a corporate governance analysis. This section looks at the extent to which
BHP Group’s corporate governance structure and culture converge or diverge with
best practices in corporate governance. The essence is to highlight where they
are doing well and areas that need improvement.
The
concluding sections are capital structure practices and distribution policies.
Analysis in capital structure practices focuses on the source of their funding,
how they create leverage, and the company's overall sustainable performance.
For distribution policies, analysis centers on the strategy employed by the
company in distributing dividend earnings, the types of dividends issued by the
company, and the effect of the announcement. Overall, this report seeks to
assess and evaluate the financial position of BHP Group Ltd. and determine
whether or not the company is sustainable.
Finally, the report concludes with a summary of findings in relation to the company’s financial position, highlighting areas where changes might be needed and areas where the company has performed well and returned positively.
INTRODUCTION
BHP Group Ltd. is the largest mining company in the world, with a market capitalization of $227.48 billion as at 2021. Headquartered in Melbourne, Australia, the company is focused on mining resources that the world needs to grow and decarbonize. Its main strategy is to deliver long-term values and returns through its cycle. It is faced with the increased challenge of bad government policies, the shift towards renewable sources of energy and the depletion of natural resources. However, its market capitalization provides opportunities for business expansion and sustainable growth. Its corporate governance structure sees the CEO working in constructive partnership with the board, being accountable to the board, and regularly reporting progress to the board. In 2020, the company paid US $15.5 million to its external auditor. Its investments have shifted towards renewable sources of energy. Overall, it can be stated that the company is sustainable as equity is 78% of total operating capital.
INDUSTRY AND BUSINESS DESCRIPTION
Industry
Background
According
to the World Bank (2022), natural resources have the potential to drive
development, growth, and poverty reduction. The natural resource mining sector
plays a pivotal strategic economic role in many countries around the world. For
many countries, mining is one of the most prominent sources of earnings, and
the growth of the mining sector is known to regulate the potential of companies
to acquire resources and their economic growth. Based on the different elements
of the natural resource mining sector, industries operating in this sector
might be categorized as geophysical industries or chemical industries (Hussain
et al., 2022). Presently, there is a shift towards renewable sources of energy
(Baglioni & Campling, 2017), aimed at sustaining the ecosystem.
Firm’s
Description and Core Business
BHP
Group PLC is a world-leading resources company headquartered in Melbourne,
Australia. It is a mining company that is presently focused on the resources
the world needs to grow and decarbonize. Copper for renewable energy, nickel
for electric vehicles, potash for sustainable farming, and iron ore and
metallurgical coal for the steel required for global energy transition and
infrastructure (BHP Group, 2022a). It is the largest (by market capitalization
of $227.48 billion) mining company in the world and the 38th most
valuable company in the world (CompaniesMarketCap, 2022; Garside, 2021).
Company’s
Business Model
The
company’s business model is founded on its strategy, which is to deliver
long-term value and returns through its cycle. As BHP Group PLC (2022b)
highlighted, they will do this by having a portfolio of world-class assets with
exposure to highly attractive commodities that are beneficial for the
mega-trends playing out across the globe. Its operating model is to operate its
assets exceptionally well, based on a disciplined approach to capital
allocation and sustaining its industry leadership.
Key
Risks and Opportunities
The
main risks facing the company are the global shift towards renewable energy streams,
resource depletion, and government regulations. Its capitalization presents numerous investment
opportunities.
CORPORATE GOVERNANCE STATS
Corporate
Governance Practices
Figure 1. BHP Governance Structure
Source: BHP Group PLC (2022c)
The
company operates a top-down corporate structure as illustrated in Figure (1).
The board has 12 members. The board is made up of both executive and
non-executive directors with the intent of delivering effective governance. The
board has extensive access to members of the senior management who frequently
attend board meetings. The CEO works in constructive partnership with the
board, is accountable to the board, and regularly reports progress to the
board. Board membership is based on a structured board success plan which
involves regular assessment of skills and expertise for building a sustainable
future and using that analysis to establish a clear succession plan (BHP Group
PLC, 2022c).
Compensation
Practices and Potential Agency Concerns
Compensation
is mainly performance-based. The board skill matrix is used to identify the
skills and experience the board needs for the next period of BHP’s development,
in consideration of circumstances and changes in the external environment of
the company. Potential agency issues are addressed through independent
reporting measures for auditing agencies and access to the company’s financial
documents. (BHP Group PLC, 2022c).
Board
Remuneration and Audit Fee
The
CEO has a base salary of US $1.7 million, with 10% of the base salary as a
pension contribution and other benefits that are not in excess of 10% of the
base salary. In cases where the executive directors meet set targets, there is:
a CDP cash award of 80% of the base salary, plus two awards of deferred shares
each of equivalent value to the cash award, based on two and five years,
respectively; and a LTIP. The LTIP is based on the fair value of the award; 41%
of the face value of 200% of the base salary. In any case, the potential
impacts of future share price movements are not included in the value of the
deferred CDP awards or LTIP awards. All these remunerations are determined by
an independent committee (constituted by the board) (BHP Group PLC, 2022c).
However, non-executive directors are not eligible to participate in any CDP or
LTIP award arrangements. For 2021, the company paid US $15.5 million to its
external auditor (BHP Group PLC, 2022c).
Divergence
from Best Practices of Corporate Governance
The
company’s report on corporate governance converged with best practices. Their
report covers the board of directors and executive leadership team, governance
structures, commitment arrangements, engagement with shareholders and
stakeholder, remuneration reports, and directors' reports. The implication is that the company is positioned to
sustain its market presence and capitalization due to
positive image.
CAPITAL STRUCTURE PRACTICES
Financing
Sources and Changing Patterns of Financing
The
company’s funding comes mainly from the profits generated through continuing
operations and a revolving credit facility of $5.5 billion. The continued
operations include investment returns, customer receipts, and shares. However,
since 2020, the group has not issued any group-level debt and it has not
refinanced any debt matured during the said year. The implication of this
action is that it has improved the capital structure and has been able to
extend its average debt maturity. As at 2021, it maintains a total debt value
of $27.91 billion and the debt represents 26% of its operating capital, with
equity making up for the outstanding 74% ($68.19 billion) ((BHP Group PLC, 2022c; Intelligent
Investor, 2022).
Historical
Analysis of Leverage
There
are certain activities in the company that provide leverage for its
debt-to-equity ratio, allowing for sustainable performance. This includes
increased revenue from $63.2 billion in 2019 to $80.9 billion in 2021. The
implication is that confidence in shareholders has increased and they are
likely to invest more towards the company’s growth. The company’s net profit
after tax has also increased from $13.7 billion in 2019 to $22.75 billion in
2021. A higher net profit implies higher operating capital, allowing for business
expansion, diversification, and sustainability. Shareholders’ equity increased
from $67.4 billion in 2021 to $68.2 billion in 2021, and this will likely
attract more investors (BHP
Group PLC, 2022c; Intelligent Investor, 2022). The company has also invested in
the Jansen Stage 1 Potash project, which is coupled with an agreement to pursue
a merger of its petroleum business with Woodside and an intention to unify its
corporate structure under BHP’s existing Australian parent company. All these
provide leverage in the form of increased cash flow. Analysis shows that it has
not drawn from its revolving credit facility in two years and has not
refinanced any of its matured debts in the said period, which implies a reduced
debt ratio and funding for its operations.
The
Effect of Leverage on Accounting and Market Performance
The
effect of leverage on accounting is already pronounced, with revenue moving to
$80.9 billion in 2021 from $63.2 billion in 2019. Additionally, its net profit
after taxes increased from $13.7 billion in 2019 to $22.75 billion in 2021. The
effect on market performance is seen in its 2022 capitalization of $227.48
billion, sustaining its position as the largest mining company in the world
(CompaniesMarketCap, 2022; Garside, 2021).
CAPITAL EXPENDITURE / INVESTMENT PRACTICE
Historical Analysis of Capital
Expenditure
Historically, their expenditures have been centred on
operations, explorations, and research and development. The capital and
exploration expenditure reduced from $7.6 billion in 2020 to $7.1 billion in
2021. In the area of exploration, one notable expenditure was the approval of
%5.7 billion for the Jansen S1 potash project in Canada. The project include
design, engineering and construction of an underground potash mine and surface
infrastructure which will also feature a processing facility, a production storage
building, and a continuous automate rail loading system. The company’s
expenditure on resource assessment increased by 5% in 2021 to $138 million,
while its Greenfield expenditure increased by 23% in the same year to $54
million. However, expenditure for petroleum exploration and appraisal has been
declining for a while, reduced from its $685 million value in 2019 to $564
million in 2020, and $322 million in 2021. This shift is likely due to the
continued pressure to shift towards more renewable and sustainable sources of
energy.
Changing the nature of
investment (tangible vs. intangible assets)
There is no change in the nature of their investments
as the company is still predominantly investing in tangible assets within the
mining sector. However, their quest to sustain their high performing culture
and leading capability have seen investments increase in the areas of
technology, autonomy, recruitment and training. Additionally, there have been
significant investments in social capital development, assisting communities
they operate it through their different networks and foundations. Aside from
these, majority of their investments have been on physical (tangible) assets in
the areas of exploring and discovering new streams of natural resources.
Investment Efficiency and
the Performance Effect of Investment
One major effect of their investments in technology
autonomy, recruitment and training has been increase in more skilled, diverse
and capable workforce that can unlock future performance. The implication is
that the staff are better equipped with skills necessary to undertake their
designated tasks in a consistent, coherent and reliable way. Therefore, there
is a resulting positive influence on the performance of the company as
demonstrated in its annual returns, revenues, and equity ratio and dividend
pay-outs. Investments on explorations, and research and development has also
been efficient with positive influence on their performance. Investments in
exploration has also brought about significant new resource discovery,
increasing their overall capital deposit for natural resources and this has
strong positive influence on their performance.
DISTRIBUTION PRACTICES
Historical
Analysis of Dividend Policy
Historically,
the company’s dividend policy provides for a minimum of 50% payout of
underlying attributable profit at every reporting period. This policy was
adopted in February 2016. For the 2021 financial year, the minimum dividend
payment for the second half of the year was $109 per share. The board, in
recognition of the importance of cash returns to shareholders, reached the
decision to pay an additional 91 cents per share, and this brought the total
dividend paid in 2021 to 200 per share (US $10.1). Shareholder return moved
from 32.2% in 2019 to 42.5% in 2022, notwithstanding the 7.2% recorded in 2020
(BHP Group PLC, 2022c; Intelligent Investor, 2022). Furthermore, the company
reported that this policy will remain unchanged in the foreseeable future. The
board assesses, at every reporting period, the ability of the company to pay
amounts additional to the minimum dividend payment, based on its capital
allocation framework.
Types
of Dividends and Evolving Trends
The
main type of dividend employed by the company is the cash dividend, where cash
values are returned to investors based on the number of shares they own.
However, the company also pays stock dividends in the form of dividend
equivalent payments (DEP). This applies to awards provided to the executives
under the CDP, STIP, and LTIP targets. These awards are in the form of the
right to receive ordinary shares in the company, and they are granted under the
following employee share ownership plans: Cash and Deferred Plan (CDP),
Short-Term Incentive Plan (STIP), Long-Term Incentive Plan (LTIP), Management
Award Plan (MAP), Transitional and Commencement KMP awards, all-employee share
plan, and Shareplus are all examples of employee benefit plans (BHP Group PLC,
2022c).
Announcement
Effect
Similar
to other companies in the stock market, announcements have an effect on
performance and dividends payable, where positive announcements will have
positive effects and vice versa. The effect is more pronounced in the price per
share, which has increased from an Australian $19.09 in 2017 to $35.82 in 2021.
Going further, the dividend yield has increased from 8.1% in 2019 to 8.3% in
2021. This is because of its announcement that the shareholders would not
change its dividend policy and its ability to distribute fully franked
dividends. Finally, the announcement can also serves as a motivation for
present investor and employees of the company to consider taking more shares,
and this will sustain the company’s performance.
CONCLUSION
Discussions
above point to the fact that the mining industry is a profitable one, but it
faces the issue of a shift to renewable forms of energy. Therefore, companies
are encouraged to diversify their operations towards renewable energy in order
to create sustainable performance. A review of BHP Group Ltd shows that it is
the largest mining company in the world with a market capitalization of $227.48
billion. The company adopts a top-down business model where the CEO is under
the authority of the board members and they make decisions about the company
together. Its strategy is based on continuous improvement. The main risks
facing the company are depleting natural resources, government policies, and a
shift towards sustainable energy consumption. However, the company has vast
financial muscle to expand its operations and create the desired
sustainability. Corporate governance analysis shows a transparent approach to
corporate governance, one that is transparent and converges to best practices
in corporate governance. It is able to leverage its performance through reduced
borrowings, business expansions, and increased dividend pay-outs to attract new
investors. Its dividends are either in cash or stock, and dividend
announcements have a direct influence on the company’s financial and
non-financial performance.
REFERENCES
Baglioni,
E., & Campling, L. (2017). Natural resource industries as global value
chains: Frontiers, fetishism, labour and the state. Environment and Planning A: Economy and Space, 49(11). https://doi.org/10.1177/0308518X17728517
BHP Group
(2022a, Jan 7). “About Us”. BHP
Group. https://www.bhp.com/about
BHP Group
(2022b, January 17). “Our Strategy”.
BHP Group. https://www.bhp.com/about/strategy
BHP Group
PLC (2022c, March 31). “Annual Report
2021”. BHP Group. https://www.bhp.com/-/media/documents/investors/annual-reports/2021/210914_bhpannualreport2021.pdf?sc_lang=en
CompaniesMarketCap
(2022, May 17). “Market capitalization of
BHP Group (BHP)”. CompaniesMarketCap. https://companiesmarketcap.com/bhp-group/marketcap/
Garside, M.
(2021, Nov 17). “BHP-Statistics &
Facts”. Statista. https://www.statista.com/topics/3401/bhp-billiton/#topicHeader__wrapper
Hussain, C.
M., Paulraj, M. S., & Nuzhat, S. (2022).
Source
reduction and waste minimization in the mining industries. Source Reduction
and Waste Minimization – Elsevier, 169-176. https://doi.org/10.1016/B978-0-12-824320-6.00011-3
Intelligent
Investor (2022, May 18). “BHP Group
Limited (BHP) – Financials”. Intelligent Investor. https://www.intelligentinvestor.com.au/shares/asx-bhp/bhp-group-limited/financials
The World
Bank (2022, May 17). “Extractive
Industries”. The World Bank. https://www.worldbank.org/en/topic/extractiveindustries/overview#1
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