BHP - Enterprise Risk Management
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#BHP
Risk Management Strategy Briefing
Charles W GoodyearChief Financial Officer
Rowen H BainbridgeVice President Market Risk Management
December 2000
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#BHPAgenda
• Introduction
• Strategy
• Rationale
• Strategy in practice
• Communications
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#BHPMarket Risk Management Strategy
• Market Risk Strategy is consistent with BHP’s overall strategy
• The outcome is simple, but its based on complex, quantitative analysis
• Strategy works for BHP due to its low cost, diversified asset base
• Tools become building blocks for decision-making beyond the market risk strategy
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#BHPAgenda
• Introduction
• Strategy
• Rationale
• Strategy in practice
• Communications
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#BHP‘Portfolio Risk Management’
Market Risk Management Strategy• To manage risk at the portfolio level through the natural
diversification in the BHP Portfolio.• To only hedge when the residual risk in the portfolio may
compromise the delivery of corporate objectives.• To a limited extent capture value when a market within the
portfolio deviates significantly from long run expectations.• To communicate BHP's policy and resultant risk profile to
stakeholders in a clear, precise and responsive manner.
Market Risk Management Objective• To support the delivery of BHP’s financial targets, while
protecting the Company’s future financial security and flexibility.
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#BHP‘Portfolio Risk Management’ Strategy
• Manage risk at the portfolio levelUnderstand portfolio characteristicsLink capital allocation to portfolio risk
• Manage risk to an acceptable level Self insurance modelOnly hedge if you have to
• Limited strategic financial transactionsMarkets under/over valued within agreed limits
• Raise bar on communicationsClear, precise and responsive
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#BHPAgenda
• Introduction
• Strategy
• Rationale
• Strategy in practice
• Communications
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#BHP
• There is no value in reducing volatility
• Valuations reflect corporate strategy not earnings volatility
• Good communication is highly valued by investors
• Costs of hedging are high for BHP's key risks
• Only hedge if you have to
• Financial markets provide opportunities to improve returns
• BHP has a diversified portfolio
Elements of our rationale
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#BHPRationale
• BHP has a diversified portfolio
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#BHPRationale
• BHP has a diversified portfolio• There is no value in reducing volatility
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#BHP
Total Shareholder Return vs. Volatility (last 4 years)
-30
-20
-10
0
10
20
30
40
50
0 10 20 30 40 50 60Volatility (%)
Tota
l Sha
reho
lder
Ret
urn
(%)
There is no value in reducing volatility
BHP's Peer Companies
Hedger
Non-hedger
Source: Thompson FIR May 2000, BHP Team analysis
BHP
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#BHPRationale
• BHP has a diversified portfolio • There is no value in reducing volatility• Valuations reflect corporate strategy not earnings
volatility
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#BHP
Comparison of Premium Return to Premium Value
OMV
Norsk Hydro Enterprise
Chevron
Shell
0.2
0.4
1.2
-3 -2 -1 0 1 2 3 4
ENI
TexacoCEPSA
Repsol YPF
Lasmo
TotalFinaElf
1.0
0.6
0.8
Royal DutchExxon Mobil
BPAmoco
Economic Value Added
Mark
et M
ultip
leValuations reflect corporate strategy not earnings volatility
Source: Goldman Sachs ‘Essential Oils’
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#BHPMa
rket
Mul
tiple
1999 Actual Comparison of Premium Return to Premium Value
0.00
0.50
1.00
1.50
2.00
2.50
-6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00%Economic Value Added
Valuations reflect corporate strategynot earnings volatility
BHP's Peer Companies
Hedger
Non-hedger
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#BHP
Total FinaNorth Ltd
Valuations reflect corporate strategynot earnings volatility
Mark
et M
ultip
le
1999 Actual Comparison of Premium Return to Premium Value
0.00
0.50
1.00
1.50
2.00
2.50
-6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00%Economic Value Added
Nucor CorpPhelps Dodge
Western Mining
Woodside
Barrick Gold
Devon
BP Amoco
Enterprise Oil
Exxon
Lasmo
Suncor Energy
Freeport Copper
Phillips PetroleumUnocal Corp
USX-US Steel Group
ShellBHP
EnronRio Tinto
Source: BHP Team analysis
BHP's Peer Companies
Hedger
Non-hedger
Chevron
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#BHP
1999 Actual Comparison of Premium Return to Premium Value
Valuations reflect corporate strategynot earnings volatility
Source: BHP Team analysis
Mark
et M
ultip
le
0.00
0.50
1.00
1.50
2.00
2.50
-6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00%Economic Value Added
Strategy 1Strategy 1Risk Management asIntellectual Capital
Strategy 2Strategy 2Simplicity, clarity and
low cost strategy
BHP's Peer Companies
Hedger
Non-hedger
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#BHPRationale
• There is no value in reducing volatility
• Valuations reflect corporate strategy not earnings volatility
• Good communication is highly valued by investors
• BHP has a diversified portfolio
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#BHPRationale
• There is no value in reducing volatility
• Valuations reflect corporate strategy not earnings volatility
• Good communication is highly valued by investors
• Costs of hedging are high for BHP’s key risks
• BHP has a diversified portfolio
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#BHPCosts of hedging high for key risksSource: BHP Team analysis
3,000
1,0001,2001,4001,6001,800
2,0002,2002,4002,6002,800
Cash 3 month 15 month 27 month
LME Futures Contracts
Average
Average
1990199119921993199419951996199719981999
1989
A Copper Example
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#BHPRationale
• There is no value in reducing volatility
• Valuations reflect corporate strategy not earnings volatility
• Good communication is highly valued by investors
• Costs of hedging are high for BHP’s key risks
• Only hedge if you have to
• BHP has a diversified portfolio
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#BHP
Illustrative
Only hedge if you have to$A
US M
ILLI
ON
FINANCIAL YEAR2003 20042001 2002
CashflowCall on Cash
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#BHP
US Industrials
How Market Risk effects gearing
00.10.20.30.40.50.60.70.8
020406080Gearing (percent) 2001
Prob
abili
ty
Prob. (Key ratio > 51.4%)
Unhedged <1%
Current hedge <1%
100% hedgeable <1%
Current hedge100% hedgeable
Unhedged
30.3 LOWER QUARTILE
MEDIAN39.2
UPPER QUARTILE 51.4Single ‘A’ Rating
Source: BHP Team analysis
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#BHP
Prob. (Key ratio > 51.4%)
Unhedged 15%
100% Hedged 14%
After management action 1%
How Market Risk effects financial plans
Possible Management Actions• Discretionary CAPEX• Acquisitions• Exploration• Funding requirements• Divided policy• Share buy-backs• Discretionary investments/distribution
Gearing distribution 2003
0
0.05
0.1
0.15
0.2
0.25
0.3
020406080Gearing (percent)
Prob
abili
ty
After management action100% hedgeable
Unhedged
Source: BHP Team analysis
30.3 LOWER QUARTILEMEDIAN39.2UPPER QUARTILE 51.4
Single ‘A’ Rating
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#BHPRationale
• There is no value in reducing volatility• Valuations reflect corporate strategy not earnings
volatility• Good communication is highly valued by
investors• Costs of hedging are high for BHP’s key risks
• Only hedge if you have to• Financial markets provide opportunities to improve
returns
• BHP has a diversified portfolio
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#BHPFinancial markets provideopportunities to improve returns
15 Month Contract as at 17/10/00 = $27.39 USD/bblPercentile > P99
10 Year Histogram of 15 Month Futures Contract
15 Month Contract For Oil (USD/bbl)
Prob
abilit
y
10 12 14 16 18 20 22 24 26 28 30 More
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#BHPAgenda
• Introduction
• Strategy statement
• Rationale
• Strategy in practice
• Communications
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#BHPStrategy in practice
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#BHPStrategy in practice
P90
Choppy waters
Agreed strategy
P5Rating Agency disaster caseP1
What is the potential range of risk?
Riding the waves
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#BHPStrategy in practice
Risk limits for the portfolio • Cashflow at Risk limit;
• The risk that BHP gearing will exceed target gearing
• Ratio of Cashflow at Risk to projected Cashflow
Risk limits for strategic financial transactions
NOTE: Other risks are also included to keep total risk within an acceptable level
• Stop loss Annual, Monthly and Quarterly • Value at Risk $25m
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#BHPStrategy in practice
TreasuryPetroleum
Execution*
Policy Committee supported by Market Risk Management functionCFO for strategic financial transactions
All activities subject to Board approved limits and monitoring
Strategy Setting
BoardGovernance and Policy Setting
AuthorityResponsibility
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#BHPSummary
• Manage risk at the portfolio levelUnderstand portfolio characteristicsLink capital allocation to portfolio risk
• Manage risk to an acceptable level Self insurance modelOnly hedge if you have to
• Limited Strategic financial transactionsMarkets under/over valued within agreed limits
• Raise bar on communicationsClear, precise and responsive
![Page 32: BHP - Enterprise Risk Management](https://reader030.fdocuments.us/reader030/viewer/2022012405/552152a5497959be788b488c/html5/thumbnails/32.jpg)
#BHPAgenda
• Introduction
• Strategy statement
• Rationale
• Strategy in practice
• Communications
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#BHPWhat we will communicate
• Rationale behind strategies; and• Stop Loss Limits.
• CFaR limits;• Modelling assumptions; and • Detailed transactions and
transaction counterparties.
Will not be disclosedWill be disclosed
• Quarterly performance update; and
• Value at Risk (VaR) and VaRlimit – Quarterly Update.
For strategic financial transactions
• Policies – Annual statement, or as major policy changes occur;
• Exposure profile; and • Information on outstanding
hedge book – Quarterly update.
Portfolio Risk
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#BHPMarket Risk Management Strategy
• Market Risk Strategy is consistent with BHP’s overall strategy
• The outcome is simple, but its based on complex, quantitative analysis
• Strategy works for BHP due to its low cost, diversified asset base
• Tools become building blocks for decision-making beyond the market risk strategy
QUESTIONS
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#BHP