So welcome, everyone, to our 2018 financial year results. I'm in Melbourne, and Peter Bevan, our Chief Financial Officer, joins us from London. And as always, please note the disclaimers, both here
and
at the end of the presentation and their importance. Today, we announced a very strong set of results built on the solid foundations that we have set over the past 5 years. At BHP, our focus is simple: to maximize cash flow, maintain capital discipline and increase value and returns. And we stay accountable to this through a sharp focus on our 6 key strategic value drivers: on a culture of continuous improvement and our disciplined use of the capital allocation framework. And they've all contributed to a strong set of results in 2018, and we will build momentum into 2019 beyond.
Higher volumes and higher prices drove underlying EBITDA to over $24,000,000,000 and net operating cash flows increased to $18,000,000,000 We reduced net debt by over $5,000,000,000 We invested $6,800,000,000 in our high return development options, and we announced dividends of $6,300,000,000 Before I hand over to Peter to go through our financial performance in detail, let me turn to our priority, safety. The safety, health and well-being of our people is our number one priority. And tragically, over the 2018 financial year, 2 of our colleagues died at work. And we will not accept this, so it's vital we learn as much as we can from these tragic incidents. Over the year, leaders across BHP have held safety engagements with a record number of employees and contractors, and we will build on this to share lessons learned with as many people as possible.
We also had a slight increase in our total recordable injury frequency to 4.4 per 1000000 hours worked. And while the increase was modest, I'm encouraged that our safety initiatives have helped reduce the number of events with a potential to cause a fatality by 8%. And for us, this is an important leading indicator of our future safety performance. The further deployment of technology, amongst many things, also provides us with an opportunity to remove our people permanently from harm's way. And for example, since we started using autonomous haul trucks at Jimbo Bar, significant incidents there have fallen by more than 80% h0.
At Samarco, we remain committed to the recovery of the communities and the ecosystems affected by the dam failure. The Renova Foundation has made substantial progress in accordance with the framework agreement. I visited Brazil again in May to spend time with the team in Belo Horizonte. And despite challenges, the speed and scale of progress they have made since my last visit are remarkable. And I'm pleased to report also that Renova has just received the final licenses so it can commence reconstruction of the Bento Rodriguez resettlement.
And that's important because for BHP, the resettlement program is key, and so we're very pleased to reach this major milestone as we work to rebuild the communities that were impacted by the Samarco tragedy. The new governance agreement with the prosecutors that we signed in June is also a major step forward. It settles the 20,000,000,000 raise claim, it enhances community participation, and it provides a constructive technical framework to work towards the settlement of the BRL 155,000,000,000 claim. So while we still have much to do in Brazil, I'm encouraged by the team's hard work and by the progress they've made. So I'll now hand over to Peter.
Welcome, Peter.
Thank you, Andrew.
Higher prices and a solid strong 2018 financial year. Excluding Onshore U. S, which is treated as a discontinued operation, we generated EBITDA of $23,000,000,000 up 20%. Our margin was 55%, similar to that achieved in 2011 when prices were 70% higher. It's a clear endorsement of our productivity focus.
And underlying attributable profit was almost $10,000,000,000 our highest since 2014. Including Onshore U. S, we recorded 3 exceptional items, a $2,800,000,000 impairment against the carrying value of onshore U. S. That we announced last month, The $1,800,000,000 charge associated with U.
S. Tax reform that we booked last half. And $650,000,000 related to Samarco, largely due to updated estimates for Renova's programs. Including these and the onshore U. S.
Results, attributable profit was $3,700,000,000 Each of our commodities again made a significant contribution. Iron ore generated EBITDA of almost $9,000,000,000 at a margin of 61% as improved productivity and supply chain stability supported lower costs and record volumes. Copper EBITDA almost doubled to $6,500,000,000 at a margin of 54%. With record ore milled, Escondido production is at levels seen in 2006 when grades were 50% higher. Coal EBITDA increased over $4,000,000,000 as Queensland Coal overcame early challenges at 2 of its operations to deliver record production.
And finally, conventional petroleum contributed more than $3,000,000,000 a margin of 62%. Here, our focused exploration strategy is extending the development pipeline and supported a year on year increase in resources of over 300,000,000 barrels. The EBITDA waterfall chart, which I present each period, clearly shows the benefit of higher commodity prices. While we're beginning to see signs of inflation in certain areas, notably diesel, contracted costs and raw materials, our strong operational performance means we again captured this upside. Over the year, group production increased by 8%.
The release of latent capacities supported record production at 9 operations. However, this was partly offset by lower volumes from conventional petroleum due to field decline, Olympic Dam due to the planned maintenance campaign and 2 of our BMA mines due to geotech issues. Each of these also had a negative impact on fixed cost dilution, which is a key driver of the increase in controllable cash costs and our overall productivity performance. We've consistently said that productivity gains would be lumpy and in 2018 that's been evident. The planned maintenance at Olympic Dam and unforeseen challenges at BMA both weighed on productivity in the first half.
But with almost $400,000,000 of productivity gains delivered in the second half, we largely offset these and carry good momentum into the new financial year. Over 2018, Escondido contributed more than $500,000,000 of productivity gains with the ramp up of the 3rd concentrator. And Western Australian iron ore contributed a further $500,000,000 as we achieved record production and further reduced unit costs. Our productivity target for this year is $1,000,000,000 and largely reflects the ongoing release of latent capacity across our Australian iron ore and coal assets. Despite the strong recent productivity performance and our expectations for financial year 2019, the first half productivity challenges in coal and the divestments of shale and Cerro Colorado means we won't achieve original productivity guidance over the 2 years to the end of the 2019 financial year.
As we harness technology, continue to optimize the way we work and further empower our people, we'll continue our productivity journey and drive additional improvements into 2020 and beyond. Going forward, we'll increasingly talk to production and unit costs, which are more directly applicable to EBITDA and cash flows. Costs of our major assets were broadly in line with guidance. At Wayo, costs continue to decline. In 2018, they fell a further 5% in Australian dollar terms.
And despite an increase in strip ratio, we'll lower these to below US13 dollars per tonne in the medium term. At Queensland Coal, costs were impacted by geotech issues and while these are now well managed, ongoing productivity improvements will only partially offset an 8% rise in strip ratios and inflation impressions in 2019. At Escondida, costs rose as the benefit of a one off prior period change in estimated inventories unwound. This year, improved labor productivity and optimized maintenance strategies will keep costs below $1.15 per pound, despite $0.04 per pound in labor negotiation settlement costs and grade decline of over 15%. Lastly, in conventional petroleum, costs last year and this reflect lower production due to natural field decline.
On average, unit costs are expected to increase slightly in the 2019 financial year as our ongoing productivity and efficiency measures mitigate the impacts of grade and field decline, higher strip ratios and emerging inflationary pressures. These charts need little explanation. They highlight the tremendous cash generating capacity of our assets. Over the year, net operating cash flow was $18,500,000,000 and free cash flow was $12,500,000,000 close to the record set in 2011 at the peak of the last cycle. BHP has generated over $25,000,000,000 of free cash flow in 2 years.
It's a fantastic result. In the 2019 financial year, if spot prices persist, we expect free cash flow of around $9,000,000,000 as lower prices relative to the 2018 average, higher tax installments and an increase in capital expenditure offset continued strong operating performance. Our capital allocation framework remains institutionalized across every financial decision we make. We use it to transparently guide capital between balance sheet, investment and returns to shareholders. It's supported by robust processes and has worked well since its inception.
Over the period, we invested $6,800,000,000 We reduced net debt by over $5,000,000,000 and we paid $5,200,000,000 to our shareholders. So changing our dividend policy 3 years ago, on top of the $8,400,000,000 under the payout ratio, we have announced additional dividends of almost $4,000,000,000 Over the past 2 years, we reduced net debt by over and today we sit at $10,900,000,000 Our commitment to a strong balance sheet is unwavering. And as we said previously, this translates to net debt of between $10,000,000,000 $15,000,000,000 in the medium term. With net debt now in the lower half of this range and our capital programs funded from operating cash flows, we expect to return the net onshore U. S.
Proceeds to shareholders. I know this is of great interest to many of you, but we will confirm how and when these will be returned at the time of deal completion. We have a rich suite of quality organic opportunities. However, our commitment to capital disciplines means we only invest in the best of these. In the 2018 financial year, we approved 2 major projects: the South Flank Sustaining Mine in Western Australia and the Spence Growth Option in Chile.
At the time of approval and at consensus prices, these offered average returns of almost 25%. These projects, along with our 3 other major projects and 4 latent capacity projects, are included within our guidance for 2019 2020, which remains unchanged at below $8,000,000,000 per year. Our relentless focus on capital productivity is seeing us thrive on lower levels of capital. We continue to push to get the most out of every dollar we invest and are seeing strong results from this focus. Over the year, return on capital employed increased to 14% or 18% excluding onshore units.
The red lines indicate where each sat when I first presented this 12 months ago. And as you can see, all assets have reported an improvement. Higher prices clearly helped, but so too have our actions. Escondido reported a large step up in returns as it benefited from the ramp up of Los Colorados and a full year production following industrial action in 2017. Western Australian iron ore continued to provide returns of almost 30% with further production creep and productivity improvements across the supply chain.
We're confident that our detailed asset level plans will drive continued improvement to around 20% in the 2022 financial year assuming 2017 financial year prices. We remain absolutely focused on maximizing cash flow, maintaining capital discipline and increasing value and returns. In the 2018 financial year, we made great progress against each of these objectives. A strong operating performance and ongoing capital discipline supported free cash flow of over $12,000,000,000 Our balance sheet is more or less where we want it to be. Our return on capital continued to improve and is now over 14%.
And we've just declared a record final dividend of USD 0.63 per share. We set the platform for the next wave of value growth and increased returns to shareholders. The organization is running well, but we know we can do better. We're adding a further $1,000,000,000 of productivity in financial year 2019. We have lots of value growth options, but must execute on the best of these.
We have 5 major projects and 4 latent capacity projects underway, all with high returns. And we look forward to returning over $10,000,000,000 of shale proceeds to shareholders. So while we've had a good year, we are confident that there is more to come. Back to you, Andrew.
Thank you, Peter. The intelligence that our marketing team provides is a differentiator for us and therefore is an important input to all our investment decisions. So as usual now, their detailed insights into the economic outlook and to our commodity markets is available in today's prospects blog on our website, and I encourage you all to read this. Just briefly, global businesses like ours face a volatile mix of geopolitical challenges, and that, of course, includes the recent shift by some towards protectionism. As I've said before on many occasion, free trade is vital to the health of the global economy.
It's the free flow of capital, goods, services and ideas across the world, which is the engine of sustained growth and which underpins the prosperity of companies like BHP and their host nations. We are therefore somewhat cautious about the short term outlook as we monitor closely the trade and geopolitical developments I've just been speaking about. But despite this, our long term view remains positive. Population growth and higher standards of living across the world will sustain demand for decades to come. And we've shaped our company accordingly.
So over the past 5 years, we focused the portfolio on our best and most strategic assets, and we've leveraged distinctive enablers to prepare our company for the future. We strongly believe in a simple yet diversified portfolio of Tier 1 assets, and we see the benefits, too, of having a committed and connected workforce who can concentrate on the things that matter most without distraction. So they always push our safety performance higher, identify and quickly replicate best practice and harness the increasing power of innovation and technology. So let me elaborate on the secure foundations that we've laid across our portfolio and our culture and our strategy because combined with our bold ambitions, they will allow us to seize opportunities for future success. Simplicity is one of our charter values, and the makeup of our portfolio is now a testament to this.
The recently announced sale of our onshore U. S. Assets brings total divestment proceeds to more than $18,000,000,000 over 6 years, and these, along with the South32 demerger, have made BHP a much simpler, stunningly simple, I would say, company with just 13 operated assets. These large, long life assets produce the high quality products that we sell to our customers and make them even more valuable in an environmentally conscious world. They're low cost and they generate strong cash flow through the cycle.
They're in stable low risk jurisdictions and enjoy security of tenure. And they're in value chains where rent is concentrated close to the mine gate or the wellhead, which is where our resources and our capabilities are at their most competitive. Our experience demonstrates that great ore bodies get better over time. And as this occurs, we're able to unlock more optionality within our footprint, and these options are low risk, low cost and highly capital efficient. And so with the possible exception of more copper and conventional oil, we have close to our ideal portfolio, and a portfolio that is truly unique with abundant organic opportunities to meet our short, medium and longer term ambitions.
And all these development options are filtered through our capital allocation framework, which applies strict oversight to all our investment decisions. But success is not just about the right assets and the right commodities, it's how you develop and operate them truly creates real value. BHP's identity is steeped in more than 130 years of history. And over this time, we've held ourselves to account through high levels of governance and rigorous processes. And as the company evolved, systems and bureaucracy grew in complexity.
So we've now tackled this on several fronts, culturally, organizationally and operationally. We've restructured to create global functions and centers of excellence for things like maintenance. We've unwound almost a decade of cost inflation through our new operating system. We've made our work leaner and fit for purpose, and we've embraced the business case for greater diversity and gender balance. And we've engaged and connected our work force, which has helped unlock even more productivity.
So we've come a long way, but we still see a great potential to further reduce the bureaucracy, to unlock the next wave of productivity through technology and automation throughout the value chain and to build a culture that rewards and celebrates agility and innovation. But it also retains our long commitment to discipline, to safety and strong governance. Combination of our simple portfolio and our empowered culture really brings our strategy to life. So over the past few years, I've consistently outlined our 6 strategic focus areas that increase the value and returns of BHP, cost efficiencies, technology, latent capacity, major projects, exploration and onshore U. S.
And over the year, we've continued to make good progress in each of these. We've reduced C1 costs at Western Australia and Iron Ore to $13 a tonne. We've implemented technology to advance our drive for automation throughout our value chain. We've progressed 4 latent capacity projects with average returns of around 50%, and we've approved 2 major projects with average returns of almost 25%. We've encountered hydrocarbons at 4 exploration wells, including just last week at the Bongos prospect in Trinidad and Tobago, and we've signed agreements to make a clean all cash exit from shale.
These are strong results, but our plans demand more, much more as we push to lift our base value by 40% and at 2017 prices, return on capital to 20%. So maybe some details. In Minerals Australia, through operational excellence and the release of latent capacity, we will build on our momentum, and we expect record production at a number of our assets there this year. At Queensland Coal, we will offset an 8% rise in strip ratios through increased productivity and the ramp up of the Cavill Ridge Southern Circuit. And at Western Australian Iron Ore, we expect to exit the year at a record annualized rate of 290,000,000 tonnes, at 30% more than envisaged with our last major growth project in 2014 as costs have almost halved since then.
In Minerals Americas, we expect Escondido to average 1,200,000 tonnes per annum to 2025. Continuous improvements in fleet runtime, in labor productivity and in concentrator throughput will help offset lower grades. So that despite grade decline and increased use of more expensive desalinated water, we will keep our costs there to below $1.15 per pound in the medium term. And last year's last week's agreement at Escondida, which has now been signed, along with other recent settlements across our portfolio such as those at BMA and at Spence, will now provide BHP a period of industrial relations certainty in CALM. And we're going to use this to even further engage our workforce right to the frontline so that we enhance our culture and accelerate productivity.
At Spence, the development of the Hyprogene resource remains on track, and we will significantly increase output from last year's record 200,000 tonnes when it comes online in 2021. And finally to conventional petroleum, which remains a great business for our shareholders. It consistently generates strong cash flows and returns. And over the past 10 years, we've consistently shown us well that we can replace barrels at a competitive cost and that our quality portfolio of future investment options remains highly competitive for capital. We built a suite of 30 low cost brownfield projects with average returns of 40% to offset fuel decline.
And we have 2 major projects in execution: Greater Western Flank B to be completed in 2019, and Mad Dog 2 comes online in 2022, and both are attractive at an oil price below $50 a barrel. Our pipeline of 8 additional major projects in petroleum at various phases of evaluation and development is highly attractive with average returns of more than 25%. And our exploration strategy also shows great promise. Each well brings us closer to understanding the scale and commerciality of recent discoveries and confirms that we're operating in attractive exploration fairways. Across our suite of petroleum opportunities, we will look to accelerate production now in order to capture favorable prices.
So now let me finish where I began. Our focus remains on 3 things: maximize cash flow, maintain capital discipline and increase value and returns. Over the past 5 years, we've laid foundations to support these strategic initiatives. We've reshaped our portfolio and enhanced our future institutionalized our capital allocation framework and strengthened the balance sheet and delivered a step change in productivity. The benefits of these foundations are clear in our 2018 financial year results.
We delivered volume growth of 8% and free cash flow of more than $12,000,000,000 We reduced net debt, invested in future growth and announced returns of $6,300,000,000 to shareholders. That includes our highest ever final dividend. And we increased return on capital employed to over 14% or 18% if you exclude shale. We will build momentum now into 2019 as we focus on our 6 value drivers. Productivity is expected to mitigate inflationary pressures, higher strip ratios and lower grades.
Free cash is expected to be around $9,000,000,000 at current spot prices, and that excludes the $11,000,000,000 expected from the shale sale. And as we progress the plans I've outlined today, we will develop more organic opportunities under strict capital discipline and improve return on capital employed. We also expect to return the net amount of the shale proceeds to the shareholders on completion of the transactions. And as we look forward, our focus on capital discipline, cash generation and value and returns will not waver. And with a constructive outlook for our commodities, lower costs and higher production, with a culture of continuous improvement, with a strong balance sheet and a rich suite of quality organic options, BHP is set up for a great future.
Thank you.
Your first question comes from the line from Paul Beyer from Goldman Sachs. Please ask your question.
Hi, Paul.
Yes. Hi, Andrew and hi, Peter. Andrew, I have a few questions on met coal and also conventional oil. Just looking at met coal, how confident are you that you can reverse the cost trend and actually achieve that medium term cost target? And then also looking at growth opportunities, have you the ability to actually accelerate projects such as Blackwater, Bypass and Woods Well?
And then looking at conventional oil, some great exploration success recently. Just thinking, should you not increase or look to increase your conventional exploration spend further post the sale of U. S. Onshore? And then looking at that recent success in Trinidad and Tobago and now Samurai, which I know that your partner Murphy seems pretty excited about.
What are the conceptual development plans for the discoveries at TNT and Wildling Samurai North Ocean City? Thank you.
Okay. That's a lot there. Maybe I won't answer all your questions to give time for a few others as well. But let me talk about met coal. Yes, we are confident that we can reverse the cost trend.
Obviously, as Peter explained, some of the more difficult geotech conditions that we face at Blackwater and Broadmeadow have led to slightly higher costs than we would have expected. But with everything we are doing with improving the reliability and the cycle time and the compliance to plan of our mobile operations, we believe that we can continue to creep our volumes at the same time as reducing our costs. And certainly, if that means that some of our growth opportunities could be accelerated, we'll choose to do so. It's a good discussion as to whether we should increase exploration spend. Of course, we are pleased that we are finding hydrocarbons.
We think we're in the right place. But you need to analyze these things as you go along. You need to think about what it means for the geology. And there is an optimum pace. Obviously, the more successful we are, there is the case to increase our spend.
And of course, at the moment, we do have access to one of the cheapest drilling contracts, I think, to drill some of those wells in the industry as a way of as part of our countercyclical commitment to that. Conceptual development plans, look, we're working on them all the time. It depends you mentioned several accumulations as to how connected they might be. We might want to do some that tries to establish that connectivity. We are going as fast as we can, but I have nothing to talk to you about right now.
Your next question comes from Hayden Bairstow from Macquarie. Please ask your question.
Hi, Hayden.
Hi, Andrew. How are you going?
I'm good. Thanks.
Just a follow-up on I guess on Olympic Dam. I mean, just understanding your confidence in the ramp up of those underground sort of meterage targets you're setting yourself when they are, in my mind, I think, reasonably aggressive to sort of hit those sort of meterage targets per jumbo. I mean what's your confidence there? And what's the variability do you think on the outcome as you go through that ramp up in the next couple of years given Olympic Dam clearly the lagging asset now from a Rokey basis?
Yes. Look, I accept that we have a lot to do to continue to build confidence in Olympic Dam. But this is something that we can really concentrate now on as an organization since we've cleared almost everything else off our table other than just making the most of this tremendous portfolio we've now got. And so our attention is very much on Olympic Dam. We have seen since we last spoke to you a considerable improvement in our development rates at Olympic Dam in the Southern Mine area, and that I think has put our growth plans that we have for Olympic Dam back on track.
You're right to acknowledge the criticality of that. We've also seen since our major shutdown, big improvements in smelter performance. But as we've announced in our announcement today, we're just assessing a small issue in the smelter in the asset plant. But yes, I think it's something that really is very important to us now to get right. It's the one piece of business that we want to get to the levels of return that you saw on Peter's slide that we're getting everywhere else now that shale is gone.
And it will absolutely have the focus of the best and brightest in BHP to make that happen.
Your next question comes from Meno Sanathis from Morgan Stanley.
Hi, Meno. Go ahead.
Hi, Menno. Thanks for staying up so late.
Good morning, everybody.
Yes, that's all right.
Two simple questions, please. The productivity improvements of SEK 1,000,000,000 for FY 'nineteen seem quite ambitious even if you compare it to a very good second half in FY 'eighteen. What gives you the confidence that you can deliver this type of step up? And secondly, around Escondido, could you maybe give us a little bit more detail on what was proposed last week and the process from now when the roading takes place and will you know if it is in the bag or not?
It's in the bag. I think the line broke up. I mean, we've signed everything with the union. The deal is done. Okay.
And it's been done on market. It's a tremendous achievement for the team. And we've secured some changes to the health agreements, which means that we can provide better health support for the workforce probably at lower cost, and we've also secured changes in work practices that will allow us to continue to drive productivity in Escondido to make sure it remains highly investable even though grades are falling. The productivity for $1,000,000,000 Well, of course, we had a slightly higher ambition a bit earlier, which we've had to kind of push out into FY 2020 as a result of really the issues in coal I've already referred to, not going away and us having to deal with sort of higher cost operations in order to produce the coal at Blackwater and Broadmeadow. But again, it's a bit similar to the comments I made to Paul.
We are now firing on all cylinders and trying to improve the productivity, particularly of the mobile fleet and the efficiency of our stripping, and the signs are good.
Your next question comes from Lyndon Bagen from JPMorgan.
Thanks very much. Andrew, you've spoken a lot about the portfolio. Can we sort of hone in a little bit on conventional petroleum? There's still quite a large number of assets in that division, a lot of which small. What is your long term vision for that portfolio?
Do you see it ultimately shrinking a bit from here to get it right? Or do you think it is actually right at the moment?
Well, we of course are facing a period of reasonable decline as the existing production ages. And obviously, our exploration success and our success in Mexico is creating a number of possibilities how in the fullness of time, we can replace that production and reverse that decline, but there is a bit of trough in between that. Now it's not absolutely essential that we fill that trough. It has to fit within the capital allocation framework. We don't have particular targets for the size of particular businesses.
It depends really on the options they generate and how they compete within the capital allocation framework as to which gets the most growth capital. So we like the business and we would like to keep generating options there. We have a fair set at the moment. And so exploration shows one way to it. And clearly, I've said in certain circumstances, we would consider some form of acquisition, but it's not critical for the strategy of the company.
Okay. And just a second question. I'll ask the Janssen question this call. Just wondering about the 122,000,000 dollars increase in the budget there. And also, I guess, any latest thoughts on trying to monetize a bit of that asset for shareholders given it's still a drag on the ROCE curve?
Okay. So that increase in budget is simply a result of having to provide for what it will take to complete the shafts. We always said it would do that. We had assumed in our initial budget for the shafts that we would have made a decision at this point, which as you know, we have deferred and we're not in a hurry to make a decision about a project. In the meantime, we continue to work on the engineering of the project so that we can improve the returns.
We're looking for a partner, which of course could give you early monetization, and we're watching the market, but not in a hurry to make a decision.
Your next question comes from Sam Webb from Credit Suisse.
Thanks, Andrew. Just two questions, please. First is with regards to CapEx outlook for next couple of years, just under that $8,000,000,000 number. I mean, how should we think about that given you put $1,000,000,000 ish into onshore petroleum? I mean, is that number effective?
Should we normalize for that? So that number is effectively less than $7,000,000,000 now. And then just to your comments around keeping that $10,000,000,000 to $15,000,000,000 net debt range and putting the onshore proceeds to one side. Can you just talk around that a little bit? And should we expect that any time you expect net debt to go below that $10,000,000,000 that will manifest in increased returns coming back to shareholders?
Thanks.
I'm going to ask Peter to ask you answer your two questions basically on the CapEx outlook, Peter, of €8,000,000,000 and our
So on the CapEx, we have guided this year and the current financial year
of onshore CapEx. But what we've also and we know that that's obviously not going to not going to have anything for the in FY 2020. We knew that and we're happy with that. But we've got projects that have been added to the list and they were great projects, so we're very happy to continue to hold that guidance at least 8% or less for this year and next year. I think that makes perfectly good sense.
On the net debt range, it's 10% to 15% medium term. We think that that's the right number for us. We have a very strong ability to generate cash flow, obviously, in the current circumstances, but as we know, also in more difficult circumstances. And of course, we set that range in a stress tested environment in our modeling, and so we think that's the right number. And so we you should expect us to be at the bottom end of that range given uncertainties in the world, but I don't think at this point in time we're expecting to be less than that in that range.
At 10.9%, we're pretty close to the bottom of it, so it's good.
Okay, Sam. There's another question.
Your next question comes from Clark Wilkins from Citi.
Hi, Hi, Claude.
Hi. Just first question on Nickel West. How does that fit in the portfolio now? And that's probably not the scale, but I think in recent presentation, you talked about extending the life after 2,040. So things are getting there on life, but putting up the scale.
So how does that fit within your portfolio thinking now? And also just on the cost inflation side, is there some cost inflation pressures returning? What are you seeing there? And also, has that had an impact on the sort of the CapEx side of sort of the CapEx starting basically remain unchanged despite the U. S.
Onshore assets effectively dropping out.
Okay. Look on Nickel West, we're backtracked. When we did the South32 demerger, we retained Nickel West because we actually didn't feel South 32 could really handle an early closure of Nickel West if markets have continued to deteriorate. Of course, markets have stabilized. And as you've commented, the team we put in to run that business, not only have they reduced the closure costs, which now seem not as relevant, they've also made the asset perform much better and shown the possibility of an extension to life of its life.
While that's been going on, the whole world of battery materials has come to the fore. And what I personally didn't appreciate at the time of South 32 is that the nickel that's produced out of Nickel West is one of some of the best nickel in the world in which to make batteries, particularly for electric vehicles. So that's obviously changing the marketability of it, but it's also giving us a window on the future of battery materials, which we need to consider for our own strategy. So we're putting all that into the mix and while we're doing that, we're happy to retain Nickel West for now, but it could go either way in the future And the people who run that asset are well aware of that. They don't seem the least bit distracted by it because they're doing a great job.
On cost inflation, well, we're seeing the usual things, diesel and steel, certain basic commodities like for example sulfuric acid. But of course, the first two and to some extent, the third are things that we also make. And so we are not as affected by that and on a net basis as you might think, although it will show up in the cost numbers of individual assets. And then we're seeing sort of pockets of other inflation to do with, say, labor costs in parts of Australia. The shale business, which is soon to go, has seen a lot of inflation to do with fracking and drilling.
But I don't I wouldn't want to exaggerate that. There's been a bit of a margin reset as some of those suppliers have moved back into profitability, and I don't think you should extrapolate that forever. So we're not completely that phased by cost inflation. And with everything we see that's possible in productivity, we feel and we're going to try very hard, we have a very good shot at actually matching that inflation and more so we can continue to drive our costs down.
Your next question comes from Myles Alsop from UBS.
Hi, Myles. Another all nighter for you. Thank you for doing that.
Well, I'm on holiday.
Oh, well, even better.
Middle of
the night and on holiday.
Thank you. A little bit on the conventional exploration. Could you just remind me of the timing of when we'll get visibility on SENSENORUS, on TRION and the project Trinidad? And then secondly, with your $9,000,000,000 sort of free cash flow, Bob, what's your assumption for Samarco in that?
Okay. I'm going to give Peter the second question. But on the first one, well, we're drilling a well in Trinidad at the moment. And after that, we have one more well to drill, which is to further appraise the other gas discovery we have in Trinidad. And then the rig will go back and drill the first well in Trion, which is a part of the appraisal there, and that will give us more visibility of it.
Obviously, we've got a lot of interesting information coming in around the Shenzhen area. A previous questioner mentioned Samurai, and we're putting that all together at the moment. We're keen to be able to do something sooner rather than later. But as I said in the answer to an area question, I don't have specific timings available for you just yet. Peter, on assumptions for Samarco and the SEK 9,000,000,000?
I think you should expect on Samarco the cash flows for this year, more or less something in line of what we've been experiencing over this, the FY 2018, even FY 2017. I think it's more or less about CHF 300,000,000 or so on Renova. And then there's about CHF 100,000,000, maybe a little bit more on other costs to support Samarco itself, working capital support, plus we have some costs inside of BHP itself. So it's in that sort of vicinity that we've included in that forecast at spot.
Next question.
Okay.
The next question comes from Glenn Loeffler from UBS.
Hi, Glenn.
Hi, good morning. Just two quick ones. Just on the productivity program, Andrew. Just so I'm clear, are you walking away from $2,000,000,000 number or is it or is the timeline just uncertain? And then the second one, just interested in your thoughts and the Board when you sat down the other day to think about your dividends and capital management.
You're now at the bottom end of your net debt range. By the to your own admission, you'll generate $9,000,000,000 of free cash flow. So by now, you're probably below the bottom of your net debt range, I would imagine, with the cash you've generated in the last 7 weeks. How do you think about capital management and buybacks versus dividends? And why no on market buyback now?
I mean, you're probably at the bottom of your range and comes out of, say, future cash anyway. Thanks.
Well, there's a lot in that second question. I'm probably going to throw some of it to Peter. But on the first one, look, we're not walking away from the €2,000,000,000 target. It's just going to take us a bit longer to deliver it because of the hit we took from the coal issues in the first half of this year. But as Peter said, once we're through that target, we intend to put all our efforts and all our focus on unit cost guidance, but we still own that target.
And the deficit that we're acknowledging in what we can deliver this year is mainly on the volume side. And so we will absolutely deliver that volume and deliver that the remaining part of that target, but now in 2020 rather than in financial year 2019. I'm going to ask Peter some to handle the details of your second question. And then but I would just say to you that as a company, our intention is to make decisions about typically is to make decisions about a major capital distribution to do with the shale proceeds when we have the proceeds in the bank and when the board can understand that at the time rather than to preempt them. But Peter, maybe you can take it over into the more detailed issues that Glyn asked.
As we do every 6 months, it's always a clean of paper when we think about a dividend. And I'll just comment on really the final dividend, which is just the same as we always think about it. Obviously, 50% is the minimum. It's cash, so that's a given. And what is left over at this point is $0.17 That's the additional dividend that is included in the $0.63 we just declared.
That totals about $900,000,000 or so, just a little less than that $8.50 So the first criteria for buyback versus cash dividends is it has to the buyback has to be material. And secondly, obviously, it has to be value versus a cash dividend. At $900,000,000 or $850,000,000 or so, that's just not enough for us to undertake a buyback given the scale back even at the very, very I mean, we've done big, big buybacks in the past and you still get 90% scale back. So for the amount of effort that we have to put into that to get less than $1,000,000,000 back to shareholders, we don't think it's a sensible thing to do at this point in time. But obviously, the SEK 10,000,000,000, that's a different kettle of fish that obviously meets the materiality.
And so we'll just assess the value of that as in the way that we would normally consider investments and we'll take a look at that. But we can't make that decision until we've completed no, we nearly completed the deal. And so that's the 31st October. So we'll make a decision before that. And what we'll have is a great opportunity, which to hear from all the shareholders, see now and then.
And obviously, that's going to be incredibly important feedback.
Okay. Next question?
Your next question comes from James Carey from Deutsche Bank.
Hi, James. Hi, Andrew. Thanks for taking the question. I see the people in the press recently saying that they definitely held discussions with you about the whole of your North American Petroleum portfolio. You've definitely reiterated strength of it today.
Can you discuss how close you came to considering letting go of those assets? And perhaps talk a little bit about 2 assets that you're flagging final investment decision in the next 12 months, the Landis 3 and Ruby?
Okay.
So let me just deal with the first question, which is a very simple one. We didn't come remotely close to letting go of our conventional business. We were selling our shale business and we were selling our shale business. The board have made a very clear decision that conventional business as it is currently configured is core to this company, and it was not for sale. I don't have the exact times to FID on Atlantis 3 and Ruby, but I'm sure the Investor Relations teams can get back to you after this presentation and let you know.
Your next question comes from Khan Pesa from CLSA.
Hi, Khan.
Thanks for taking my question. Can you please provide an update on TRION given the recent government election in Mexico? And also talking about cost increases in Cuisin cold, given the cost inflation, can you please maybe talk about specific initiatives which will enable BHP to get back to that 50 $7 a tonne from current guidance of $58,000,000 $68,000,000 to $72,000,000 Thanks.
I think I've already answered the second question in answer to some of the previous questions. So in the interest of time, I'll just and space for more questions, I'll just talk about TRION. Look, we've not seen any consequences and indeed the various commentary of the President-elect of Mexico are no particular cause for alarm for us in our work on TRION. We have a great relationship expected. We've seen other opportunities to drill.
And as I said earlier on, I think in about in a few months' time, in well time, once we've completed our current appraisal program in Trinidad, the rig is going to Mexico or the Mexican side of the Gulf of Mexico to start the appraisal of TRION.
Your next question comes from Peter O'Connor of Shaw and Parker.
Hi, Rocky.
Good morning, Andrew and Peter. I want to follow on from the question about buybacks. Pete, you made the comment that I think it was about value and scale, the 2 of the key factors you look at. And just pick up on the value side of that. How do you take account of the value per share of BHP on an NPV basis or however you think of the value of your business when you do a buyback?
Look, if Peter has anything to add, he can do. But I think at this stage, we're very much in consultation mode. We're about to go on the road and talk to a lot of our investors. We're keen to hear from them about some of the criteria they might wish us to apply and whether we look at whether we return money through a buyback or through a special dividend. And the Board really haven't started that discussion yet and won't start that discussion until we have all that shareholder feedback, until we have the money in the bank, and then we will review things.
So I'm reluctant to give you anything detailed there because we're still working on what's the appropriate way to do it. Have I missed anything, Peter?
No, that's fine, Andrew. I mean, we think hard about all of the ways that we allocate capital. It's pretty consistent in how we do things. You're happy to know. And there's always lots of ranges that we think through.
And when we get there, we'll get there.
Okay.
Thanks, Andrew.
So are there any more questions?
There are no further questions at this stage.
Okay. Well, I think given that, thank you for listening to myself and Peter. We certainly enjoyed presenting these results, and we look forward to meeting probably all of you in the coming days and particularly appreciate those of you from the U. K. Who've phoned up in the middle of the night.
That's very nice of you to do so. So thank you again and the briefing is now over.