BHP - Enterprise Risk Management

#BHP

Risk Management Strategy Briefing

Charles W GoodyearChief Financial Officer

Rowen H BainbridgeVice President Market Risk Management

December 2000

#BHPAgenda

• Introduction

• Strategy

• Rationale

• Strategy in practice

• Communications

#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

#BHPAgenda

• Introduction

• Strategy

• Rationale


• Communications

#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.

#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

#BHPAgenda

• Introduction

• Strategy

• Rationale


• Communications

#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

#BHPRationale


#BHPRationale

• BHP has a diversified portfolio• There is no value in reducing volatility

#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

#BHPRationale

• BHP has a diversified portfolio • There is no value in reducing volatility• Valuations reflect corporate strategy not earnings

volatility

#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’

#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


Hedger

Non-hedger

#BHP

Total FinaNorth Ltd


Mark

et M

ultip

le


0.00

0.50

1.00

1.50

2.00

2.50


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


Hedger

Non-hedger

Chevron

#BHP




Mark

et M

ultip

le

0.00

0.50

1.00

1.50

2.00

2.50


Strategy 1Strategy 1Risk Management asIntellectual Capital

Strategy 2Strategy 2Simplicity, clarity and

low cost strategy


Hedger

Non-hedger

#BHPRationale





#BHPRationale




• Costs of hedging are high for BHP’s key risks


#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

#BHPRationale




• Costs of hedging are high for BHP’s key risks

• Only hedge if you have to


#BHP

Illustrative

Only hedge if you have to$A

US M

ILLI

ON

FINANCIAL YEAR2003 20042001 2002

CashflowCall on Cash

#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


#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


30.3 LOWER QUARTILEMEDIAN39.2UPPER QUARTILE 51.4

Single ‘A’ Rating

#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


#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

#BHPAgenda

• Introduction

• Strategy statement

• Rationale


• Communications

#BHPStrategy in practice


P90

Choppy waters

Agreed strategy

P5Rating Agency disaster caseP1

What is the potential range of risk?

Riding the waves


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


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

#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

#BHPAgenda

• Introduction

• Strategy statement

• Rationale


• Communications

#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

#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

#BHP

Documents

BHP - Enterprise Risk Management