BHP is going green, or at least it looks like it’s trying.
The multinational mining company on Tuesday announced its full year earnings with a US$17 billion underlying profit and record final dividend. Shareholders will see a dividend of US$2.00 per share, taking the year's total dividends to a record US$3.01.
However, the big news is that BHP, one of the world’s largest resources companies, is planning to exit the oil and gas industry.
The all-stock merger will encompass BHP’s entire petroleum division across Australia, North Africa and the Americas.
The new Woodside-BHP Petroleum entity will be owned 48 per cent by BHP shareholders and 52 per cent by Woodside shareholders.
The merger is expected to be completed by June 2022, however, it still needs to be approved by regulators and shareholders.
“Bringing the BHP and Woodside assets together will provide choice for BHP shareholders, unlock synergies in how these assets are managed and allow capital to be deployed to the highest quality opportunities,” BHP chief executive Mike Henry said on Tuesday evening.
BHP’s decision to sell out of gas and oil marks a major shift in how it sees its role in the resources landscape - petroleum has formed a huge element of the company’s operations since the 1960s.
The Big Picture: Mounting pressure from investors
The UN’s Intergovernmental Panel on Climate Change (IPCC) described it as a “code red” for humanity, calling for “immediate, rapid and large-scale” action to cut emissions within the next few years.
The nearly 4,000-page document warns of the catastrophic consequences to the planet if urgent action isn’t taken, among which was the demand that the world phase out all coal-fired energy by 2050.
But although governments may continue to ignore the warnings - investors certainly aren’t and pressure is fast mounting on companies to confront climate risk.
Woodside and BHP have also received sustained pressure from environmental groups and responsible investment leaders.
“Australian companies cannot drag their heels on the climate crisis. Net zero by 2050 commitments are meaningless if they are not accompanied by substantive emissions reductions by 2030,” Australasian Centre for Corporate Responsibility climate and environment direct Dan Gocher said.
“At least 12 ASX200 companies have plans to expand fossil fuel production: Beach Energy, BHP Group, Incitec Pivot, Mineral Resources, Oil Search, Origin Energy, Santos, Seven Group, South32, WH Soul Pattinson & Co, Whitehaven Coal and Woodside Petroleum.”
When it comes to fossil fuel assets, BHP has a collection of mines in Queensland, after selling the majority of its shale business to BP in 2018.
However, BHP’s oil and gas operations include plants in the Bass Strait and the North West Shelf, along with Trinidad and Tobago and in the US Gulf of Mexico.
Gocher said investors across all resources companies need to take action and demand an end to fossil fuel expansion.
“It’s time to vote against the re-election of obstructive directors, link remuneration to emissions targets and end the greenwashing.”
BHP announces potash plan
BHP also announced a US$5.7 billion investment in its Jansen potash project in Canada.
Potash is a potassium-rich salt used in fertiliser to improve agricultural production and plant growth.
The deal means BHP will now deal in five resource groups: iron ore, gas, oil, copper, coal and potash.
Potash represents what BHP considers a “future facing” commodity. BHP’s Henry in 2020 said potash was at the centre of one of the key megatrends of the future: the need to improve crop yields and quality.
BHP considers potash to be in hot demand for the next 30 years due to a swelling global population and increasing urbanisation.
And as global warming increases the value of arable land, the world will need to find new ways to farm that land more efficiently.
BHP’s deal with Tesla: Is this the future for EVs?
The Woodside deal comes after BHP also partnered with Tesla recently to supply the electric vehicle manufacturer with nickel from its Western Australian operation.
Nickel is one of the key materials required to create energy-dense electric batteries that can run for longer. However, the process of mining the commodity comes with its own environmental costs.
Comparatively, BHP’s Nickel West operation in Western Australia is considered one of the most environmentally friendly nickel operations in the world, with a carbon footprint half the size of the other nickel producers in Indonesia, where most of the world’s nickel is produced.
Tesla chair Robyn Denholm in June said the company plans to spend more than $1 billion a year on battery metals from Australian mines.
Tesla’s decision to partner with BHP could elevate small Australian mining firms in the future, eToro market analyst Josh Gilbert told Yahoo Finance.
“One of the integral parts of the electric vehicle (EV) sector is battery life, and how long EVs can run before charging,” Gilbert said.
“We heard Elon Musk speak this week during Tesla’s earnings announcement, claiming that EVs are at a never-before-seen infection point and sustainable production of nickel will be essential for sustainable vehicles.”
With the nickel market still considered relatively small, the BHP Tesla deal will prompt miners to create greener options, Gilbert said.
“This news will ensure the miners push towards sustainable mining options to attract the wealth of the EV industry, which could also potentially benefit smaller miners in Australia. It should also make it much easier for EV manufacturers to source nickel in a sustainable way.”
BHP has predicted nickel demand will increase by 500 per cent over the next 10 years as EVs and green energy take off.
However, challenges remain around the ethics of EV supply chains more broadly.
“Finding environmentally-friendly nickel will continue to be a challenge for EV manufacturers, with Elon Musk also previously expressing concerns. When demand grows and supply drops, the sustainable aspect lowers, so these EV manufacturers have a responsibility to ensure that materials for batteries are sourced sustainably,” Gilbert said.
“Some of the world’s biggest mining operations are currently based in Indonesia, and unfortunately, their reliance on coal for mining nickel means EV manufacturers are likely to avoid them due to poor ESG ratings.
“Tesla has already decided to move away from cobalt use in their batteries, so we can only hope this resonates across the industry.”
Why all this matters for investors
For investors, this is a big trend that isn’t going away.
BHP’s push to embrace future-facing minerals is part of a much bigger trend.
The share prices of the companies producing metals used in electronics and electric vehicles, including lithium and rare earths, have skyrocketed over the past year. That’s because these metals are forecast to be in short supply over the next decade.
If there’s one thing that’s clear, a seismic shift towards a greener future is underway. Now it’s up to the rest of the world to get on board.