Page 37 - Annual Report 2020

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Capital allocation, and assets and growth options
Risks associated with the allocation of capital through annual planning and other processes, to make investment decisions and to discover,
maintain and grow assets suited to our capabilities and strategy. Strategic Report

Why is this important to BHP?
Our strategy is to have the best capabilities, commodities and assets to create long-term value and high returns. While we seek to design and
implement the right strategy at the right time, we may not always be effective in doing so.
Our decisions and actions relating to the allocation of capital across asset or reserve discovery, acquisition, maintenance, growth, development
or divestment impact our financial performance and financial condition, and therefore the sustainability of our returns. This is particularly the case
with commodities that we view as attractive (for example, copper, oil and nickel sulphides).

Threats Governance at BHP
Changes in our portfolio, failure to secure or discover new reserves or • not investing in opportunities due to increased debt levels resulting in
resources, missed opportunities to invest or a failure to effectively a lack of available growth capital
allocate capital or achieve expected returns from existing assets or • missed investment opportunities due to a failure to understand
growth investments have impacted our performance in the past and potential new developments or identify major trends (for example,
may in the future lead to: faster electrical vehicle penetration or hydrogen cost competitiveness
• loss of value, for example, due to incorrect or changing assumptions could impact whether we are well positioned for these changes in
(including those related to commodity prices) used to assess growth copper, nickel, metallurgical coal or petroleum)
or investment opportunities • financial write-downs (for example, as a result of changes in market,
• failure to achieve expected commercial objectives from assets or industry or prices, inability to recover reserves, deteriorating demand/
investments, including cost savings, sales revenues or operational supply fundamentals, value migrating away from where we are Remuneration Report
performance, resulting in value loss (such as that experienced with positioned in value chains, per our strategy as described in section
US shale) 1.4.1, or additional costs)
• poor performance of current assets due to over-investment in • loss of overall value at an asset due to the pursuit of the incorrect
growth capital at the expense of non-discretionary sustaining capital strategy (for example, investing in growth projects in a commodity that
(for example, delaying asset maintenance tasks to free up capital for may have deteriorating demand fundamentals, such as energy coal)
growth projects resulting in production losses) • lack of diversified production base, increasing exposure to large
• unexpected costs or liabilities of an investment due to poor regulatory single-event risks (for example, too much reliance on Australian-based
conditions in a new region, or inherited liabilities of acquired assets assets or particular commodities) that may result in loss of value or
or entities (such as legacy asset rehabilitation or legal dispute costs) reduced cash flows
• adverse market reactions (for example, to businesses associated with • inability to retain or attract key staff who are critical to the successful
production or use of energy coal) resulting in a potential impact to our design and implementation of our strategy, including in relation to the Directors’ Report
reputation, social value or our ability to retain the confidence of allocation of capital and growth in our business
external stakeholders and shareholders to execute our strategy As evidenced by price volatility during CY2020, there are and may
• poor performance impacting our ability to deliver forecasted returns continue to be potential short to medium-term impacts on certain
to shareholders commodity prices due to the COVID-19 pandemic that could impact
values and result in growth project delays.

Management
We have a number of strategies, processes and frameworks in place • management reviews and governance activities to support operational
designed to grow and protect the strength of our portfolio and to help and project forecasts and planning
deliver ongoing returns to shareholders, including: • our CAF, which provides the structure and governance for prioritising
• our exploration program, with a focus on replenishing our resource capital allocation across the Group and adding growth options Financial Statements
base and enhancing our portfolio to our portfolio (for more information, refer to section 1.4.5)
• a long-term strategy that informs the decisions and actions in capital • investment approval processes that apply to investment decisions,
allocation and which is embedded through a tested CAF including mergers and acquisitions activity, overseen by an investment
• an ongoing strategy process that assesses the competitive advantage committee as described in sections 2.14 and 2.15
of our business and enables identification of threats and opportunities • annual reviews of our portfolio valuations to identify any value change
for our portfolio using forecasting and fit-for-purpose scenarios and test internal value methodologies and assumptions against
external benchmarks
• monitoring indicators to interpret external events and trends • embedding the social value framework designed to drive better
• commodity strategies and commodity price protocols that are outcomes that benefit all stakeholders through strategy, planning and
reviewed and presented to the Executive Leadership Team and Board
• corporate planning processes, including life of asset plans, capital investment processes (including emissions, water, other
environmental factors and community initiatives)
prioritisation and asset appraisals, which inform forecasts for Additional information
proposed investments and operations
FY2020 insights
While the COVID-19 pandemic has affected commodity prices and had significant impacts on businesses and national economies around the world
(as discussed in the Geopolitics and stakeholder relations risk factor), it may also present opportunities for growth options through acquisitions in
attractive commodities that align with our strategy. The discipline and competition for capital stimulated through our CAF is designed to drive better
decision-making and capital efficiency. This helps to strike a balance between returns to shareholders and reinvesting in the business and is intended
to enable us to be in a position to consider acquisition opportunities that may arise. Shareholder information

BHP Annual Report 2020 35