#BHP

Risk Management Strategy Briefing

Charles W Goodyear
Chief Financial Officer

Rowen H Bainbridge
Vice President Market Risk Management

December 2000
Agenda #BHP
• Introduction

• Strategy

• Rationale

• Strategy in practice

• Communications
Market Risk Management Strategy #BHP
• 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
Agenda #BHP
• Introduction

• Strategy

• Rationale

• Strategy in practice

• Communications
‘Portfolio Risk Management’ #BHP
Market Risk Management Objective
• To support the delivery of BHP’s financial targets, while
protecting the Company’s future financial security and
flexibility.
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.
‘Portfolio Risk Management’ Strategy #BHP
• Manage risk at the portfolio level
Understand portfolio characteristics
Link capital allocation to portfolio risk

• Manage risk to an acceptable level

Self insurance model
Only hedge if you have to

• Limited strategic financial transactions

Markets under/over valued
within agreed limits

• Raise bar on communications

Clear, precise and responsive
Agenda #BHP
• Introduction

• Strategy

• Rationale

• Strategy in practice

• Communications
Elements of our rationale #BHP
• BHP has a diversified portfolio
• 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
Rationale #BHP
• BHP has a diversified portfolio
Rationale #BHP
• BHP has a diversified portfolio
• There is no value in reducing volatility
 There is no value in reducing volatility #BHP
Total Shareholder Return vs. Volatility (last 4 years)
Source: Thompson FIR May 2000, BHP Team analysis

50
BHP's Peer Companies
40
Total Shareholder Return (%)

Hedger
30 Non-hedger

20
10
0
BHP
-10
-20
-30
0 10 20 30 40 50 60
Volatility (%)
Rationale #BHP
• BHP has a diversified portfolio
• There is no value in reducing volatility
• Valuations reflect corporate strategy not earnings
volatility
 Valuations reflect corporate strategy
not earnings volatility #BHP
Comparison of Premium Return to Premium Value
Source: Goldman Sachs ‘Essential Oils’

Exxon Mobil
1.2 Royal Dutch
BPAmoco
Shell
1.0
Market Multiple

Chevron
0.8
TotalFinaElf
Texaco
CEPSA
0.6 ENI Repsol YPF
Norsk Hydro Enterprise
OMV Lasmo 0.4

0.2

-3 -2 -1 0 1 2 3 4
Economic Value Added
 Valuations reflect corporate strategy
not earnings volatility #BHP
1999 Actual Comparison of Premium Return to Premium Value

2.50 BHP's Peer Companies

Hedger
2.00 Non-hedger
Market Multiple

1.50

1.00

0.50

0.00
-6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00%
Economic Value Added
 Valuations reflect corporate strategy
not earnings volatility #BHP
1999 Actual Comparison of Premium Return to Premium Value
Source: BHP Team analysis

2.50 BHP's Peer Companies

Hedger
2.00 Rio Tinto Woodside Non-hedger
Enron
Market Multiple

1.50 Exxon
BP Amoco Barrick Gold
Western Mining
Shell Freeport Copper
Devon BHP
Chevron
1.00 Phelps Dodge North Ltd Suncor Energy
Total Fina Nucor Corp
Phillips Petroleum
Unocal Corp
0.50 Enterprise Oil
USX-US Steel Group Lasmo

0.00
-6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00%
Economic Value Added
 Valuations reflect corporate strategy
not earnings volatility #BHP
1999 Actual Comparison of Premium Return to Premium Value
Source: BHP Team analysis

2.50 BHP's Peer Companies

Strategy 1 Strategy 2 Hedger
2.00 Risk Management as Simplicity, clarity and Non-hedger
Intellectual Capital low cost strategy
Market Multiple

1.50

1.00

0.50

0.00
-6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00%
Economic Value Added
Rationale #BHP
• BHP has a diversified portfolio
• There is no value in reducing volatility
• Valuations reflect corporate strategy not earnings
volatility
• Good communication is highly valued by investors
Rationale #BHP
• BHP has a diversified portfolio
• 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
Costs of hedging high for key risks #BHP
Source: BHP Team analysis

3,000
Average
2,800
1989
2,600 1990
2,400 1991
1992
2,200 1993
1994
2,000
1995
1,800 1996
1997
1,600 1998
1,400 1999

1,200 A Copper Example Average

1,000
Cash 3 month 15 month 27 month
LME Futures Contracts
Rationale #BHP
• BHP has a diversified portfolio
• 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
 Only hedge if you have to #BHP
Illustrative

Cashflow
Call on Cash
$AUS MILLION

2001 2002 2003 2004

FINANCIAL YEAR
How Market Risk effects gearing #BHP
US Industrials
MEDIAN
39.2 Prob. (Key ratio > 51.4%)
UPPER QUARTILE 51.4 30.3 LOWER QUARTILE
Single ‘A’ Rating Unhedged <1%
0.8 Current hedge <1%
0.7 100% hedgeable <1%
0.6
Unhedged
Probability

0.5
Current hedge
0.4 100% hedgeable
0.3
0.2
0.1
0
80 60 40 20 0
Gearing (percent) 2001
Source: BHP Team analysis
How Market Risk effects financial plans #BHP
Gearing distribution 2003 Prob. (Key ratio > 51.4%)
Unhedged 15%
MEDIAN
UPPER QUARTILE 51.4 39.2 30.3 LOWER QUARTILE 100% Hedged 14%
Single ‘A’ Rating
After management action 1%

Possible Management Actions

0.3 • Discretionary CAPEX
• Acquisitions
0.25
Probability

• Exploration
0.2 • Funding requirements
• Divided policy
0.15
• Share buy-backs
0.1 • Discretionary investments/distribution

0.05 Unhedged
0 After management action
80 60 40 20 0 100% hedgeable
Gearing (percent)
Source: BHP Team analysis
Rationale #BHP
• BHP has a diversified portfolio
• 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
Financial markets provide
opportunities to improve returns #BHP
10 Year Histogram of 15 Month Futures Contract

15 Month
Contract
as at 17/10/00 =
$27.39 USD/bbl
Probability

Percentile > P99

10 12 14 16 18 20 22 24 26 28 30 More
15 Month Contract For Oil (USD/bbl)
Agenda #BHP
• Introduction

• Strategy statement

• Rationale

• Strategy in practice

• Communications
Strategy in practice #BHP
Strategy in practice #BHP
What is the potential range of risk?
P90

Riding the waves

Agreed strategy
Choppy waters

P5
Rating Agency disaster case
P1
Strategy in practice #BHP
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

NOTE: Other risks are also included to keep total risk within
an acceptable level

Risk limits for strategic financial transactions

• Stop loss Annual, Monthly and Quarterly
• Value at Risk $25m
Strategy in practice #BHP

Responsibility Authority
Governance and Board
Policy Setting
Policy Committee supported by Market
Risk Management function
Strategy Setting CFO for strategic financial transactions
All activities subject to Board approved
limits and monitoring

Treasury
Execution*
Petroleum
Summary #BHP
• Manage risk at the portfolio level
Understand portfolio characteristics
Link capital allocation to portfolio risk

• Manage risk to an acceptable level

Self insurance model
Only hedge if you have to

• Limited Strategic financial transactions

Markets under/over valued
within agreed limits

• Raise bar on communications

Clear, precise and responsive
Agenda #BHP
• Introduction

• Strategy statement

• Rationale

• Strategy in practice

• Communications
What we will communicate #BHP
Will be disclosed Will not be disclosed
Portfolio Risk
• Policies – Annual statement, • CFaR limits;
or as major policy changes • Modelling assumptions; and
occur;
• Detailed transactions and
• Exposure profile; and transaction counterparties.
• Information on outstanding
hedge book – Quarterly
update.
For strategic financial transactions
• Quarterly performance • Rationale behind strategies; and
update; and • Stop Loss Limits.
• Value at Risk (VaR) and VaR
limit – Quarterly Update.
Market Risk Management Strategy #BHP
• 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