FREQUENTLY ASKED QUESTIONS

What are the benefits for Australian shareholders?

We believe there is inherent value in BHP and that is why we have put forward our proposals to unlock value in the company. Within five years, we believe our Think Smart Plan could release up to US$11 billion[1] of franking credit value for Australian shareholders.

Unifying BHP could enhance the ability to monetise franking credits more quickly and more efficiently via discounted off-market share buybacks. All shareholders could benefit from the incremental accretion and share demand resulting from more franking credits being released.

Shareholders want a renewed focus on capital returns, which we believe could be optimally achieved via discounted off-market share buybacks, to instill greater management discipline with surplus cash and avoid further value-destructive acquisitions and projects – and we think this is possible while retaining an appropriately strong balance sheet.

What do you want BHP to do?

We want BHP management to work harder to find solutions to unlock value in the business – for the benefit of all shareholders.

Our proposals aim to help that process. We have called on management and the board of BHP to initiate an in-depth, open and truly independent review of BHP’s petroleum business to be overseen by a committee which includes management, shareholder representatives and outside experts – with full disclosure of all results on a timely basis. We also want the company to unify its dual listed company (DLC) structure and use the shareholder returns from discounted off-market share buybacks, which are accretive to shareholders, as a yardstick from which to judge future investments.

How has BHP destroyed shareholder value?

BHP has significantly underperformed its peers and the broader market over the short and long term. Australian SMSF investors would have been better off holding any other top 10 most commonly held SMSF stock[2] than BHP over the past 5 years. On average, BHP’s total shareholder return is 70 per cent less over the last five years, and 108 per cent less over the last ten years than the average of the other top 10 SMSF stocks. BHP’s foray into US shale has been disastrous – 78 per cent of value has been lost.[3]

Total shareholder returns at BHP have substantially underperformed Rio Tinto, a comparable portfolio, as well as the ASX 200, the FTSE 100 and the S&P 500 over the last five years. If you had invested US$100 in the ASX 200 Index five years ago, that money would be worth US$131* today. But the same US$100 invested in BHP five years ago would have fallen in value to just US$72*.

Even over the longer term, BHP has underperformed it's mining peers – for example, BHP underperformed Rio Tinto over 20, 25 and 30 years by 133%, 471% and 1,032% respectively.

*Value taken on a total shareholder returns basis as at June 30, 2017 on the basis that the initial US$100 investment was made five years earlier.

After unification, would BHP remain an Australian company and listed on the ASX?

Yes. BHP is an iconic Australian company with a proud history.

Under our proposal BHP will remain an Australian company, incorporated, headquartered, and tax resident in Australia.

A unified BHP could benefit from a full primary ASX share listing along with additional listings on the LSE, JSE and NYSE.

Wouldn't the Australian Foreign Investment Board object to unification?

Under our proposal, unified BHP would be incorporated in Australia, Australian headquartered and Australian tax resident, retaining full ASX and LSE listings, with ordinary shares listed on the ASX, and would otherwise comply with all other FIRB conditions.

How would the freeing up of billions of unused franking credits under our proposed restructure of BHP benefit Australian shareholders?

Unifying BHP could enhance the ability to monetise franking credits more quickly and more efficiently via discounted off-market share buybacks. All shareholders could benefit from the incremental accretion and share demand resulting from more franking credits being released.

A vast stockpile of franking credits is currently trapped within BHP’s legacy DLC structure, which is getting bigger every day. It is estimated that another US$2+ billion[4] of credits per year will be generated by BHP over the next five years, which could be distributed more efficiently for the benefit of working families and retirees who have invested their savings in BHP shares.

BHP said unification would cost US$1.3 billion for minimal material benefit. Why should we be supportive of unification given the costs involved?

We see BHP’s US$1.3billion unification cost estimate as fundamentally flawed as it includes costs we simply don’t believe make sense. For example, BHP has claimed that the benefit of certain Australian tax losses which have built up in BHP Billiton Plc (“PLC”) would be lost on unification, when in fact there is plenty of scope to preserve those tax benefits when unification occurs. BHP has also claimed that there are certain  “costs” of unification associated with BHP’s unsustainable Singapore-based marketing structure by which it seeks to avoid Australian tax. Other companies have moved to dismantle similar structures and, with current pressure from the ATO, we think BHP will soon have to as well.

We see c.US$200m as the real cost (excluding advisory fees) – a small price to pay for such a large value-unlock opportunity, especially when compared to the US$853 million of franking credits that have been wasted since the 2015 demerger of South32.

Won’t BHP Ltd shareholders lose out in the case of unification as Ltd and PLC will unify in the middle of the share price range?

We see no evidence that this would be the case – in fact, market precedent suggests otherwise. A useful case study is Brambles, a supply chain-logistics group that used to have a Ltd-PLC DLC structure similar to BHP’s and, prior to unification, also had PLC share price discount issues similar to BHP. During and immediately after the unification process, Brambles Ltd shares actually outperformed the ASX 200, with which they had been highly correlated prior to unification.

What shareholding does Elliott have in BHP?

Elliott’s disclosure of a shareholding of 5.04% in PLC was published in the following announcement: http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/BLT/13333955.html We first invested in the company in 2015. Our investors, some of whom are Australian, include pension plans, sovereign wealth funds, hospital and university endowments, charitable foundations, funds-of-funds, individuals and families, and employees of the firm.

Why should BHP conduct a strategic review of its entire petroleum division?

Within its petroleum business, BHP has destroyed tens of billions of dollars of value to date. For this reason there is strong shareholder support for BHP management to review its petroleum business.

BHP announced on August 21, 2017 that the board and management had determined that BHP’s onshore US assets are non-core and that options to exit those assets were being actively pursued. We see this decision to exit BHP’s shale assets as a positive first step in the right direction, provided that it is executed on the right terms within an appropriately prompt timeline.

There are several possible solutions to unlock the value of BHP’s petroleum business, including a sale or demerger of the US petroleum business and a sale or ASX listing for the Australian and other remaining petroleum assets.

Our preferred approach is a full or partial demerger of the petroleum business, but in any event, the logical next step to unlock optimal value from that business is a strategic review which shareholders have every right to expect. We believe that a demerger of the US petroleum business, or similar value optimizing initiatives, could unlock US$15+ billion[5] for shareholders.

Doesn’t the petroleum business provide BHP with diversification in a cyclical industry?

We see no evidence that it does. Despite BHP’s claims that its petroleum business provides unique risk-mitigation diversification benefits, over the last 10 years BHP’s profitability has been more volatile than Rio Tinto’s, despite Rio Tinto having no petroleum business. It is interesting to note that none of the major oil companies have mining portfolios any more and that BHP is the only major mining company with a petroleum portfolio.

Management’s misguided and failed attempts to diversify risk through its involvement in the petroleum sector have also destroyed significant shareholder value.

Who is Elliott?

Founded in 1977, Elliott manages two funds, Elliott Associates, L.P. and Elliott International, L.P., with assets under management totaling more than US$32.7 billion.

Elliott’s investors include pension plans, sovereign wealth funds, hospital and university endowments, charitable foundations, funds-of-funds, individuals and families, and employees of the firm.

With tens of millions of beneficiary stakeholders located on five continents, Elliott’s primary focus is on risk control, stability, and steady growth of capital. With 40 years of experience, it is one of the oldest hedge funds under continuous management. Today, Elliott has offices in New York, London, Hong Kong and Tokyo and employs a staff of 410 people, including 145 investment professionals.

Elliott is a multi-strategy fund, carrying out a diverse range of investment activities. Its strategies include actively managed equity investments in which Elliott’s objectives include promoting shareholder value and good corporate governance for the benefit of all shareholders.

We are an active investor – meaning we take an active interest in some of the companies we invest in, to try to improve or unlock value. We start from the premise of promoting shareholder value and good corporate governance for the benefit of all shareholders.

[1] Please refer to the Elliott presentation of April 10, 2017 for the basis for this figure.

[2] The most commonly held ($ invested) shares in Australian listed companies by self-managed superfunds as at December 31, 2016.

[3] Total shale investment includes acquisition costs of Fayetteville and Petrohawk and the associated cumulative (negative) free cash flow to December 31, 2016. Current consensus value is based on investment banks’ sum-of-the-parts valuations and includes only valuations using the discounted cash flow methodology.

[4] Elliott estimate based on taxes to be paid by Ltd in respect of its Australian assets over the next five years.

[5] Please refer to the Elliott presentation of April 10, 2017 for the basis for this figure.