Date December 4, 2000
Number 112/00
BHP ANNOUNCES PORTFOLIO RISK MANAGEMENT POLICY
BHP Limited (BHP) today announced it would adopt a 'self insurance' model to
commodity and currency price risks as part of a new risk management strategy
that will underpin the growth of shareholder value.
The 'self insurance' model is based on detailed quantitative analysis that
determined a significant degree of risk mitigation is provided by the natural
diversification of the Company's asset portfolio.
BHP Chief Financial Officer Chip Goodyear said: "Our new Portfolio Risk
Management Policy applies leading financial market analysis to a portfolio of
natural resource assets and is focused on supporting BHP's financial
objectives while protecting the Company's financial security and flexibility.
"The new risk management policy also constitutes an important component of
BHP's portfolio management approach to the allocation of capital and
supplements the enhanced discipline for capital deployment adopted during
the past 18 months, including processes implemented by the Capital Projects
Review Committee."
The BHP Portfolio Risk Management policy, approved by the BHP Board in
November, follows a comprehensive nine-month review of the Company's approach
to market price risks including commodity price risk, foreign exchange risk,
interest rate risk and freight risk.
The analysis showed BHP benefits through the scale, diversity and flexibility
of its asset portfolio with 'natural' hedges reducing the need, and therefore
the cost, of hedging market price risks. The 'self insurance' model utilises
these natural hedges as the principal means of managing market risk.
The new policy means BHP will bear the residual market risk, that is, the risk
exposure net of the natural hedges provided by diversification. This residual
risk will be managed within a quantitative 'Cashflow at Risk' framework
measuring projected business cashflow 'at risk' from adverse movements in
foreign exchange rates, commodity prices or other market risks.
Hedging transactions will only be undertaken when it is necessary to mitigate
risk from underlying exposures in order to support the Company's strategic
objectives, for example, following a large-scale acquisition. Based on the
current composition of BHP's portfolio, there is no requirement to hedge for
the forseeable future.
Importantly, BHP will now manage market risk at the portfolio level, taking
into account the Company's natural diversification benefits, rather than the
previous practice of hedging individual price risks on a transaction or asset
basis.
BHP will allow its current hedged positions in oil and copper to mature over
the remainder of this financial year, and currency hedging positions to mature
through to 2004.
In addition to risk mitigation, the new policy enables BHP to capture value
by entering into strategic financial transactions when there is perceived to
be a significant under or over valuation of a commodity market represented
within the Company's portfolio.
These transactions will only occur infrequently and to a limited extent.
They will be treated separately from hedging activities and will be strictly
controlled within defined limits.
Attachment - Briefing Paper - BHP 'Portfolio Risk Management' - A New Market
Risk Management Strategy.
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Further information can be found on our Internet site: http://www.bhp.com
Contact:
MEDIA RELATIONS
Mandy Frostick, Manager Media Relations
Ph: 61 3 9609 4157 Mob: 61 419 546 245
INVESTOR RELATIONS
Robert Porter, Vice President Investor Relations
Ph: 61 3 9609 3540 Mob: 61 419 587 456
Francis McAllister, Vice President Investor Relations
Houston
Ph: 1 713 961 8625
