BHP May Announce $12 Billion Spinoff of Billiton Assets

Illawarra Coal Australia, image; BHP Billiton

By David Stringer

Aug. 15 (Bloomberg) — BHP Billiton Ltd. may announce a spinoff of assets estimated to be worth as much as $12 billion next week, as the world’s biggest mining company casts aside operations acquired in the 2001 purchase of Billiton Plc.

Directors will consider a structure to focus BHP on its four main products, including iron ore and petroleum, when they meet next week, and announce any decisions immediately, the Melbourne-based company said today in a statement. It has already sold assets worth $5.2 billion since January 2012 as part of plans to simplify its portfolio.

“The market will be quite well predisposed to it and it probably adds some value to the BHP story,” said Brenton Saunders, a Sydney-based investment analyst with BT Investment Management Ltd., which manages about A$64 billion ($60 billion) and holds BHP shares. “The devil is in the detail, it will depend on which assets are included and which aren’t.”

Focusing BHP on iron-ore, copper, coal and petroleum projects that stretch from Australia to the Americas and generated about 85 percent of its sales last year, will raise free cash flow, help boost production growth and deliver stronger return on investment, Chief Executive Officer Andrew Mackenzie said in a May speech. Mackenzie, appointed in February 2013, also identified potash as a potential fifth unit.

“The board has continued to study various structural alternatives, including at its meeting this week,” the company said in today’s statement. “A demerger of a selection of assets is our preferred option.”

Shares Gain

BHP advanced as much as 3.7 percent in London trading, the biggest intraday gain in seven months, and was 2.8 percent higher at 2,082.5 pence at 9:31 a.m. The stock accelerated gains after the announcement in Sydney, closing 2.3 percent higher at A$39.05.

A spinoff that included nickel, manganese and aluminum operations which span Australia, South Africa and Colombia, a South African coal unit and the Cannington lead and silver mine may be worth as much as $12 billion, according to a valuation today from CLSA Asia-Pacific Markets.

Such a restructuring would be the largest since the A$3.3 billion spinoff of its steel unit in 2002. A demerged company will probably be based mainly around former Billiton assets, Glyn Lawcock, an analyst at UBS AG in Sydney, said in a July 14 note to clients. A new company would likely have a primary listing in Australia and may also be traded in both the U.K. and South Africa, Lawcock said.

Management Clear-Outs

Mining companies are cutting costs and sharpening portfolios as commodity prices retreat and after poorly timed acquisitions in a decade-long $614 billion investment spree led to asset writedowns and management clear-outs. Investors including BlackRock Inc.’s Evy Hambro, who manages the $8 billion World Mining Fund, have urged producers to refrain from costly growth projects and focus on shareholder returns.

The $11.6 billion acquisition of Billiton gave BHP assets including aluminum, nickel and thermal coal that no longer fit Mackenzie’s strategy of focusing on four main commodities. BHP spokeswoman Eleanor Nichols declined to comment on which assets may be included in any demerger.

Chief Financial Officer Graham Kerr may run the spinoff company from headquarters in Perth with a portfolio that includes BHP’s West Australian nickel unit and the Cannington mine, the Australian Financial Review reported today. BHP’s Nichols declined to comment on the report.

Productivity Savings

Creating a smaller collection of operations with long lifespans may be a catalyst for further productivity savings, Mackenzie said in May.

In 2011, as China devoured everything from iron ore to copper to feed economic expansion, BHP’s return on invested capital was 35 percent, according to data compiled by Bloomberg. The figure slumped to 13 percent two years later as Chinese growth slowed, the data show.

BHP’s aluminum, manganese and nickel unit accounted for about 14 percent of revenue in the 12 months ended June 30, 2013. That’s down from about 30 percent in the year through June 2007, according to filings. Revenue from iron ore has risen from about 12 percent to 31 percent over the same period

Glencore Plc CEO Ivan Glasenberg said in March the commodity trader and metals producer planned to study BHP’s Australian nickel division. BHP confirmed in May it was considering the sale of all or part of the unit.

Investor Support

Investors are likely to support any spinoff company as it would provide an alternative to the larger producers, according to BT’s Saunders.

“Globally there are not that many reasonable quality mid- cap diversified mining groups,” he said.

Shareholders will seek more clarity on Mackenzie’s plans for BHP’s remaining portfolio amid weak prices for iron ore, petroleum and copper, according to Tim Schroeders, a Melbourne- based portfolio manager who helps manage $1 billion in equities, including BHP shares, at Pengana Capital Ltd.

“When the price of the commodities in those divisions have all fallen, it’s difficult to grow your profits, despite volume increases and cost cutting, so that’s the big picture,” Schroeders said today by phone, before BHP’s statement. “In terms of repositioning the businesses, I don’t think that there’s a magic wand.”

–With assistance from Jesse Riseborough in London.

Copyright 2014 Bloomberg.