BHP Discards Poised to Become Mining’s Biggest Spinoff

By David Stringer and Jesse Riseborough

BHP Billiton Ltd. (BHP) announced what’s poised to be the biggest spinoff in the mining industry, separating aluminum, coal and silver assets to create a company valued at about $15 billion after it begins trading next year.
The new unit, to be based in Perth, will operate in five countries from Australia to South Africa, the Melbourne-based producer said today in a statement while announcing a 10 percent jump in profit to $13.4 billion. Graham Kerr, BHP’s chief financial officer since 2011, will be CEO.
Miners are trimming portfolios as commodity prices retreat and after poorly timed acquisitions in a decade-long $616 billion investment spree led to
asset writedowns and management clear-outs. The new company may be worth about $15 billion when listed and be mining’s biggest spinoff in at least a decade, according to CLSA Asia-Pacific Markets.
“It’s not a given that it’s going to be ultimately attractive to investors when it lists,” Tim Schroeders, a portfolio manager at Pengana Capital Ltd., who helps manage $1 billion in equities, including BHP, said today by phone after the announcement. “There are some assets that are attractive within that mix, and some that we are less keen on.”

Photographer: Jeremy Piper/Bloomberg

Andrew Mackenzie, Chief Executive Officer of BHP Billiton Ltd.

BHP fell 3.9 percent to 1,987.5 pence at 10:06 a.m. in London, reversing a 1.4 gain in Sydney before the announcement, as some investors had anticipated BHP would announce a program of share buybacks, according to Paul Gait, a London-based analyst at Sanford C. Bernstein Ltd.
“The miscalculation was that there had clearly been a very significant expectation in the market for a buyback,” he said by phone. “In the absence of that and just getting Spinco you can see why people are disappointed.”

New Producer

The new producer will hold the world’s largest producer of silver in the Cannington silver and lead mine in Australia, the Cerro Matoso nickel operation in Colombia, the Illawarra metallurgical coal business and aluminum assets in Australia, South Africa, Mozambique and Brazil.
“In a single step, we will significantly increase BHP Billiton’s focus on the exceptionally large resource basins that underpin its competitive advantage,” CEO Andrew Mackenzie said in the statement. BHP will prioritize iron ore, copper, coal and petroleum assets that stretch from Australia to the Americas, and has identified the soil nutrient potash as a potential fifth unit.
Assets to be included in the as yet unnamed company are estimated to be worth more than the 2006 listing of Polyus Gold OJSC in a $14.4 billion transaction by MMC Norilsk Nickel OJSC, according to data compiled by Bloomberg.

South Africa

It will be listed in Australia and also trade in South Africa, where it will have a regional head office in Johannesburg, BHP said in the statement, adding that it plans to issue shares in the company to its U.K. and Australian stockholders next year.
BHP is continuing a process to sell its Australian nickel unit, which isn’t included in the new company, Mackenzie told reporters on a conference call.
Assets being divested into the new company are currently cash flow positive with an underlying earnings before interest, tax, depreciation and amortization margin of 21 per cent in the year to June 30, the producer said in the statement. The portfolio is poised to take advantage of price rises in the medium term in the commodities it will produce and may consider brownfield investment opportunities, BHP said.

Profit Climbs

BHP’s underlying profit rose to $13.4 billion in the 12 months to June 30, from $12.2 billion a year ago, the company said in a separate statement. That missed a $13.6 billion median forecast of 19 analyst estimates compiled by Bloomberg.
The remaining core company will target cost cutting and other productivity gains of at least an additional $3.5 billion by the end of June 2017, BHP said in a separate statement.
The new company will have about 24,000 employees and contractors, BHP said. That compares to BHP’s current total of about 128,000.
Divesting BHP of the group of assets may be the largest demerger in any industry since Morgan Stanley announced the $15.8 billion spinoff of Discover Financial Services in December 2006, according to data compiled by Bloomberg.
David Crawford, a BHP director since 1994, will lead the demerged entity’s board and step down from BHP in November.
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 12.5 percent of revenue in the 12 months ended June 30, according to today’s statement. 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