BHP

BHP Billiton is splitting off its coal, aluminium, manganese and silver assets into a new company valued at over US$20 billion, as it looks to focus on its strongest businesses. This will be one of the biggest divestments of assets in mining history.

Chief Executive Andrew Mackenzie said that simplifying BHP from a broadly diversified asset base to one focused on four commodities, namely iron ore, copper, coal and petroleum, would rev up growth in cash flow and boost returns.

“By concentrating on what we do best, the development and operation of major basins, we can improve our productivity further, faster and with greater certainty,” Mackenzie said in a statement.

Investors disappointed by deal structure

While BHP reported an 8% rise in second-half underlying attributable profit to US$5.69 billion, the company’s London-listed shares fell more than 3% on Tuesday. Investors were disappointed by the deal structure. Many had been hoping for a buyback of up to $8 billion of its own shares after its profits rose 23% in the year through June.

Shareholders in BHP Billiton Ltd and BHP Billiton Plc will receive shares in the new company on a pro-rata basis.

“The balance sheet is strong and getting stronger and laying the basis for future discussions on capital management,” Mackenzie said when asked about the buyback option, but added that the demerger was “unquestionably the best option” compared to complicated and costly trade sales.

“This is much more attractive for shareholders and more value-adding than trade sales,” Mackenzie said, since the spin-off company created from the demerger would consist of high quality assets, “engineered by BHP.”

Details of the spin-off company

The spin-off company, dubbed NewCo by BHP, will include BHP’s aluminium, manganese, Cerro Matoso nickel, some coal assets and the Cannington silver, lead and zinc mine and will be headquartered in Perth and listed in Australia and South Africa.

Although BHP has not revealed the size of the new company, analysts have estimated that it could be worth over US$20 billion depending on its assets. The company will be headed up by BHP Billiton chief financial officer Graham Kerr, while Brendan Harris, head of investor relations, would be chief financial officer.

NewCo is expected to generate enough cash to cover its costs and have little debt, according to Mackenzie, but there is no commitment that the company will pay a dividend. However, it will have the flexibility to do so if its cash flow is strong enough.

Creating jobs in South Africa

Newco will have assets in five countries and employ 24 000 full-time employees and contractors, 200 of which would be South African jobs, that “will be managed by a dedicated board, a strategy and an organisation tailored to their asset needs,” said Mackenzie.

Kerr said: “Together all these assets give a diversified portfolio that in the 2014 financial year generated $10bn in revenue and had strong robust returns averaging an EBIT of $3.3bn or a 34% margin over the last 10 years.

“We’re not divesting from South Africa. This is a demerger. BHP Billiton will retain a substantial number of South African shareholders – about 9% of the shareholder base.

“As BHP Billiton we continue to explore for oil and gas in South Africa, but we believe that through the creation of Newco, which has many South African assets in it, we will establish a basis for even more success.”

Newco’s new board and the leadership will have strong South African representation, Kerr said.

Mackenzie added that “We believe in South Africa and its future and we think this is a way of supporting South Africa even more strongly.”

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