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BHP Billiton to spin out non-core assets

by Paul Whitfield  |  Published August 19, 2014 at 10:03 AM

BHP Billiton Ltd. will spin off aluminum, manganese, coal, nickel and silver operations from Australia to South Africa to create a new mining company that could be worth as much as $17 billion.

BHP's CEO Andrew Mackenzie confirmed the plan, which was hinted at on Friday, ahead of his company's annual results conference on Tuesday, August 19.

"A demerger will maximize value for our shareholders," he said.

The new company will have 11 main assets including BHP's Colombian Cerro Matoso Nickel business, Energy Coal South Africa, Aluminum South Africa and Australian operations including manganese producer Gemco, aluminum unit Worsley, Illawarra Metallurgical Coal and the Cannington silver, lead and zinc mines.

BHP, like many of its rivals, has spent years seeking to offload underperforming and sub-scale businesses, many of which were acquired prior to 2007 on expectation of long-term increases in global commodity prices. Those hopes foundered on slower-than-expected growth in China, and the global economic slump triggered by the 2007/08 financial crisis. Mining companies including BHP and its closest rival Rio Tinto Group were forced to swallow huge write-downs and changed tactics, and CEOs, to focus on improving shareholder returns and eschewed acquisitions.

Mackenzie, who replaced Marius Kloppers in early 2013, has turned its attention to a so-called "four pillar" strategy that is centered on BHP's largest and most profitable operations in petroleum, potash, copper, iron ore and coal. The four business units - petroleum and potash are combined in the BHP model - together account for about 97% of BHP's underlying Ebitda, according to a company presentation.

BHP on Tuesday posted Ebitda of $32.4 billion for its financial year ending June 30, up 6.8% year-on-year. Underlying profit rose to $13.4 billion, up 23% on last year's figure of $11.2 billion.

The assets to be spun off into the new company do not include BHP's Nickel West operations in Western Australia, which BHP is negotiating to sell and which is expected to fetch about $800 million. BHP is also still considering the fate of its New Mexico Coal business and some smaller petroleum assets, the company said on Tuesday

The new mining company, which is yet to receive a name, could be worth between $15 billion and $17 billion according to brokers including CLSA Asia-Pacific Markets.

The new entity would have posted an average annual Ebitda of about $3.3 billion over the past 10 years, according to BHP's chief financial officer and future CEO of the new company Graham Kerr. That Ebitda figure had slipped to about $1.8 billion for the year ending June 30, highlighting the recent decline in profitability of the assets that will be spun off.

The new business is expected to be headquartered in Perth, Western Australia, and will operate a regional office in Johannesburg, South Africa. The company is planning to seek listings in both Australia and South Africa and will issue American Depositary Receipts. It will be chaired by BHP board member David Crawford. Kerr will be replaced as CFO of BHP by Peter Beaven, currently head of BHP copper.

The spin off will reduce BHP's operations from the current 41, bringing it closer to a target of 19 assets, including coal, copper and iron ore mines and oil fields in Australia, potash and oil units in North America and copper mines in South America.

"In a single step, we will significantly increase BHP Billiton's focus on the exceptionally large resource basins that underpin its competitive advantage," said Mackenzie. "With a simpler portfolio, we are targeting sustainable, productivity-led gains of at least $3.5 billion per annum by the end of the 2017 financial year."

The difference in the quality of the assets being retained by BHP against those being spun off is evidenced by their respective earnings margins. BHP will retain operations with an underlying Ebit margin of 42%. The new company's assets posted an average Ebitda margin of 21%.

BHP shareholders will receive stock in the new company on a pro-rata basis linked to their existing stake. BHP shareholders will vote on the demerger, which is expected to complete in the first half of 2015.

Shares in BHP, which trades in London as BHP Billiton plc, fell Tuesday to 1,978 pence ($32.93), down 89 pence or just over 4% on their Monday close.

Richard de Carle and Susannah Macknay of law firm Slaughter and May are advising BHP on the demerger, supported by Louise Campbell and Ellizabeth Szanto. Jeanette Zaman is advising on tax matters, Philip Snell on financing and Michael Rowe on competition issues.

Herbert Smith Freehills Freehills LLP is advising on Australian law while ENSafrica is advising on South African law.

Tags: Andrew Mackenzie | BHP Billiton Ltd. | BHP Ebitda | coal | copper | David Crawford | demerger | financial crisis | Graham Kerr | iron ore | Marius Kloppers | non-core assets | Peter Beaven | petroleum | potash | Rio Tinto Group

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