BHP unveils $10bn big bang demerger

[miningmx.com] – BHP BILLITON unveiled proposals for a demerger of its coal, aluminium, manganese and silver assets creating a company – to be listed in Perth and Johannesburg – with average pretax earnings of $3.3bn.

The Newco created from the demerger, which BHP Billiton hopes will be listed in mid-2015, represents a big bang approach to the mining firm’s portfolio simplification strategy, reducing the number of assets under its control by half.

Andrew Mackenzie, CEO of BHP Billiton, said today the demerger was “unquestionably the best option” in preference to trade sales which would have been more complicated owing to lengthy approval processes, and transaction costs.

“This is much more attractive for shareholders and more value-adding than trade sales,” Mackenzie said, adding that the Newco created from the demerger consisted of high quality assets, “… engineered by BHP”.

However, shares in BHP Billiton fell 4.75% on the Johannesburg Stock Exchange today, a decline more to do with the group’s decision not to announce a share buy-back which UK stockbroker, SP Angel, said had been “driving the share price” recently.

All in all, the Newco would have assets in five countries and employ 24,000 full-time employees and contractors. It would be managed by “… a dedicated board, a strategy and an organisation tailored to their [asset] needs,” said Mackenzie.

Graham Kerr, currently CFO of BHP Billiton, would be CEO of Newco. Said Kerr: “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”.

Included in the Newco is the South African and Mozambican aluminium businesses, as well as the Worsley and Alumar assets in Australia and Brazil respectively.

The thermal coal assets contained in BHP Billiton Energy Coal South Africa (Becsa) have been included in Newco along with Illwarra, a coking coal mine in Australia while BHP’s manganese assets in South Africa and Australia would also be added.

Cerro Matoso, a nickel producer in Colombia is included in Newco but Nickel West, the Australian asset is excluded. Mackenzie said Nickel West was mature and was more likely to be disposed in a trade sale with several suitors showing interest.

From a revenue perspective, roughly half of Newco comprised of South African assets, but Kerr was adamant the demerger did not represent divestment from the country where political instability and regulatory uncertainty is a feature of business.

“We will list the new company on the Johannesburg Stock Exchange to give South African investors another choice,” said Kerr in a conference call with media.

“The new board will have strong South African representations and we will run the African business out of Johannesburg led by a South African who has more power,” said Kerr. A shared services centre in Johannesburg would create 300 new jobs, he said.

“It will look at the options in South Africa with greater flexibility. We are not leaving South Africa.”

UK shareholders in BHP Billiton would also receive shares in the Newco although it was likely many investors would not be mandated to hold Australian or South African-listed shares with a flow-back possible.

“If we had gone down route of a UK listing, it would have been a lot more expensive, with more difficult approvals, and more costly cost of incorporation,” said Mackenzie. The Newco was a company worth investing in, he said.

DIVIDENDS

From a BHP Billiton perspective, the demerger of the firm’s assets would not result in a rebasing of the group’s dividend.

“The absolute amount of dividend paid per share will not change as a consequence of the demerger, so in effect we are increasing the dividend payouts,” said Mackenzie. He also said productivity improvements in BHP could be made more quickly with $3.5bn in productivity-led gains targeted by the end of the 2017 financial year.

BHP Billiton had reduced capital and exploration expenditure to a self-imposed ceiling of $15bn for the current financial year which would be dropped to just below $10bn if the demerger is approved.

However, the group may invest “at the same rate to create even more value or invest less and further increase cash returns to shareholders,” it said in a presentation accompanying its full-year figures, also published today.

BHP Billiton posted an attributable profit to shareholders of $13.8bn, a 23% improvement year-on-year, but some 4% softer than the Thompson Reuters StarMine consensus with the petroleum and potash division the main culprit.

“Results are a little softer than we forecast and net debt came in $25.8bn against the target of under $25bn which is disappointing,” said Goldman Sachs. Another disappointment was the company passed on a possible buy-back of shares.

A final dividend of 62 cents per share was declared compared to 59c/share in the previous financial year.

NEXT MOVES

Mackenzie said BHP Billiton hoped to provide an update on its demerger plans in November. “This proposal acknowledges that BHP has two great companies in its portfolio. It would simplify the portfolio in a single step,” he said.

Although a quicker route to portfolio rationalisation than piecemeal asset sales, the demerger proposal still has regulatory hurdles to jump with board approval only due to be sought after Australian and South African government approvals, and tax-related approvals from the Australian Taxation Office as well as listing approvals.

The listing in Johannesburg would be a secondary inward listing whilst BHP Billiton would remain listed in the country.

Said Kerr: “We [BHP Billiton] will retain a substantial number of South African shareholders (about 9% of the total register) and will continue to look at oil and gas in South Africa,” he said.

Through the creation of the Newco, the company would “… establish a basis for more success in those assets,” Kerr said.