BHP meets Eskom amid $20bn demerger chatter

[] – BHP Billiton has resumed negotiations with Eskom on its
aluminium smelter contracts in Richards Bay only days before the National Energy
Regulator (Nersa) was to start a hearing process that could result in a cancellation of the

This step was taken amid reports from Australia that BHP Billiton, the world’s largest
mining company, wants to get rid of all its interests in South Africa. This includes the
aluminium smelters, its coal mines, and its manganese mines in the Northern Cape.

It wishes to unbundle them as part of $20bn of assets and possibly list as a separate
company in London, Melbourne and Johannesburg.

BHP Billiton wants to retain only its most profitable assets, iron ore and metallurgical
coal in Australia, copper in South America and petroleum interests in North America. It
became known in Australia this weekend that it had negotiated important tax
concessions for the unbundling from that country’s treasury.

Thembani Bukula, board member in charge of electricity at Nersa in Pretoria, told
Afrikaans medium newspaper, Sake [Business], in Pretoria on April 4 that Nersa had just
requested the suspension of the inquiry into the controversial aluminium contracts.

These contracts give 7% of the country’s power to the aluminium smelters, but the price
at which it is bought covers less than half of Eskom’s generation costs. The public is
therefore subsidising the smelters.

The investigation was delayed over the past year because of numerous objections by
BHP Billiton against the publication of a discussion document dealing with this matter.

However, Nersa’s board formally decided early this year that the discussion document
must be published at the end of March at the latest. “They have just asked us to
suspend the process again because they have resumed negotiations with Eskom on the
contracts,” Bukula told Sake.

Eskom has been trying hard since 2009 to renegotiate the contracts with BHP Billiton,
but the Australian group would make no concessions. Eskom finally applied to Nersa in
2012 for a review of the contracts on the grounds that the pricing formula is unfair to
other power consumers.

BHP Billiton has been considering restructuring and disinvesting from its South African
interests for more than two years. The aluminium smelters recorded a loss in the second
half of 2012 at an average aluminium price of $2,340 per ton, but since then BHP
Billiton is no longer reporting the results of the aluminium division separately.

However, the aluminium price is in a long-term bear phase. The London price was less
than $1,800 per ton for the majority of this year and has even reached a low of $1,680.

Fund managers and analysts are fairly satisfied with the plan of unbundling the less
profitable assets. “This has been talked about for a very long time, but nothing has
actually happened,” the manager of a large fund, who wishes to remain anonymous,
told Sake.

It will be difficult to sell the smelters on their own. Therefore the plan is to unbundle
them together with the South African coal and manganese mines. The management can
give more attention to the loss-earning assets in such a company.

There will, however, have to be assets in the new company that generate money, Barend
Ritter, portfolio manager of resource portfolios at Sanlam Asset Management, said.