In front of the wave

[] – BRIAN Gilbertson, the architect of several diversified resources companies, including BHP Billiton, is watching developments around a possible partial unbundling of the Melbourne-headquartered firm closely, but dispassionately.

“Life changes as time goes by, and time has gone by,’ said the mining veteran who is actively managing a small, but diversified portfolio of assets in Pallinghurst Resources, a Johannesburg-listed company he chairs.

“In the time that’s gone by, I guess the assets we put in are no longer seen as core in a world where the big miners are being told to focus on delivering cash to investors,’ he said. “In today’s environment, they might make different decisions to the ones we made back then.’

He regards the formation of BHP Billiton through the merger of South Africa’s London-listed Billiton with Australia’s BHP as one of his best professional achievements.

Gilbertson was the executive chairman of Gencor for five years to 1997 and then chaired Billiton until 2001. He was CEO of BHP Billiton up to 2003 when he suddenly resigned after just six months. The official statement spoke of irreconcilable differences with the board.

In 1994, mining house Gencor bought the loss-making mining and metals division of Billiton for $1.2bn. It had been owned by Royal Dutch Shell since 1970. Gilberton then split out the aluminium, coal and base metal assets from Gencor in 1997 which he combined with the assets in Billiton and listed the entity in London.

It was the first time South African assets had been moved in such a way to London attracting comments that Gilbertson had emigrated the mines.

After a few years learning how the capital markets worked in London, Gilbertson and his team set their sights on Australia’s Broken Hill Proprietary Company, or BHP for short. A merger was duly consummated in 2002. “They were asset rich. but project poor, while we in Billiton were project rich but asset poor,’ Gilbertson said.

Billiton had a project pipeline of about $3bn at the time of its split from Gencor, and had two-thirds of its assets in South Africa. Once the merger went through, the enlarged company announced 12 new projects worth $2.9bn.

“Once we had put it together it gave BHP an international presence with projects they could build on and a team of “we-can-do-it’ guys because Billiton people joined their team,’ he said.

“For a while, we traded behind Rio Tinto which was regarded at the time as the industry leader,’ said Gilbertson. “We delivered on the diversification, which meant we could forecast with great confidence the cash flow. We could guarantee investors so much every quarter in cash. As the market saw us do that, we surpassed Rio and became the industry leader.’

Today, however, the aluminium assets that formed the basis of the early BHP Billiton have turned into a hornet’s nest for the group’s newly appointed CEO, Andrew Mackenzie.

A key competitive advantage of the group’s Hillside aluminium smelter was an in-built margin buffer in which the cost of power supplied by Eskom changed in proportion with the price of aluminium on the London Metals Exchange. At the time no-one worried about this because South Africa had an electricity supply surplus.

It’s no good whistling against a hurricane. If it’s what the shareholders want, it’s the only thing that’s going to fly

South Africa’s economic growth and the ageing nature of Eskom’s fleet, however, has resulted in a chronic power supply deficit. Electricity costs have increased heavily – 16% a year from 2009 to 2013 and 8% a year from 2014 to 2018 – so that the discounts to market BHP Billiton’s aluminium smelters pay is a source of irritation for some, outright fury for others. BHP Billiton also won’t disclose the exact nature of the contract with Eskom which has stoked the controversy further.

As a result, it’s now become clear that Mackenzie’s BHP Billiton wants to be rid of the aluminium assets, a decision that finds favour anyway as the group simplifies its asset base.

While the National Energy Regulator of South Africa pours over the contracts – with threat of outright cancellation becoming more possible – BHP has turned its attention to a structure focusing on the free cash flow from its assets in iron ore, copper, coal and petroleum, with potash being the potential fifth pillar of its business.

“If you can say you got rid of that argument with Eskom and you’re not exposed to the vagaries of South Africa; and if you can say you’re focused on the five legs of the business, then investors say: “Good boy’, and the company’s value goes up,’ Gilbertson said.

Gilbertson declined to say what he’d do if he was heading BHP at this stage. Given his track-record, however, he’d probably be bold by unbundling the weak assets speedily.

This would provide shareholders with the option of bulking up in those investments or selling them. “It’s no good whistling against a hurricane. If it’s what the shareholders want, it’s the only thing that’s going to fly,’ he said.

BHP’s focus on five pillars in its business means assets like those in aluminium, nickel and bauxite could be spun out, creating a separate $20bn company for shareholders.

Investment banker Goldman Sachs is said to be working with BHP to consider a variety of strategies around non-core assets. Interestingly, the assets for sale are those brought into the company by Billiton. The assets spun out of BHP could be listed in London, Sydney and Johannesburg if they’re not sold piecemeal.

Mick Davis, a former financial director at Gencor who joined Gilbertson at Billiton, has started a resource investment fund – X2 Resources – since his departure from Xstrata establishing a war chest of about $3.5bn in private money. The Australian press is reporting Davis has approached BHP Billiton to buy its thermal coal assets, and possibly its nickel and manganese assets, which would give X2 Resources exposure to South Africa, the country of Davis’s birth.

It could be a case of history repeating itself, with Davis listing Xstrata in London in 2002 on coal assets in South Africa and Australia that were bought from Glencore. If he is successful in buying BHP’s coal assets, he will be very much starting from a similar base. The investors backing Davis are clearly hoping lightning will strike a second time.


Gilbertson had no such empire-building notions in establishing Pallinghurst, a company with investments in steel-feed minerals, platinum,, gemstones and the downstream gemstone jewellery market in the shape of Faberge.

This mix of assets in Pallinghurst constitute a diverse range of investments, but they have yet to set the firm’s share price alight.

Asked if his backers were expecting him to replicate his successes at Gencor, Billiton and BHP Billiton, Gilbertson said: “They might have been, but if they were, they dreamt it up. We were quite clear on what we’d do: we said we’d find a small number of opportunities where we could add value, and I think we have.’

Arne Frandsen, CEO of Pallinghurst Resources, said that unlike other private investment, Pallinghurst has actual mining assets. It also had a very firm “hand on the tiller’ to steer it in the direction management sees fit.

“A lot of people have raised money, but just tell me where their assets are. It’s taken us seven years and we were in front of that wave,’ Frandsen said. “We have a small group of investments which we try to give as much attention as we can.’

Pallinghurst has built a manganese mine from scratch, and turned around an ailing, start-up platinum company which is due to roll out a new, patented smelting technology and list on the Johannesburg Stock Exchange, and possibly a second bourse when market conditions are right, said Gilbertson.

Faberge has been folded into Gemfields, the third leg in Pallinghurst’s portfolio, and one which has been pushing hard to change the structure of the largely unstructured emerald market, mimicking De Beers.

“We have brought order. We have created a system of auctions which is absolutely trusted and accepted as establishing prices transparently,’ said Gilbertson. “The prices have been rising auction after auction as the market accepted there is a responsible pricing system,’ he said, adding there had been a tenfold increase in emerald prices since the first auction three years ago.

Gemfields now accounts for between 20% and 25% of the global emerald market. “It’s been a huge change. The auctions are watched by the other big producers of emeralds, mostly in Colombia’ he said.

We said we’d find a small number of opportunities where we could add value, and I think we have

Pallinghurst has worked hard at making its assets produce at the lowest possible cost, deploying the latest technology, securing close government relationships and, in the case of South Africa, solid black economic empowerment partners, an area that has been problematic for others, said Frandsen.

The gap between the Pallinghurst share price and its net asset value is “substantial’, Gilbertson. “We didn’t think the gap would be as big as it was as we went along,’ he said. “But we are seeing as the mines come right the market is starting to realise something is coming here. The gap has closed a bit and our shares have out-performed the market.’

The manganese mine produced a million tonnes of saleable ore last year and has plans to double output. The platinum assets produced 150,000 ounces of platinum group metals, and Gemfields has been turned around. “We are getting into the harvesting stage, but I’m not saying we’re going to sell,’ Frandsen said.

“We want to place in the hands of our investors the full value of the assets we have created,’ Gilbertson said. “Gencor traded at a discount to its underlying asset value and we were losing between 25% and 30% in that type of structure.’

When the platinum is listed – most likely as Sedibelo Platinum Mines – value will be unlocked. Pallinghurst’s 80%-owned Jupiter company, owner of the Tshipi manganese mine in South Africa and undeveloped iron ore prospects in Australia, could either be re-listed or merged with assets unbundled from BHP Billiton, or unbundled in other ways in order to create value.

Pallinghurst is also studying two other investment opportunities which are “far more creative’ than the option of buying assets spun out by the majors such as Rio Tinto or BHP Billiton, Gilbertson said.

BHP is not the only diversified miner coming under pressure from shareholders. For reasons related to South African political risk, Anglo American is also under pressure.

South Africa has come to be regarded as a risky mining investment destination, a view that has been given increased currency ever since the notion of nationalisation was popularised by former ANC Youth League president, Julius Malema. Uncertainty related to mining laws and a changing fiscal regime add to the complexity of investing in the country.

More recently, the South African labour environment has become unsettled with the emergence of the Association of Mineworkers and Construction Union (AMCU) which has displaced the National Union of Mineworkers.

Allan Seccombe is the senior mining writer for Business Day. He was commissioned by Miningmx to write this article for The Mining Yearbook, distributed with the Financial Mail.