BHP Billiton (BHP) has all but confirmed it is looking at slimming down and spinning off weak or non-essential assets in alumina, aluminium, manganese, thermal coal, bauxite and nickel with a value of up to $A20 billion.
The company was yesterday forced to issue a statement on the idea after media reports revealed the plans which are said to be called "Project River".
BHP however said the idea of slimming down its asset holdings had been underway for a couple of years.
What BHP didn’t say, but what the story looks like – is that the company wants to get rid of the remaining assets acquired in the Billiton takeover more than a decade ago, and some weak assets owned for years by BHP.
"As we have said previously, the simplification of our portfolio is a priority and is something we have pursued for several years," BHP said yesterday.
"In the last two years alone, the Group has announced or completed divestments in Australia, the United States, Canada, South Africa and the United Kingdom, including petroleum, copper, coal, mineral sands, uranium and diamonds assets," BHP said in a short statement.
"We believe that a portfolio focused on our major iron ore, copper, coal and petroleum assets would retain the benefits of diversification, generate stronger growth in free cash flow and a superior return on investment.
"By increasing our focus on these four pillars, with potash as a potential fifth, we will be able to more quickly improve the productivity and performance of our largest businesses.
"We continue to actively study the next phase of simplification, including structural options, but will only pursue options that maximise value for BHP Billiton shareholders.
"Any course of action remains subject to detailed review and an assessment of alternatives," the company concluded.
BHP has already sold off assets worth $US6.5 billion in the past year.
Some analysts reckon the $20 billion figure in the media reports was too high given the minerals named. Some said the real figure would be around $10 billion. A $20 billion figure would be achieved by including thermal coal assets in Australia.
The news pushed BHP shares up in afternoon trading to a day’s high of $37.29 before easing in late trading to end at $37.05, a gain of $1.6%. The shares rose 2.5% in London trading.
The rise yesterday went some way to offsetting the 2.7% slide in the company’s share price in the March quarter.
BHP has been urged to follow this course by some of its big global investor shareholders.
They have had success in urging the company to cut costs, which it has done in the past year to 18 months.
Any move to bundle up and spin off the underperforming assets will need to take heed of the attempt by Rio Tinto to do just that with much of the aluminium, alumina and bauxite business in Australasia and several other countries.
Rio started that process nearly three years ago, but was forced to abandon it because no one wanted the assets.
Rio tried a spin off, then trade sales, but couldn’t find buyers at prices that would be economic.
Major shareholders are understood to have indicated their reluctance to take the assets in an in speccie spin off.
That problem will confront BHP because the assets it is said to be looking to get rid off are not high performers – with the small exception of nickel which has burst back into life this year with a 14% gain in world prices in the first quarter.
Thermal coal in South Africa and several other countries are also seen to be marginal assets, given the gloomy outlook for coal. It is not clear if they are included.
The Cannington zinc and silver mine in northwestern Queensland was another asset mentioned, but it is coming to the end of its working life and is not a major attraction for buyers either.
BHP CEO Andrew Mackenzie has also promised an update on the future of BHP’s massive Olympic Dam uranium, copper and gold mine in South Australia in the fourth quarter of this year.
Former Xstrata boss Mick Davis (he was pushed out after the Glencore takeover last year) has just raised close to $US4 billion for a new mining company and could be interested in some of the BHP assets – but it will be a question of price.
Unlike many other miners currently selling off assets, BHP is not a forced seller and has the strength to retain assets rather than sell them too cheaply.
And, remember, this is not such a big deal.
Yes, the $A20 billion figure in the media reports is a large number. But BHP is valued at $A189 billion ($A119 billion in Australia). The $20 billion figure is around 11% of that value.
