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BHP Billiton moves ahead with asset spin-off

Published:Wednesday | August 20, 2014 | 12:00 AM

By James Wilson and Neil Hume in London

BHP Billiton shares dropped nearly 5 per cent after the global mining house unveiled long-awaited restructuring plans that raised concerns for London-based investors and did not include a share buyback as part of the proposals.

The divestment undoes much of the merger that created the Anglo-Australian resources group in 2001. On Tuesday it listed a suite of aluminium, coal, silver and manganese mines and plants it will split off into a separate company.

The new, as yet unnamed company, will be listed in Australia with a secondary listing in South Africa. Graham Kerr, chief financial officer at BHP, is to be chief executive.

Jac Nasser, BHP chairman, said: "For over a century, BHP Billiton has progressively reshaped its business to maintain its industry leadership. We believe the proposed demerger, if implemented, will accelerate the simplification of the group's portfolio, provide investors with choice and unlock value in both companies."

However, shares in the company dropped 4.7 per cent to pound19.70 in morning trading in London after BHP did not announce a buyback of its shares. This dashed hopes that it would start to return more cash to shareholders after two years of trying to rein in costs and debts that escalated during the commodities supercycle.

"We will return excess cash to shareholders in the most efficient way. By ensuring that we start from a position of strength, we will be well placed to implement an enduring programme that can be managed in a more consistent and predictable manner," BHP said.

Christopher LaFemina, analyst at Jefferies, said that while the 'new BHP' would be an even higher quality version of the current BHP, he was not convinced demerging lower quality assets by itself was a path to value creation.

"Breaking up one company into two potentially creates negative synergies, and we do not buy the argument that these non-core assets have been undervalued within BHP Billiton," he said.

Traders said the share price fall also reflected disquiet with the proposed terms of the demerger.

Under the structure of the deal, owners of BHP's PLC shares will be given stock in the new vehicle, even though it will be listed in Australia and South Africa. This creates a problem because many UK shareholders have investment mandates which do not allow them to own overseas companies. As such, many of them will be forced to dump their shares in the spin-off company.

"We think small Billiton shareholders could get cashed out with the company buying their shares," said one London-based trader.

The plans were announced as BHP reported a 10 per cent rise in underlying annual profits to US$13.4bn. Revenues rose almost 2 per cent to US$67bn.

"Overall earnings were slightly disappointing, particularly compared with the strong performance shown by Rio Tinto and Anglo American, despite the company achieving and exceeding cost-cutting targets," analysts at BMO Research said.

Andrew Mackenzie, BHP chief executive, said the assets that would form the new company "will be more valuable in a purpose-built, independent company than they would be in BHP Billiton".

Simplification is the biggest strategic decision yet under Mr Mackenzie, a Scot who took over as chief executive at BHP early last year as part of a wave of leadership upheaval at the world's largest mining companies.

The spin-off concentrates BHP on four main commodities - iron ore, petroleum, copper and coal - where its margins are higher than for the assets it is separating off, and where BHP generated 96 per cent of its underlying annual earnings. BHP may also make a move into potash, a commodity that Mr Mackenzie favours for its links to long-term population and economic growth.

It reverses a period when BHP and rivals diversified as widely as possible and underscores miners' avowed return to more disciplined and profitable investment. Shareholders have been angry that BHP and other miners did not manage to return more of the fruits of the commodities boom.

Among the assets to be spun off are aluminium and manganese businesses; Cerro Matoso Nickel in Colombia; coal businesses in South Africa and Australia; and Cannington, a large silver and lead mine.

BHP did not include Nickel West in Australia, suggesting it hopes to sell the business separately.

(c) 2014 The Financial Times Limited