The world’s biggest mining company, BHP Billiton, announced plans to spin off businesses worth an estimated $16 billion, most of them acquired in a 2001 merger, to focus on its most profitable activities.
But it held off on a share buyback, disappointing investors who had hoped to receive around $5 billion. BHP’s London-listed shares fell 4.5 per cent yesterday.
Chief executive Andrew Mackenzie said the widely expected move to simplify BHP around the “four pillars” of iron ore, copper, coal and petroleum – with potash as a potential fifth pillar – would spur cashflow growth and boost returns.
These assets generated 96 per cent of the group’s underlying core profit in the 2014 financial year.
“A demerger is a logical next step for other high-quality assets also in our portfolio that don’t have a scale of those in our major business,” Mackenzie said in a call with investors.
The spin-off company, dubbed NewCo for now, will bundle BHP’s aluminium, manganese, Cerro Matoso nickel in Colombia, South African energy coal, some Australian metallurgical coal assets and the Cannington silver, lead and zinc mine.
It will not include Nickel West in Australia, for which a separate sale process was continuing, Mackenzie said.
“It’s probably a better asset mix than we thought it would be beforehand. BHP has added Cerro Matoso, which is a better nickel asset than its Nickel West division, and Illawara Coal,” said David Radclyffe, an analyst with CLSA in Sydney.
BHP confirmed the spin-off as it reported an 8 per cent rise in second-half underlying attributable profit to $5.69 billion due to higher output volume and cost cuts. The figure was just below a consensus analyst forecast of $5.94 billion, according to Thomson Reuters Starmine’s SmartEstimate.
The company said it had cut costs in the 2014 financial year by $2.9 billion and expected to achieve a further $3.5 billion over the next three years.
Some analysts and investors saw the fall in BHP shares yesterday as an over-reaction.
“Some people may be disappointed because nothing was announced on a special dividend or buyback,” said Albert Minassian, an analyst with Investec in London.
“But if you already have big news about a spin-off there is no point announcing the two together. You keep something for the next time. The money is still there,” he said.
BHP had been targeting net debt of around $25 billion before it would consider returning capital to shareholders. But on reaching that goal, it said it would only go ahead when it could return capital in a predictable and sustainable way.