BHP Billiton a step closer to selling-off non-core operations

Speculation has been flooding the news since last year, but last April CEO Andrew Mackenzie addressed them directly by acknowledging he was studying the next phase of its “simplification” strategy, which included structural options.

“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,” he said at the time.

Since his appointment as BHP leader last year, Mackenzie has stressed that he would manage the company’s portfolio of businesses to boost shareholder returns. It has also emphasized its focus will be on a handful of big assets in relatively safe parts of the world.

Since the BHP – Billiton tie up in 2001 the contribution that most Billiton assets brought to the group earnings has sunk from almost 30% at the time of the fusion to about 10% today.

In May, the company announced a major shake-up of non-core operations beginning with its Western Australian Nickel West business. The news came on the heels of the creation of a new aluminum division, BHP Billiton Aluminum Pty Ltd., which may include other non-core assets such as nickel and bauxite in an $18 billion company.

Mackenzie even said last month that the case for further simplification of the business was “compelling”.

BHP wants to focus on its Australian coal operations as one of its five main pillars. “We probably need more coal, not less,” Mackenzie said recently. (Image courtesy of BHP Billiton).

“Merging with Billiton has not been a bad deal. It just happens that some of the assets they bought are now those that they do not view as having potential for the next two to three decades,” RBC Capital Markets analyst Tim Huff, was quoted by FT.com as saying.

Under BHP’s merged structure, some assets —thought to be those being primed for demerger— are still held by Billiton in London, while a handful are held by BHP in Australia.

If Australian-owned assets were excluded from the demerger, that would leave BHP’s aluminum, manganese, nickel assets in Colombia and South African coal assets as those possibly bound for a new entity.

The world’s No.1 mining company has a history of spinning off non-core assets. In 2002, it demerged its steel business, which subsequently became BlueScope Steel.

As part of the circulating rumours, it is said that Mick Davis’ new company would be quite keen on bidding for any assets that Mackenzie may want to offload, especially after the former Xstrata boss announced in March that he had $3.75 billion to invest in buying reasonably priced projects.

BHP shareholders would have to approve any plan to demerge and spin off its non-core assets in a single unit.

Cover image by hxdbzxy