BHP Plans Biggest Mining Spinoff as Commodity Boom Ends

BHP Billiton Ltd. announced what’s poised to be the biggest spinoff in the mining industry, separating aluminum, coal and silver assets to create a company valued at about $15 billion after it begins trading next year.

The new unit will operate in five countries from Australia to South Africa, the Melbourne-based producer said today in a statement, while announcing a 10 percent jump in full-year profit to $13.4 billion.

BHP’s London-listed shares fell the most in almost three years. A decision to skip a widely anticipated share purchase will disappoint investors, who had expected a $3 billion buyback, Citigroup Inc. said.

Miners are trimming portfolios as commodity prices retreat and after poorly timed acquisitions in a decade-long $616 billion investment spree led to asset writedowns and management clear-outs. The biggest mining investors including BlackRock Inc. have campaigned for greater returns to shareholders after management frittered away cash on failed acquisitions and expansions that flooded metals markets.

“The miscalculation was that there had clearly been a very significant expectation in the market for a buyback,” Paul Gait, a London-based analyst at Sanford C. Bernstein Ltd., said by phone. “In the absence of that and just getting ‘Spinco’ you can see why people are disappointed.”

BHP fell 4.9 percent to close at 1,965 pence in London trading, the biggest fall since October 2011. The declined wiped 5.9 billion pounds ($9.8 billion) of its market value to 113 billion pounds. The stock rose 1.4 percent in Australia before the announcement.

New Chief

The as yet unnamed company will be based in Perth and be headed by current Chief Financial Officer Graham Kerr. It will hold the world’s largest producer of silver in the Cannington silver and lead mine in Australia, the Cerro Matoso nickel operation in Colombia, the Illawarra metallurgical coal business and aluminum assets in Australia, South Africa, Mozambique and Brazil.

“It’s not a given that it’s going to be ultimately attractive to investors when it lists,” Tim Schroeders, a portfolio manager at Pengana Capital Ltd., who helps manage $1 billion in equities, including BHP, said today by phone after the announcement. “There are some assets that are attractive within that mix, and some that we are less keen on.”

BHP will prioritize iron ore, copper, coal and petroleum assets that stretch from Australia to the Americas, and has identified the soil nutrient potash as a potential fifth unit.

Change Required

“While our current structure has worked well we are now at a point where the status quo no longer positions us to best maximize value,” CEO Andrew Mackenzie told analysts. “Change is required.”

The new company may be worth about $15 billion when listed and be mining’s biggest spinoff in at least a decade, according to CLSA Asia-Pacific Markets. That’s more than the 2006 listing of Polyus Gold OJSC in a $14.4 billion transaction by MMC Norilsk Nickel OJSC, according to data compiled by Bloomberg.

It will be listed in Australia and also trade in South Africa, where it will have a regional head office in Johannesburg, BHP said in the statement, adding that it plans to issue shares in the company to its U.K. and Australian stockholders next year.

“While the announced de-merger is a catalyst for BHP, we are not convinced that this plan creates long-term value for shareholders,” Chris LaFemina, an analyst at Jefferies LLC, wrote today in a note to clients. He now prefers stock in BHP’s biggest rival Rio Tinto Group, he said.

Nickel Unit

BHP is continuing a process to sell its Australian nickel unit, which isn’t included in the new company, Mackenzie told reporters on a conference call. Mergers and acquisitions won’t be studied for a “considerable period,” he said today.

Assets being divested into the new company are currently cash flow positive with an underlying earnings before interest, tax, depreciation and amortization margin of 21 percent in the year to June 30, the producer said in the statement.

BHP’s underlying profit rose to $13.4 billion in the 12 months to June 30, from $12.2 billion a year ago, the company said. That missed a $13.6 billion median forecast of 19 analyst estimates compiled by Bloomberg.

The remaining core company will target cost cutting and other productivity gains of at least an additional $3.5 billion by the end of June 2017, BHP said.

The new company will have about 24,000 employees and contractors. That compares with BHP’s current total of about 128,000.

David Crawford, a BHP director since 1994, will lead the demerged entity’s board and step down from BHP in November.

Returns Slumped

In 2011, as China devoured everything from iron ore to copper to feed economic expansion, BHP’s return on invested capital was 35 percent, according to data compiled by Bloomberg. The figure slumped to 13 percent two years later as Chinese growth slowed, the data show.

BHP’s aluminum, manganese and nickel unit accounted for about 12.5 percent of revenue in the 12 months ended June 30, according to today’s statement. That’s down from about 30 percent in the year through June 2007, according to filings. Revenue from iron ore has risen from about 12 percent to 31 percent over the same period.

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