BHP BILLITON's manganese operations in South Africa, thought to be on the block. Photo: BHP Billiton

BHP BILLITON's manganese operations in South Africa, thought to be on the block. Photo: BHP Billiton

BHP Billiton's $20bn Bluff Aimed at Dealflow Deadlock

Issue 80, April 2014

BHP Billiton tacitly endorsed news reports in Australia this week that it is planning a mammoth $20bn demerger that would hive the group into two.

The report said top level executives at BHP, including former Goldman Sachs banker Paul Perry, were working on a scheme called “Project River” that would spin the group’s aluminium, nickel and bauxite businesses off to investors, shored up by manganese and thermal coal assets.

“The simplification of our portfolio is a priority,” BHP said in response to the news. “We believe that a portfolio focused on our major iron ore, copper, coal and petroleum assets would retain the benefits of diversification.” Potash, it said, could become a fifth “pillar”.

“BHP has a heap of non-core assets that should be divested,” said analysts at Commonwealth Bank. “A demerger is a fast way of doing that.”

Others viewed the news as a bluff, aimed at flushing out buyers for mines in its aluminium, manganese and nickel division, seen as a warehouse for unwanted assets. “It’s a good bartering tool,” portfolio manager Tim Schroeders told Reuters. “You can say, ‘Yes, we’d like to get them off our books, but we do have this alternative.’”

A demerger would succinctly shunt assets off the company’s books, including environmental liabilities associated with its smelting operations, but would not realise cash or significantly impact net debt. According to Deutsche Bank, BHP has the potential to realise $25bn in non-core disposals, which would pay down debt entirely.

Private equity groups are believed to be queueing-up to accumulate mine portfolios. Ex-Xstrata boss Mick Davis this week said that his private vehicle, X2 Resources, has raised up to $3.75bn for mining acquisitions, thought to be aimed at copper, nickel, zinc and coal.

Davis was finance director at South Africa’s Billiton, before its merger with Australia’s BHP in 2001. A possible demerger has drawn attention to the original deal, suggesting Billiton bosses got the better of their Australian counterparts. Billiton shareholders received 44 per cent of the new group, but Billiton assets now contribute only 6 per cent of earnings and are overwhelmingly non-core.

The deal was spearheaded by Billiton’s Brian Gilbertson, now lead backer at gemstone champion, Gemfields.

“The simplification of our portfolio is a priority.”
“It’s a good bartering tool.”

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