BHP Billiton’s SA-focused spin-off raises skirt, promises big dividends

A man walks out of the head offices of BHP Billiton in central Melbourne. REUTERS/Mick Tsikas
A man walks out of the head offices of BHP Billiton in central Melbourne. REUTERS/Mick Tsikas

The sheer size of the “The Big Australian” BHP Billiton is quickly apparent as details emerge about its spin-off, South32. The new offshoot, which will be listed on the JSE as well as Australia and the UK, is to house all of BHP’s existing South African assets and a smattering of what has now been deemed “non core” interests from elsewhere. Cynics interpret the move, which will cost BHP over R7.5bn in one-off charges, as a vote of no confidence in SA’s future by the world’s biggest mining group. Those taking a more positive stance see it as an opportunity for both companies – South32 will house around a third of BHP’s existing assets – to become more productive through tighter focus. – AH 

By Brett Foley

(Bloomberg) — The mining company that BHP Billiton Ltd. plans to spin off will pay 40 percent of its underlying earnings as dividends and will cost the world’s biggest miner $738 million in one-time charges.

South32 Ltd., which will house about a third of BHP’s current operations including coal mining in South Africa and silver in Australia, had pro forma net debt of $674 million at the end of 2014, Melbourne-based BHP said in a statement.

“The debt level is less than most people expected,” said Tim Schroeders, a portfolio manager at Pengana Capital Ltd. who helps oversee about $1 billion in equities including BHP shares. “It will also help South32 management in terms of their ability to grow the business.”

Separating BHP’s assets will allow both companies to better chase additional productivity savings as the world’s largest miners seek to bolster margins with cost cutting as commodity prices slump, BHP Chief Executive Officer Andrew Mackenzie said today. BHP and Rio Tinto Group, the second-biggest miner, are reducing capital expenditure to the lowest level since 2010 as iron ore, their biggest earner, trades near six-year lows.

With 12 assets or joint ventures in five countries and producing seven commodities, South32 will include Australia’s Cannington mine, the world’s largest silver and lead operation. It will also be the dominant global manganese ore player, the seventh-biggest alumina producer and the No. 9 nickel company, according to Macquarie Group Ltd. estimates.

Cash Returns

“We are building a new company from the ground up. We will have competitive assets, significant reserve lives and financial strength,” Chief Executive Officer-elect Graham Kerr said in the statement. “We will manage our business with a view to generating strong cash returns.”

The new company will be based in Perth and have about 24,000 employees and contractors, about 9,000 of whom will be in South Africa, BHP said. That compares with BHP’s current total of about 128,000.

BHP shareholders, who will receive one South32 share for each BHP stock, will vote on the proposed demerger on May 6. If approved, the company will start trading on May 18. BHP gained 1.4 percent to A$29.80 at 10:05 a.m. in Sydney.

South32 had gross assets of $26.7 billion at the end of December and contributed net profit after tax of $738 million in the six months ending Dec. 31, the company said today. It will assume about $1.54 billion of BHP’s closure and rehabilitation provisions and BHP will save about $100 million a year in costs, 90 percent of which will be achieved by the end of the 2017 financial year.

Limited Growth

With limited options for growth among current assets and an average mine life of about 13 years, the new company will need to consider acquisitions, according to Sydney-based Deutsche Bank AG analyst Paul Young.

“It has to be a different strategy to BHP because it is a different investment proposition,” Pengana’s Schroeder said by phone. “Part of that strategy will eventually be growing the business through acquisitions. Having relatively low debt and a reasonable payout ratio of 40 percent will help with that.”

With the prices of most of its materials poised to rise and companies including Glencore Plc and X2 Resources Ltd. seeking mining acquisitions, the new company may also become a target, according to Sanford C. Bernstein & Co. and Aviate Global LLP.

Once approved, South32 shares will trade in Australia, South Africa and the U.K.

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