BHP’s SpinCo: Divorce after 13 years is Vote of No Confidence in SA

Today's big news from the world's largest resources firm, Melbourne-headquartered BHP Billiton, had had a mixed reception. BHP is to create an independent business by spinning off its South African assets together with silver and nickel operations from Columbia and Australia. It looks very much like a de-merger of the deal struck between Australia's BHP and South Africa's Billiton in June 2001. The new creation, dubbed SpinCo by the group, is well named . BHP's spin doctors have dressed it up as an unbundling of non-core operations (aluminium, manganese, nickel, silver ) which would sit easier if there wasn't a split between the coal assets – the South African coal business going in to the new creation, others staying in the "new" BHP.  The immediate reaction from investors was to drop BHP's share price 3%. For the rational, this looks very much like the Big Australian has passed a vote of no confidence in South Africa. Even down to retaining the SpinCo head office in Perth, Western Australia, a strange decision considering 15 000 of the new company's 24 000 staff are based in SA. Our go-to man on mining, Cadiz's Peter Major, considers whether there is any upside. Including whether this might be another Sibanye. We've also carried comment by Shaun Murison of IG below the transcript.  – AH

ALEC HOGG: BHP Billiton announced this morning that it's going to create a new mining and metals company by spinning off some of its assets.  Peter Major, Mining Analyst at Cadiz Corporate Solutions is with us on the line for his take on the demerger.  Pete, you were around when BHP and Billiton got together in the first place.  At that point in time, this is the last possible thing one would have thought would happen, but it has.  There's a demerger and it's almost as if the old Billiton (not all of those assets) is going to be recreated.

PETER MAJOR:  Yes, that's right and Alec, I don't think we can say nobody ever anticipated this years ago, when BHP and Billiton got together.  I think many people said 'hey, this has to be the endgame.  We're getting together now'.  It's kind of like when Anglo American went to London and when De Beers delisted.  They say 'no, there's going to be all kinds of reporting.  South Africa's still our true home and base.  This is just being done for practical reasons', but look how quickly we all lost touch with De Beers once they delisted, and look how quickly Anglo continued to diversify out of the country.  I don't think we were too surprised that South Africa became distant when BHP and Billiton merged, and we were always wondering how long the South African assets were going to be in there and in which form, so this isn't unanticipated, but I think it's good news.

ALEC HOGG:  That's interesting.  Well, we did have a couple of South Africans, at least, running the old BHP Billiton.  Now, it's very much the Aussies are running the South African unit if you like.  Why do you see it as good news?

PETER MAJOR:  I see it as good news from the top down.  This allows people to have a position – an investment – in South African assets and if that position doesn't do well, it's very visible why it's not doing well and it means it's visible to the government, to the unions, and to international people.  We know this government, rightfully so, still cares about international opinion, which is good.  If all countries cared about international opinion, we'd have less wars and less nonsense.  Now, they're going to have an asset that has quite a few South African assets in it, and we'll see if it outperforms South Africa, who'll get the kudos for it.  If it underperforms and trades at a bad rating, well that's a louder message to South Africa that the world isn't happy with how you're running things.

GUGULETHU MFUPHI:  Peter, isn't that part of the problem; that we're waiting to see how this new asset performs before we actually take significant action?  Shouldn't the State be putting in preventative measures to ensure that this asset will perform well?

PETER MAJOR:  Well, of course, but everybody will agree with that, Gugu.  However, is it going to change how people do things here?  We should be aiming to be Number One.  We should think like Germany or Korea.  We want to be Number One.  We don't care if there are 200 countries in the world, we want to be number one and everything we do is going to point towards us getting to Number One.  That should be our attitude.  That should always be our attitude.

ALEC HOGG: But maybe the investment in the new SpinCo – although it's only ten percent of BHP Billiton – is going to be Number One because given the current sentiment, it's likely to come on the market at a discount and I suppose you'd be licking your lips at that.

PETER MAJOR:  Hey Alec, I can tell you've been around the block a few times.  This could be a Sibanye redux, version two.  Remember when Sibanye came on the market.  Remember how people were saying Goldfields is dumping its worn-out old assets and I think you and I were pretty much on the same line.  We said no, this has a good management.  It's a great asset that hasn't been managed properly, and now it's going to be managed for the benefit of those assets alone, and not for a bunch of overseas assets.  Look how it turned out and I see no reason why this can't be similar.

ALEC HOGG:  I buy that, but that was Neal Froneman.  He's a dyed-in-the-wool miner and knows how to turn things around.  We have the CFO…we have an accountant from BHP Billiton who's taking over as the Chief Executive here, so it doesn't instil me with quite the same confidence that Froneman did.

PETER MAJOR:  Well, a lot of media attention is going to set that guy straight real quick because if he doesn't deliver, I know you're going to have him under the gun, all the other media is going to have him under gun, and he'll be replaced by somebody who can deliver.

ALEC HOGG:  But tell us about the head office being in Perth, rather than being in Johannesburg.  As we said earlier, it's a largely South African business (Spinco), and yet Perth is where they're going to headquarter, and not Johannesburg.

PETER MAJOR:  I know that.  I don't like that one bit.  I wish the primary listing was in the JSE or you had a dual listing as Billiton has in London and Australia.  That would have shown more respect for the South Africans and it would have bought much more goodwill.  Maybe they don't care about goodwill now.  They should.  A large component is South African, and by saying 'hey, our primary listing is going to be split between Perth and Johannesburg', I think that would have scored a lot of kudos and a lot of goodwill, and it would have shown that they respect these assets, and they want them to grow and do well.

ALEC HOGG:  I love that – respect.  Peter Major, Mining Analyst at Cadiz Corporate Solutions.  Well, if they don't respect us, I suppose it's going to give us a better opportunity to buy their assets cheap.

Comment by Shaun Murison of IG: