The Big Australian should strike a deal with Rio Tinto – by Terry McCrann (Melbourne Herald Sun – August 27, 2013)

ALUMINIUM was the ghost at the BHP Billiton profit feast last week.

Although the aluminium, manganese and nickel division generated more than $9 billion of revenue, it contributed just $164 million of EBIT (earnings before interest and tax).

Compare and contrast that with the jewel in the BHPB crown – iron ore, which on a little more than double that revenue, at $20 billion, contributed more than 67 times as much EBIT, or $11.1 billion.

Incidentally, I never – and I’m equally certain, neither would most other commentators – have ever thought, in the good old days pre-China, that we’d end up describing lumpy, plentiful, iron ore as the ‘jewel” in anyone’s crown.

That it is, certainly in the corporate crowns of BHPB and Rio Tinto. It’s also made multi-billionaires of Gina Rinehart and Andrew Forrest. In contrast, aluminium ain’t going to make a billionaire of anyone. Thanks to China continuing to smelt uneconomically, aluminium has a knack of turning billionaires, corporate or otherwise, into mere millionaires.

BHPB has to be looking very seriously at selling out of the metal. It’s just too troublesome. And when, rather than if that happens, its interests in nickel and manganese would also come into play.

BHPB’s manganese is a pretty good business. But in the growth dynamics of BHPB it would arguably be too small and disconnected on its own.

Now the question about aluminium, is not so much a decision to sell. If it’s not yet been formally taken, it will.

Underperforming aluminium was already an oddity in the BHPB of the last CEO, the aggressive expansionist Marius Kloppers.

But it stands out like the proverbial – or, not so proverbial – sore thumb, in the BHPB of new CEO Andrew Mackenzie, with his ruthless focus on productivity and assets having to generate acceptable rates of return.

Simply put, there’s no prospect of aluminium – perhaps the last real vestige of ‘social metal’ in the 21st century – earning even an UNacceptable rate of return, any time soon.

If BHPB is – quietly – looking to sell, and it must be, although the company would make no comment on it, one option it would have to be, or at least, should be, contemplating, is doing a creative deal with its arch-rival Rio Tinto.

Rio has a much bigger, even more disastrous investment in aluminium. It spent more than $40 billion buying Alcan and has written off more than $30 billion of that.

It wants – publicly, even more desperately than BHPB – to get out of aluminium. Or, less rationally, at least out of some parts of its aluminium business.

But it has failed to find a buyer at a reasonable price, or perhaps even at almost any price.

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