BHP Needs Rebound, Not Spinoffs, Amid Metal Slump: Real M&A – by Angus Whitley and Elisabeth Behrmann (Bloomberg News – April 17, 2014)

A spinoff of BHP Billiton Ltd.’s (BHP) least-loved assets may do little for shareholders of the world’s largest mining company.  BHP, which is wringing out costs after a decade-long mining boom ended, said this month it’s studying “structural options” to help narrow its focus to four commodities including iron ore. With mines aging and new oil and gas fields becoming harder to find, BHP’s return on invested capital has sunk to the lowest since 2003, according to data compiled by Bloomberg.

Separating the nickel, manganese and aluminum assets from BHP probably wouldn’t boost profit at either the new or old entity, said Sanford C. Bernstein Ltd. Profit margins for the unfavored business have evaporated at the bottom of the commodity cycle and CLSA Asia-Pacific Markets said a spun-off company may be valued at $7.5 billion, just 4 percent of Melbourne-based BHP’s market value.

“There’s a long history of the larger companies succumbing to the cyclical pressures,” John Robertson, director at EIM Capital Managers Pty in Melbourne, said by phone. “If you’re going to float off a large chunk of assets that currently have a low return on capital, unless somebody’s got a magic wand, it’s really not going to do much.”

In 2011, as China devoured everything from iron ore to copper to feed economic expansion, BHP’s return on invested capital was 35 percent, Bloomberg data show. The figure slumped to 10 percent two years later because of slower Chinese growth and costs that were still aligned with a resources boom.

Four Assets

BHP Chief Executive Officer Andrew Mackenzie has said he wants to run a smaller collection of assets with long lifespans. He has picked iron ore, copper, coal and petroleum projects that stretch from Australia to the Americas and generated about 85 percent of BHP’s sales last year. Focusing on those commodities will boost returns and free cash flow growth, BHP said in an April 1 statement.

That same day, the Australian Financial Review reported that BHP and Goldman Sachs Group Inc. bankers were working on options that included a spinoff.

“The negative is that they mistime the cycle and they sell these things at a really low price and things change quickly,” Peter Esho, chief market analyst at Invast Securities Co. in Sydney, said by phone. “I’d rather they just do nothing than try to do too much.”

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