Mackenzie forges BHP Billiton’s path with touch from the past – by James Wilson (Financial Times – June 10, 2014)

For BHP Billiton, less is more. Diamonds from the edge of the Arctic, copper from Arizona’s desert and titanium from dunes by the Indian Ocean: all are assets that the world’s most valuable resources group accumulated and subsequently decided it could perfectly well live without.

To that list of assets, sold by the miner since 2012, can be added facilities from nickel plants in Australia to South African manganese mines. An array of BHP Billiton’s assets are up for potential divestment in what Andrew Mackenzie, chief executive, says is a retreat from complexity.

“The case for continued simplification of our portfolio is compelling,” he told investors last month. This could go beyond piecemeal sell-offs, with the miner looking at “structural options” – an allusion to a possible spin-off of assets into a separate vehicle.

What shape this could take is open to question. But if most assets deemed non-core are included it would in effect leave BHP without most of what it agreed to acquire when, in 2001, it announced its landmark merger with Billiton.
Then, the Billiton assets were “a sensational fit” with BHP, in the words of Paul Anderson, first chief executive of the combined group. Now, with a few exceptions they are fringe businesses.

“It is clear that today the former Billiton assets are bringing very little to the group,” says Paul Gait, an analyst at Bernstein Research in London.

When BHP, “the Big Australian”, and Billiton, a UK-listed company previously spun out of South Africa’s Gencor, merged they claimed leading or near-leading market share in seven different commodities: metallurgical coal, used in steelmaking; steam or thermal coal, for power stations; copper; iron ore; aluminium; ferroalloys; and titanium minerals.

The last three of these were brought into the marriage by Billiton, which also provided substantial coal and copper assets.

Now BHP Billiton says it will develop around five big resource “basins”. Two – the company’s met coal and its iron ore – are in Australia; two more are the company’s oil and gas assets in the US and Gulf of Mexico; and the fifth is its huge Escondida copper mine in Chile.

None is from the Billiton side of the business – although ex-Billiton Andean copper projects are also included in growth plans.

Just how marginal some of the Billiton heritage has become to BHP Billiton is borne out by the assets’ low contribution to group earnings.

Mines and projects traceable to the former Billiton earned about $2bn for the group last year, before interest and tax. By contrast, assets from the BHP side, including petroleum, iron ore and Escondida, contributed almost 10 times as much.

The pattern has continued in the first half of this financial year, when ex-Billiton assets received less than 9 per cent of group capital expenditure and accounted for less than 10 per cent of underlying group earnings before interest and tax.

Glyn Lawcock, head of resources research at UBS in Sydney, says this earnings imbalance is probably now less stark. “Some of those assets – nickel, aluminium – were at the bottom of the cycle last year. Now they will be making a lot more money, while some of the other commodities such as iron ore will be making less,” he says.

At the time of the merger, BHP and Billiton said pro-forma annual ebit was $3.3bn, with almost 30 per cent from Billiton. Even then, Billiton’s investors were seen to have done well. BHP investors ended up with 58 per cent of the combined company though their company’s market capitalisation on the eve of the announced deal was almost double that of Billiton.

For the rest of this article, click here:

Comments are closed.