BHP Billiton’s $20bn spin-off plan welcomed

Investors have welcomed news BHP Billiton is considering spinning off many of its non-core assets including aluminium, nickel and bauxite in a transaction that could create a new $20 billion resources company that would be handed back to shareholders.

It is understood that a team advised by investment bank Goldman Sachs has been working on Project River, which is examining a number of strategic options for assets that do not provide adequate returns to shareholders including a demerger.

The market reacted positively to the news – broken by AFRcom on Tuesday afternoon – with dual-listed BHP shares finishing Tuesday’s trade in Australia up 5&t at $37.05.

“BHP has a heap of non-core assets that could/should be divested,” said Commonwealth Bank analysts Andrew Hines. “A demerger is a fast way of doing that – makes sense.” BHP chief executive Andrew Mackenzie is determined to streamline the resources gjant as part of his “four pillars” strategy, focusing on iron ore in the Pilbara, US petroleum, copper in South America and coal in Queensland’s Bowen Basin. Potash remains a potential fifth pillar.

Many of the businesses now considered “non-core” became part of the $189 billion company when it merged with South Africa’s Billiton in 200L These Billiton assets, such as energy coal in South Africa and aluminium assets, now account for less than 10 per cent of the combined company’s earnings. It is understood Australian assets such as bauxite, manganese, alumina, Canningtonzinc mineas well as the nickel division purchased during the $9.2 billion acquisi

tion of WMC Resources in 2008 could be spun off.

Itwas widely thought BHPwould continue to sell individual assets as part of

efforts to reduce net debt to $US25 billion.

But sources close to the process said the demerger option “had gathered momentum” with senior BHP executives actively considering potential listings on the Australian, London and South African stock exchanges for the new company. However, the sources said no final decision had been made and stressed the project

had been running for more than a year without a conclusion.

“Wecontinuetoactively study thenext phase of simplification, including structural options, butwillonlypursueoptions that maximise value for BHP Billiton shareholders,” the miner said in response to the AFRcom article.

Up(teted! BHP is considering spinning oft including aluminium nickel and bauxite in How the Financial Review broke the story on at 1.31 pm.

“Any course of action remains subject to detailed review and an assessment of alternatives.” It is understood there are still deliberations about what assets would be included in any sale or demerger process if it were to go ahead. Some observers argue the company’s energy coal assets in the NSW Hunter Valley should be included.

“This work quite rightly should be Continued plO 7-7 Chanticleer back page

Base metals Andrew Mackenzie has made it clear his ideal BHP is sustained by top ! tier, long-life

resources with product and geographical diversity.

Matthew Stevens p34

A name for the new group could be Billiton Mark 2.

, Many of the assets I being discarded by BHP are the ones it acquired in its 2001 merger with Billiton.

Jamie Freed p!0

Dumped How BHP Billiton could split into core and non-core assets Cannington WA iron ore Likely to keep Likely to shed Escondida copper Manganese Gulf of Mexico Colombia Coal North West Shelf Cerro Matoso Earnings 2013 (SUS) Bass Strait UK Petroleum $19.82bn Olympic Dam South Africa Coal US shale gas NickelWest Other petroleum Aluminium Brazilian iron ore Alumina NSW coal

From page I BHP Billiton’s spin-off plan welcomed buyers are harder to come by therefore listing them as an alternative to a trade sale becomes a real possibility,” said Tim Schroeders, a resources fund manager at Pengana Capital.

“Even if you don’t realise the price you want, if you are selling to your existing shareholders they can’t complain that you have sold them something too cheap.” Mr Schroders said Australian investors would not miss the fact a spin-off of BHP’s aluminium, manganese and nickel assets would create a listed company that was similar to the structure of Billiton prior to the 2001 merger.

“It would rightfully call into question the validity ofitandsomeof thekudos people got for it at the time,” he said.

“It would also put a big spotlight on the terms that were struck at the time which in hindsight would appear to have clearly disadvantaged BHP shareholders.” While the likes of Rio Tinto have struggled to attract genuine interest during some assets sales over the past 18 months, there are signs the investment cycle could be turning.

An investment founded by former Billiton executive Mick Davis, X2 Resources, this week raised $US2.5 billion of committed equity capital, and a further $US1.25 billion of conditional equity capital to invest in mid-tier mining and metals assets.

Mr Davis was briefly chief financial officer at BHP Billiton before leaving to set up Anglo-Swiss miner Xstrata.

“We believe the timing for this venture remains very opportune and we will now focus increased attention on starting the investment process,” Mr Davis said.

Mr Davis has identified BHP’s Nickel West division and some of Rio’s Australian coal projects as potential targets.

According to Deustche Bank analyst Paul Young, BHP has the potential to make $US25 billion of asset sales.

Chief financial officer Graham Kerr and Graeme Devlin, who is BHP’s UKbased head of mergers and divestments, are two of the executives involved in Project River. Paul Perry, a former Goldman banker based in Australia for BHP, is also involved.

It is believed the findings of Project River could be put to the board at its April or May meetings. Directors met

last week in London.

Mr Hines has long argued that a

demerger would make sense for BHP.

“BHP continues to own a number of assets that we would consider ‘noncore’ and has reasonably well flagged that the new Aluminium, Manganese and Nickel division is a warehouse for assets that it is running for cash, and would willingly divest if a reasonable offer was made,” he wrote in October.

“At the time of the merger, the rela

tive value of the two businesses was 56 per cent BHP and 44 per cent Billiton. Today, the Billiton assets only contribute 6 per cent to group earnings and all of mem could be considered non-core.” Demergers are often well-received by the market. BHP chairman Don Argus was backed by shareholders

when he decided to spin-off his steel businesses, OneSteel and BlueScope Steel, in the early 2000s.

A recent UBS study showed the past 13 significant demergers had outperformed the benchmark index by 8 per cent in the one-year postthesplit It is understood the Project River team also considered unwinding BHP’s dual listing structure – the company is listed in Australia and Britain – but decided the process, known as “unification” would be too complicated.

“As we have said previously, the simplification of our portfolio is a priority and is something we have pursued for several years,” BHP said on Tuesday.

“In the last two years alone, the Group has announced or completed divestments in Australia, the United States, Canada, South Africa and the United Kingdom, including petroleum, copper, coal, mineral sands, uranium and diamonds assets.

“We continue to actively study the next phase of simplification [but] any course of action remains subject to detailed review and an assessment of alternatives.” Mr Mackenzie has also promised an update on the future of BHP’s massive Olympic Dam uranium, copper and gold mine in South Australia in the fourth quarter of this year.

It is understood Olympic Dam remains a core asset for BHP and is not part of project river.

In the last two years alone, the Group has announced or completed

divestments in Australia, the United States, Canada, South Africa and the United Kingdom.

BHP Billiton

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