A New Round of Restructuring May Start for Miners

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A proposed spinoff by BHP Billiton Ltd. (BHP) of about $15 billion in assets signals the start of a new round of disposals as the biggest mining companies adapt to the end of a boom for commodities.
With Anglo American Plc (AAL) fielding offers on a weekly basis for mines and Rio Tinto Group last month dumping Mozambique coal assets for a fraction of what it paid three years ago, producers are streamlining in the wake of China-led minerals demand that drove record profits as metals prices soared.

Mining companies have been sharpening portfolios as commodity prices retreat and after poorly timed acquisitions in a decade-long $616 billion investment spree led to asset writedowns and management clear-outs. BHP rose the most in seven months in London trading after saying it favors a plan to separate out some of its operations and may announce details this week.
Diamonds, Nickel

“The fact that this has been so positively received clearly will have an impact on the way the other miners evaluate the options for disposal of rump assets,” Paul Gait, mining analyst at Sanford C. Bernstein in London, said yesterday by phone. The announcement symbolizes “the end of the super-cycle and the beginning of a more normal cycle,” he said.

In 2011, as China devoured everything from iron ore to copper to feed economic expansion, BHP’s return on invested capital was 35 percent, according to data compiled by Bloomberg. The figure slumped to 13 percent two years later as Chinese growth slowed, the data show.

BHP’s drive to simplify its business to four main products of iron ore, petroleum, coal and copper by spinning off smaller assets shows a way forward for competitors. With many of the operations that will probably be spunoff acquired as part of the Melbourne-based company’s 2001 takeover of Billiton Plc, the plan also bookends an era of ever-rising prices.

Anglo American and Rio Tinto are the most likely to follow BHP in spinning off assets, Bernstein’s Gait said. Anglo’s nickel assets and some of its copper mines could be removed, while Rio could dust off earlier plans to sell aluminum and diamond businesses and its iron ore operations in Canada, Gait said.

“Our aim is to focus the portfolio and our capital on those assets that offer the greatest source of potential value - - over the short and long term,” Anglo said in an e-mailed response to a request for comment. “We are not going to be definitive at this time and we are not bound to a restrictive timeline. Our decisions will be based on driving the best possible outcome for stakeholders.”

A London-based spokesman for Rio declined to comment.

“This will be a test case for the other major mining companies,” Tim Huff, an analyst at RBC Capital Markets in London, said by phone. “If it works, I think you’ll see the creation of some new mid-cap mining companies. That’s actually a good thing for investors as there has been a real need for mid-caps in the space after many of them disappeared in the last round of M&A.”

Anglo’s CEO Mark Cutifani began a review of all the company’s operations in April last year as he set a target to increase the return on capital to at least 15 percent in 2016. He will consider disposing of businesses that pull down the average. The company has already said it plans to exit from some of its platinum mines.

“We are receiving expressions of interest, literally on a weekly basis,” Cutifani said last month in an interview on Bloomberg Television.

Rio Tinto CEO Sam Walsh, who took over last year after his predecessor Tom Albanese made $14 billion in writedowns on failed acquisitions, has slashed costs and sold assets.

The size of BHP, which has a market value of about $190 billion, puts it in a unique position to spin off unwanted assets, according to Credit Suisse Group AG.

“It is different for BHP because of its size relative to the other major mining companies, it’s perhaps the only one where you can put together a new company of a meaningful size,” said Paul McTaggart, a Sydney-based analyst at Credit Suisse. “No one else will do this, as they run the risk of making themselves pure-play commodity companies again.”

BHP may announce details of the assets that will be carved out as soon as this week after a board meeting, a statement from the company shows. It has already sold assets for $5.2 billion since January 2012 as part of plans to simplify its portfolio.

Focusing BHP on iron ore, copper, coal and petroleum projects that stretch from Australia to the Americas and generated about 85 percent of its sales last year, will raise free cash flow, help boost production growth and deliver stronger return on investment, CEO Andrew Mackenzie said in a May speech. Mackenzie, appointed in February 2013, identified the soil nutrient potash as a potential fifth unit.

A spinoff that included nickel, manganese and aluminum operations that take in Australia, South Africa and Colombia, a South African coal unit and the Cannington lead and silver mine in Queensland may be worth as much as $12 billion, according to a valuation from CLSA Asia-Pacific Markets.

Such a restructuring at BHP would be the largest since the A$3.3 billion spinoff of its steel unit in 2002. A demerged company will probably be based mainly around former Billiton assets, Glyn Lawcock, an analyst at UBS AG in Sydney, said in a July 14 note to clients.

“Other mining companies will be watching this process very closely,” said Tim Schroeders, a Melbourne-based portfolio manager who helps manage $1 billion in equities, including BHP shares, at Pengana Capital Ltd. “If it is seen as viable and the demerger is a success, it may open the door for other companies and provide an alternative to unlock value for shareholders relatively quickly.”