BHP's demerger plans could make mining industry history

Tue 1:41 pm by Alessandro Bruno

After achieving signoff from the board for a plan initially announced in August, the company's shareholders will have a chance to vote on the proposal in a meeting on May 6.

If shareholders of BHP Billiton (NYSE:BHP) (LON:BLT) (ASX:BHP) approve the Australian mining company’s recommendation to carve out a host of non-core assets at a cost of more than US$700 million, there will soon be a new player in the commodities sector.

BHP, the world’s largest miner, wants to create a new company, to be named ‘South 32’, through what could be the largest mining spinoff in history.

Investors seem to appreciate the plan. BHP Billiton closed up almost 3 percent in London on the news, while trading at US$46.23, up 2.2 percent in New York.

After achieving signoff from the board for a plan initially announced in August, the company's shareholders will have a chance to vote on the proposal in a meeting on May 6. The deal would grant investors one share in the separate company for every BHP share, with regulatory approvals already received.

BHP management believes that a higher concentration of assets will enable it to improve productivity in its core activities, and provide a setting for two stronger businesses able to adapt easier to market volatility. South32 will start its life with a well diversified portfolio of high quality and cash generating businesses from the outset.

BHP has four core businesses or pillars that it will focus on: iron ore, petroleum, coal and copper. This inevitably will prove challenging, considering prices for two of these commodities, iron ore and oil, have halved in value over the past year.

South32 would inherit BHP’s portfolio of aluminum, manganese, coal, silver, zinc, lead and nickel assets. BHP says that in 2014, such an asset portfolio generated revenues of US$8.3 billion and profits of US$740 million.

By comparison, BHP’s total profit over the same period amounted to US$13.4 billion.

Based in Perth, Western Australia, South32 will consolidate assets producing aluminum, carbon, nickel, silver and zinc located in five countries of the southern hemisphere including Australia, Brazil and South Africa, connected by their being located along the 32nd parallel --- hence the new entity's name of South 32.

South32 will have its primary listing on the Australian Securities Exchange, and will also be listed in Johannesburg and London.

Shareholders can expect a dividend of at least 40 percent of South 32’s adjusted operating profit, while BHP intends to maintain its current dividend policy.

Should BHP’s South 32 spin-off proceed as planned, BHP will sustain pre-tax costs of $738 million to complete the transaction, but it forecasts annual cost savings of roughly $100 million a year from the demerger.

BHP said its plans to become the world’s largest potash producer, for now, will not be affected by the spin out. The company reiterated its commitment to continue construction of the US$2.6 billion Jansen mine in Saskatchewan