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BHP Billiton may be close to an exit from SA coal

BHP Billiton may be close to a decision on the restructuring and sale of assets that could see it exit its remaining coal operations in South Africa and the aluminium smelters at Richards Bay and Maputo.

Such rumours have circulated before. But two crucial differences this time around are that BHP Billiton has actually commented on the market speculation — something the group’s spokesmen have always maintained it never does — and also the group has not denied the speculation.

When Business Day raised the issue of a possible sale of the group’s thermal coal assets with chief operating officer Graham Kerr in mid-February, he replied that BHP Billiton’s policy was not to respond to market speculation, but observed that assets would "earn their way based on value, safety and costs".

According to reports in mainstream Australian media — the Australian Financial Review and the Sydney Morning Herald — BHP Billiton is considering spinning off its noncore assets into a new $20bn resources company.

An article in Tuesday’s Sydney Morning Herald reported: "It is understood a team advised by Goldman Sachs and using the name ‘Project River’ is working on a number of strategic options for noncore businesses including a demerger and individual asset sales. Multiple sources close to the project said no final decision had been made and stressed the project had been running for more than a year without conclusion."

In reply BHP Billiton issued a statement saying it noted the recent speculation and added: "As we have said previously, the simplification of our portfolio is a priority and is something we have pursued for several years.

"We believe that a portfolio focused on our major iron ore, copper, coal and petroleum assets would retain the benefits of diversification, generate stronger growth in free cash flow and a superior return on investment.

"By increasing our focus on these four pillars with potash as a potential fifth, we will able to more quickly improve the productivity and performance of our largest businesses. We continue to actively study the next phase of simplification, including structural options, but will only pursue options that maximise value for BHP Billiton shareholders. Any course of action remains subject to detailed review and an assessment of alternatives."

Asked to comment, Investec Securities said that although the announcement was "unusual", BHP Billiton "is simply reiterating the same strategy that it has highlighted for some years now".

Numis Securities highlighted aluminium, manganese and nickel as "the elephants in the room in our view". However, other analysts believed the group’s energy coal business was also on the chopping block because BHP Billiton wanted to focus on its more profitable metallurgical coal operations.

The financial realities driving the speculation can be seen from a breakdown of profits by source from the latest accounts for the six months to end-December.

These showed that three core divisions — potash-petroleum; iron ore; and copper — generated 96% of total interim operating profits of $12.9bn.

Aluminium, manganese and nickel combined contributed only $148m and coal kicked in with $510m. The lion’s share of the coal profits came from the group’s metallurgical coal mines in Queensland, Australia, which contributed $372m.

The South African energy coal business made a loss of $33m.

Yet the value of the net operating assets tied up in BHP Billiton’s coal business as of December 31 was put at $11.8bn and the value of aluminium, manganese and nickel assets at $9.9bn.

That is way out of kilter with the value of the iron ore assets at $23.4bn, which contributed $6.5bn to interim profits and copper at $21.8bn which kicked in $3.4bn to interim profits.

Given the drive by the resource majors for greater "capital efficiency" the money that is tied up in the underperforming sectors could be put to better use in the other business divisions or some of it could be returned to the group’s shareholders.

RBC Capital Markets analyst Des Kilalea said: "I don’t think the statement from BHP Billiton is surprising because the group has indicated publicly before that it was not prepared to put any new money into some of its assets such as aluminium.

"If you are not prepared to grow these businesses then you might as well get rid of them."

Source: www.bdlive.co.za